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# Estimating Time & Costs

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### Estimating Time & Costs

1. 1. Chapter 5 – Estimating Project Times and Costs Definition, Types, Influencing factors, Guidelines, Macro vs. Micro, Methods, Cost types 10/27/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
2. 2. Course Structure 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
3. 3. Estimating <ul><li>Definition </li></ul><ul><ul><li>The process of forecasting or approximating the time and cost of completing project deliverables </li></ul></ul><ul><ul><li>The task of balancing the expectations of stakeholders and the need for control while the project is implemented </li></ul></ul><ul><li>Types of Estimates </li></ul><ul><ul><li>Top-down (macro) estimates: analogy, group consensus, or mathematical relationships </li></ul></ul><ul><ul><li>Bottom-up (micro) estimates: estimates of elements of the work breakdown structure </li></ul></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
4. 4. Estimates Are Needed to … (1) 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) EXHIBIT 5.1 <ul><li>Support good decisions. </li></ul><ul><li>Schedule work. </li></ul><ul><li>Determine how long the project should take and its cost. </li></ul><ul><li>Determine whether the project is worth doing. </li></ul>
5. 5. Estimates Are Needed to … (2) 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) EXHIBIT 5.1 <ul><li>Develop cash flow needs. </li></ul><ul><li>Determine how well the project is progressing. </li></ul><ul><li>Develop time-phased budgets and establish the project baseline. </li></ul>
6. 6. Factors Influencing the Quality of Estimates 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) People Quality of Estimates Project Duration Project Structure and Organization Padding Estimates Organization Culture Other (Nonproject) Factors Planning Horizon
7. 7. Estimating Guidelines for Times, Costs, and Resources (1) <ul><li>Have people familiar with the tasks make the estimate. </li></ul><ul><li>Use several people to make estimates. </li></ul><ul><li>Base estimates on normal conditions, efficient methods, and a normal level of resources. </li></ul><ul><li>Use consistent time units in estimating task times. </li></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
8. 8. Estimating Guidelines for Times, Costs, and Resources (2) <ul><li>Treat each task as independent, don’t aggregate. </li></ul><ul><li>Don’t make allowances for contingencies. </li></ul><ul><li>Adding a risk assessment helps avoid surprises to stakeholders. </li></ul><ul><li>Consider 3-time estimates (O = optimistic, P = pessimistic, M = most likely) </li></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
9. 9. Macro versus Micro Estimating 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) TABLE 5.1 Conditions for Preferring Top-Down or Bottom-Up Time and Cost Estimates Condition Macro Estimates Micro Estimates (Top-down) (Bottom-up) Strategic decision making X Cost and time important X High uncertainty X Internal, small project X Fixed-price contract X Customer wants details X Unstable scope X
10. 10. Estimating Projects: Preferred Approach <ul><li>Make rough top-down estimates </li></ul><ul><li>Develop the WBS/OBS </li></ul><ul><li>Make bottom-up estimates </li></ul><ul><li>Develop schedules and budgets </li></ul><ul><li>Reconcile differences between top-down and bottom-up estimates </li></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
11. 11. Methods for Estimating Project Times and Costs <ul><li>Macro (Top-Down) Approaches </li></ul><ul><ul><li>Consensus methods </li></ul></ul><ul><ul><li>Ratio methods </li></ul></ul><ul><ul><li>Apportion method </li></ul></ul><ul><ul><li>Function point methods for software and system projects </li></ul></ul><ul><ul><li>Learning curves </li></ul></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) Project Estimate Times Costs
12. 12. Apportion Method of Allocating Costs Using the WBS 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) FIGURE 5.1
13. 13. Simplified Basic Function Point Count Process for a Prospective Project or Deliverable 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) TABLE 5.2
14. 14. Example: Function Point Count Method 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) TABLE 5.3
15. 15. Methods for Estimating Project Times and Costs (cont’d) <ul><li>Micro (Bottom-Up) Approaches </li></ul><ul><ul><li>Template method </li></ul></ul><ul><ul><li>Parametric procedures applied to specific tasks </li></ul></ul><ul><ul><li>Detailed estimates for the WBS work packages (see SB45) </li></ul></ul><ul><ul><li>Phase estimating: A hybrid (project life cycle) </li></ul></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
16. 16. SB45 Support Cost Estimate Worksheet 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) FIGURE 5.2
17. 17. Phase Estimating over Product Life Cycle 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) FIGURE 5.3
18. 18. Level of Detail - (1) <ul><li>Level of detail is different for different levels of management. </li></ul><ul><li>Level of detail in the WBS varies with the complexity of the project. </li></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
19. 19. Level of Detail - (2) <ul><li>Excessive detail is costly. </li></ul><ul><ul><li>Fosters a focus on departmental outcomes </li></ul></ul><ul><ul><li>Creates unproductive paperwork </li></ul></ul><ul><li>Insufficient detail is costly. </li></ul><ul><ul><li>Lack of focus on goals </li></ul></ul><ul><ul><li>Wasted effort on nonessential activities </li></ul></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
20. 20. Types of Costs Direct Costs Project Overhead Costs General & Administrative Overhead Costs 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
21. 21. Direct Costs <ul><li>Costs that are clearly chargeable to a specific work package. </li></ul><ul><ul><li>Labor, materials, equipment, and other </li></ul></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
22. 22. Direct (Project) Overhead Costs <ul><li>Costs incurred that are directly tied to an identifiable project deliverable or work package. </li></ul><ul><ul><li>Salary, rents, supplies, specialized machinery </li></ul></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
23. 23. General and Administrative Overhead Costs <ul><li>Organization costs indirectly linked to a specific package that are apportioned to the project </li></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
24. 24. Contract Bid Summary Costs 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) FIGURE 5.6 Direct costs \$80,000 Direct overhead \$20,000 G&A overhead (20%) \$20,000 Profit (20%) \$24,000 Total bid \$144,000
25. 25. Three Views of Cost 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) FIGURE 5.5
26. 26. Refining Estimates - (1) <ul><li>Reasons for Adjusting Estimates </li></ul><ul><ul><li>Interaction costs are hidden in estimates. </li></ul></ul><ul><ul><li>Normal conditions do not apply. </li></ul></ul><ul><ul><li>Things go wrong on projects. </li></ul></ul><ul><ul><li>Changes in project scope and plans. </li></ul></ul><ul><li>Adjusting Estimates </li></ul><ul><ul><li>Time and cost estimates of specific activities are adjusted as the risks, resources, and situation particulars become more clearly defined. </li></ul></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
27. 27. Refining Estimates - (2) <ul><li>Contingency Funds and Time Buffers </li></ul><ul><ul><li>Are created independently to offset uncertainty </li></ul></ul><ul><ul><li>Reduce the likelihood of cost and completion time overruns for a project </li></ul></ul><ul><ul><li>Can be added to the overall project or to specific activities or work packages </li></ul></ul><ul><ul><li>Can be determined from previous similar projects </li></ul></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
28. 28. Refining Estimates - (3) <ul><li>Changing Baseline Schedule and Budget </li></ul><ul><ul><li>Unforeseen events may dictate a reformulation of the budget and schedule. </li></ul></ul>10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson)
29. 29. Creating a Database for Estimating 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) FIGURE 5.7 Estimating Database Templates
30. 30. Key Terms 10/01/07 SJSU - Bus. 286 David Bentley (Gray & Larson) Apportionment methods Bottom-up estimates Contingency funds Delphi method Direct costs Function points Interaction costs Learning curves Overhead costs Padding estimates Phase estimating Ratio methods Template method Time and cost databases Top-down estimates