, cost estimation and budgeting , cost estimation , learning curves , creating a project budget , activity-based costing , budget contingencies

1. 8-1
Cost Estimation
and Budgeting

2. 9/24/2019
Concept of Cost Management
It includes processes required to ensure that
the project is completed within the approved
budget.
Processes involved
i. Resource Planning: Involves determining what
physical resources (people, equipment,
materials etc) and what quantities of each
should be used to perform project activities.

3. 9/24/2019
ii. Cost Estimating: Developing an approximation
(estimates) of the costs of the resources
needed to complete project activities. It
includes identifying and considering various
costing alternatives.

4. 8-4
Common Sources of Project Cost
 Labor
 Materials
 Subcontractors
 Equipment & facilities
 Travel

5. 8-5
Types of Costs
Direct Vs. Indirect
Recurring Vs. Nonrecurring
Fixed Vs. Variable
Normal Vs. Expedited

6. 8-6
Cost Classifications
Direct Labor X X X X
Building Lease X X X X
Expedite X X X X
Material X X X X
Non-recurring
Direct
Indirect
Fixed
Recurring
Variable
Normal
Expedited
Costs

7. 8-7
Cost Estimation
 Ballpark (order of magnitude) ±30%
 Comparative ±15%
 Feasibility ±10%
 Definitive ±5%

8. 8-8
Learning Curves
Each doubling of output results in a reduction
in time to perform the last iteration.
x
:
Y = time required for the x unit of output
a = time required for the initial unit of output
X = the number of units to be produced
b = learning curve slope = log(learning %)/log(2)
b
xY aX
Where


9. 8-9
Problems with Cost Estimation
 Low initial estimates
 Unexpected technical difficulties
 Lack of definition
 Specification changes
 External factors

10. 8-10
Creating a Project Budget
• Top-down
• Bottom-up
• Activity-based costing (ABC)
Project
Plan
WBS
Scheduling Budgeting
The budget is a plan
that identifies the
resources, goals and
schedule that allows
a firm to achieve
those goals

11. 8-11
Activity-Based Costing
Projects use activities & activities use resources
1. Assign costs to activities that use resources
2. Identify cost drivers associated with this activity
3. Compute a cost rate per cost driver unit or
transaction
4. Multiply the cost driver rate times the volume of
cost driver units used by the project

12. 8-12
Budget Contingencies
The allocation of extra funds to cover
uncertainties and improve the chance of
finishing on time.
Contingencies are needed because
• Project scope may change
• Murphy’s Law is present
• Cost estimation must anticipate interaction costs
• Normal conditions are rarely encountered