Project Management -- Estimating Time and Cost Dr. Tai-Yue Wang Department of Industrial and Information Management National Cheng Kung University Tainan, TAIWAN, ROC This is a basic course blah, blah, blah…

Project Management 6e. Where We Are Now

Estimating Projects Estimating Project Management 6e. Estimating Projects Estimating The process of forecasting or approximating the time and cost of completing project deliverables. The task of balancing expectations of stakeholders and need for control while the project is implemented.

Estimating Projects Types of Estimates Project Management 6e. Estimating Projects Types of Estimates Top-down (macro) estimates: analogy, group consensus, or mathematical relationships Bottom-up (micro) estimates: estimates of elements of the work breakdown structure

Why Estimating Time and Cost Are Important Project Management 6e. Why Estimating Time and Cost Are Important To support good decisions. To schedule work. To determine how long the project should take and its cost. To determine whether the project is worth doing. To develop cash flow needs. To determine how well the project is progressing. To develop time-phased budgets and establish the project baseline. EXHIBIT 5.1

Factors Influencing the Quality of Estimates Project Management 6e. Factors Influencing the Quality of Estimates Planning Horizon Other (Nonproject) Factors Project Duration Quality of Estimates Organization Culture People Padding Estimates Project Structure and Organization

Developing Work Package Estimates Project Management 6e. Developing Work Package Estimates Use people familiar with the tasks Include a risk assessment Use several people to make estimates Preparing Initial Estimates Make no allowance for contingencies Assume normal conditions Assume tasks are independent Use consistent time units

Estimating Guidelines for Times, Costs, and Resources Project Management 6e. Estimating Guidelines for Times, Costs, and Resources Have people familiar with the tasks make the estimate. Use several people to make estimates. Base estimates on normal conditions, efficient methods, and a normal level of resources. Use consistent time units in estimating task times.

Estimating Guidelines for Times, Costs, and Resources Project Management 6e. Estimating Guidelines for Times, Costs, and Resources Treat each task as independent, don’t aggregate. Do not make allowances for contingencies. Add a risk assessment to avoid surprises to stakeholders.

Top-Down versus Bottom-Up Estimating Project Management 6e. Top-Down versus Bottom-Up Estimating Top-Down Estimates Are usually derived from someone who uses experience and/or information to determine the project duration and total cost. Are made by top managers who have little knowledge of the processes used to complete the project.

Top-Down versus Bottom-Up Estimating Project Management 6e. Top-Down versus Bottom-Up Estimating Bottom-Up Approach Can serve as a check on cost elements in the WBS by rolling up the work packages and associated cost accounts to major deliverables at the work package level.

Top-Down versus Bottom-Up Estimating Project Management 6e. Top-Down versus Bottom-Up Estimating Conditions for Preferring Top-Down or Bottom-up Time and Cost Estimates Top-down Bottom-up Condition Estimates Estimates 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

Estimating Projects: Preferred Approach Project Management 6e. Estimating Projects: Preferred Approach Make rough top-down estimates. Develop the WBS/OBS. Make bottom-up estimates. Develop schedules and budgets. Reconcile differences between top-down and bottom-up estimates

Top-Down Approaches for Estimating Project Times and Costs Project Management 6e. Top-Down Approaches for Estimating Project Times and Costs Consensus methods Ratio methods Apportion method Function point methods for software and system projects Learning curves Project Estimate Times Costs

Project Management 6e. Apportion Method of Allocating Project Costs Using the Work Breakdown Structure FIGURE 5.1

Project Management 6e. Simplified Basic Function Point Count Process for a Prospective Project or Deliverable TABLE 5.2

Example: Function Point Count Method Project Management 6e. Example: Function Point Count Method TABLE 5.3

Bottom-Up Approaches for Estimating Project Times and Costs Project Management 6e. Bottom-Up Approaches for Estimating Project Times and Costs Template methods Parametric procedures applied to specific tasks Range estimates for the WBS work packages Phase estimating: A hybrid

Range Estimating Template Project Management 6e. Range Estimating Template FIGURE 5.2

Phase Estimating over Product Life Cycle Project Management 6e. Phase Estimating over Product Life Cycle FIGURE 5.3

Top-Down and Bottom-Up Estimates Project Management 6e. Top-Down and Bottom-Up Estimates FIGURE 5.4

Project Management 6e. Level of Detail Level of detail is different for different levels of management. Level of detail in the WBS varies with the complexity of the project. Excessive detail is costly. Fosters a focus on departmental outcomes Creates unproductive paperwork

Level of Detail Insufficient detail is costly. Lack of focus on goals Project Management 6e. Level of Detail Insufficient detail is costly. Lack of focus on goals Wasted effort on nonessential activities

Types of Costs Direct Costs Direct (Project) Overhead Costs Project Management 6e. Types of Costs Direct Costs Costs that are clearly chargeable to a specific work package. Labor, materials, equipment, and other Direct (Project) Overhead Costs Costs incurred that are directly tied to an identifiable project deliverable or work package. Salary, rents, supplies, specialized machinery

Types of Costs General and Administrative Overhead Costs Project Management 6e. Types of Costs General and Administrative Overhead Costs Organization costs indirectly linked to a specific package that are apportioned to the project

Contract Bid Summary Costs Project Management 6e. Contract Bid Summary Costs Direct costs $80,000 Direct overhead $20,000 Total direct costs $100,000 G&A overhead (20%) Total costs $120,000 Profit (20%) $24,000 Total bid $144,000 FIGURE 5.5

Project Management 6e. Three Views of Cost FIGURE 5.6

Refining Estimates Reasons for Adjusting Estimates Project Management 6e. Refining Estimates Reasons for Adjusting Estimates Interaction costs are hidden in estimates. Normal conditions do not apply. Things go wrong on projects. Changes in project scope and plans.

Refining Estimates Adjusting Estimates Project Management 6e. Refining Estimates Adjusting Estimates Time and cost estimates of specific activities are adjusted as the risks, resources, and situation particulars become more clearly defined.

Estimating Database Templates Project Management 6e. Estimating Database Templates FIGURE 5.7

Project Management 6e. WBS Figure

Cost estimates Project is overestimated Project is underestimated Public projects are usually underestimated initially for launching the projects Cost estimates are used to develop budget Later are used to compared to the actual costs

Cost Escalation: Cost Overruns on Projects 300 200 Cost overrun % 100 -100 1910 1930 1950 1970 1990 1920 1940 1960 1980 2000 Year of decision to build Projects versus Percent Cost Overrun (Flyvbjerg, B., Bruzelius, N., & Rothengatter, W., Megaprojects and Risk: An Anatomy of Ambition. Cambridge:Cambridge University Press, 2003, p. 17. With permission.)

Cost Escalation: Sources of Cost Escalation and Overruns Uncertainty and Lack of Accurate Information Changes in Requirements or Design Economic and Social Factors Inefficiency, Poor Communication, and Lack of Control Ego Involvement of the Estimator Project Contract Bias and Ambition

Cost Estimating and the Systems Development Life Cycle At project initiation Regions of time- cost uncertainty At project definition At project execution Cumulative cost Contingency fund Cost estimate Time

System Life Cycle Costs Life cycle costs (LCC) All costs of a system throughout its full cradle-to-grave life cycle, i.e.: all costs incurred during the project life cycle phases of Definition and Execution PLUS all costs associated with the Operations phase of the system and the eventual disposal of the system

System Life Cycle Costs Purpose of life cycle cost analysis To anticipate the realities of operating, maintaining, and (ultimately) disposing of the end-item system To establish target costs for operating, maintaining, and disposing of the end-item system. To design the system so it will meet those target costs.

Cost Estimating Process Estimate versus Target or Goal Estimate: a realistic assessment based upon known facts about the work, required resources, constraints, and the environment, derived from estimating methods Target or goal: a desired outcome, commitment, or promise. Don’t confuse estimates with goals. The estimating process is directed at producing good estimates, not restating targets or goals.

Estimating Process Accuracy versus Precision Accuracy: the closeness of the estimated value to the actual value Precision: the number of decimal places in the estimate. Accuracy of estimates is more important than precision

Cost Estimating Process Estimating Methods Expert opinion Analogy + compensation for differences Parametric: Formula or Cost Function, e.g., Cost, engine A = (Cost, engine B) Cost, cabling = 150 (total area + 10%) + 300 (number of rooms) + 125 (number of floors) ( ) 0.7 Thrust, engine A Thrust, engine B

Cost Estimating Methods (cont’d) Cost engineering Detailed cost breakdown of labor, materials, etc. at the work package or task level. Example below

Cost Estimating Methods (cont’d) Total, 1 = 60 Total, 2 = 30

Total = $26,500

Cost Estimating Process Any of these methods can be used in any area of project Parametric and cost engineering methods are the best

Cost Estimating Process Rule of Thumb: The smaller the work packages or portion of the end-item estimated, the better the estimate

Cost Estimation Process Procedure for larger projects Project Management (PM) 1. WBS information Functional Management (FM) 2. 3. Work Team Leads

Cost Estimation Process PM: Uses WBS to identify work packages FM: Subdivide work packages into identifiable tasks; determine labor, material, facilities, and resources requirements for each Supervisors/team leads: Estimate number of labor hours and quantities of materials needed Functional Management Work team Project Management WBS information 2. 3. 1.

Cost Estimation Process Project Management 6. Labor and cost estimates Functional Management 4., 5. Work team

Cost Estimation Process Project Management 6. WBS information Procedure for larger projects, steps 4-6 Functional Management 4., 5. FM: check and aggregate time and material estimates FM: convert time estimates into costs PM: checks over and approves all estimates aggregates costs; added in overhead costs: Project cost = ∑direct costs + ∑ overhead costs Work team

Cost Estimation Process Project Management 7., 8. WBS information Functional Management Work team

Cost Estimating Process (cont’d) Project Management 7., 8.. WBS information Functional Management Procedure for larger projects, steps 7-8 Work team PM: Adds in contingency amounts. Two possible contingencies Base estimate = Σ (WP estimates + WP contingency) (to handle “known-unknowns”) Final estimate = Base estimate + overheads + project contingency (to handle “unknown unknowns”; PM controls this) PM: Compares bottom-up estimates to top-down targets or goals. Attempt to reconcile differences.

Cost Estimating Process Estimates can be made at any level project work package task

Elements of Budgets and Estimates: Project Budget Specific for each project Not a fiscal budget. Subdivided into Control Accounts, one for each work package Each cost account is a portion of the project total budget Rosebud Example

Elements of Typical Budget Direct Costs Direct Labor (DL) Charges for labor working directly on project 50,000.00 Direct Overhead on Labor (% of DL) E.g., 40% Labor support: benefits, etc. 20,000.00 Direct Nonlabor and Materials (M) Subcontractors, consultants, travel, telephone, materials, purchased parts, etc. 10,000.00 Direct Overhead on Nonlabor and Materials (% of M) Shipping, insurance, security, etc. E.g., 33.33% 3,333.33 Direct Total 83,333.33 II. General & Administrative (% of Direct Total) E.g., 20% (Indirect overhead) Corporate overhead: proposals, publicity, president, etc. 16,667.00 Budget Amount 100,000.00

Project Cost Accounting Systems ROSEBUD Project Budget $ 356,755 Basic design Hardware Software Project management Final Tests $179,868 $122,228 J $31,362 $ 12,550 $10,857 User Test Cost Accounts Procedures Materials Installation $100,846 $20,352 Q M $138,571 Y X $6,622 Assembly Specifications System Test V $20,945 $21,272 L $4,235 W

Project Budget The best project budgets are time-phased to allow cost tracking vs. time Example

Project Cost Accounting System Enables budget information be aggregated or disaggregated according to work packages or functional areas Example

Project Cost Accounting System; Cost Monitoring Weekly Expense and Cumulative Expense Profiles. Created from work package budgets and the project schedule Assume expenses occur uniformly throughout work package duration Example

Project Cost Accounting System; Cost Monitoring Weekly expense profile Analogous to resource loading profile Example

Compute uniform per-week cost (analogous to weekly resource requirement)

2. Sum per-week costs across all tasks according to schedule. 50 40 30 20 10 2. Sum per-week costs across all tasks according to schedule. Weekly expense profile Plot showing expected per work expenses based on scheduled activities and per-week costs of each.

Project Cost Accounting System; Cost Monitoring Cumulative expense profile shows the Budgeted Cost of the Work Scheduled (BCWS), which is the expected expenditure growth throughout the project Example

Cumulative expense profile BCWS Early start times 50 40 30 20 10 Cumulative expense profile BCWS

Project Cost Accounting System; Cost Monitoring Planning and Control The weekly and cumulative expense profiles are used to adjust schedules to accommodate cash-flow and working capital constraints Example

Weekly expense profile, late start Late start times L Q 50 40 30 20 10 Maximum required Working capital Weekly expense profile, late start Cumulative expense profile, early start Cumulative expense profile, late start of L and Q

Project Cost Accounting System; Cost Monitoring Planning and Control During project execution actual expenses are tracked against BCWS Example

50 40 30 20 10 Actual cost BCWS Value of Actual Work

Key Terms Apportionment methods Bottom-up estimates Contingency funds Project Management 6e. Key Terms Apportionment methods Bottom-up estimates Contingency funds Delphi method Direct costs Function points Learning curves Overhead costs Padding estimates Phase estimating Range estimating Ratio methods Template method Time and cost databases