Chapter 5

Methods of estimating times and costs Using Learning curves Types of costs

Direct Costs – Costs that are clearly chargeable to a specific work package. Indirect Costs – Costs incurred that are not directly tied to an identifiable project deliverable or work package. Special Case Costs – “estimated costs” usually assigned to task that has been done over and over. Sunk Costs – Those costs that are unrecoverable. Capital Costs – Assets that have a useful life, year or more.

5–4 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.

5–5 EXHIBIT 5.1 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.

5–6 Quality of Estimates Project Duration People Project Structure and Organization Padding Estimates Organization Culture Other (Nonproject) Factors Planning Horizon

5–7 1.Have people familiar with the tasks make the estimate. 2.Use several people to make estimates. 3.Base estimates on normal conditions, efficient methods, and a normal level of resources. 4.Use consistent time units in estimating task times. 5.Treat each task as independent, don’t aggregate. 6.Don’t make allowances for contingencies. 7.Adding a risk assessment helps avoid surprises to stakeholders.

Order of Magnitude – “seat of your pants” estimate with very little thought or preparation – Before it is stated, stress it is very rough and limited in accuracy Budget Estimate – More accurate and requires some research – Can use historical data

Definitive Estimate – Most accurate – Use the WBS completed and tested for accuracy – Include contingency allowances – lump sum amt. – Includes: training, testing, travel, monitoring, etc. Pro Forma Assessments – Initial profile of project costs – Can be order of magnitude, budget, or definitive estimates – Are refined until there is a particular level of comfort

Bottom- up – Most time consuming and most expensive – Uses WBS where each task is estimated and then added together as reverse upward. – Tendency to “pad” as one goes Parametric Procedures Applied to Specific Tasks – Using Industrial Engineering standards and analysis – Involves cost per sq. ft., linear foot, etc.

Macro (Top-down) Approaches – Consensus methods – Expert judgment – Apportion method – Learning curves

Fairly certain if done before in other projects – derive average duration from historical data Some projects books available containing mean tables for typical activities Ask around

Four categories of resources – Money – Materials – Machines – People Questions to ask? – Who and what are needed? – Who and what can do the work? – Who and what are available? – What level and competence is required?

5–14 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. Adjusting Estimates – Time and cost estimates of specific activities are adjusted as the risks, resources, and situation particulars become more clearly defined.

WBS Resource Matrix Gantt chart: a bar chart showing both the amount of time involved and the sequence in which activities can be performed LO 3

Activity 1 Activity 2 Activity 3 Activity 4 Activity 5 Activity 6 Time Vertical Axis: Always Activities or Jobs Horizontal Axis: Always Time Horizontal bars used to denote length of time for each activity or job.

A person engaged in a repetitive task will improve his/her performance over time. Airline industry was first industry to use Learning curves

To determine Learning Curve rate: T2/T1 = T4/T2=T6/T3=T8/T4 To determine time to produce nth or n units:

5–19 TABLE A5.1

5–20 TABLE A5.2