Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Day 13

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -2 Agenda Questions? IP Part 2 Corrected, Feedback Posted in Group section in Blackboard IP Part 3 (Risk Management) Due Oct 24 (Next Class) Assignment 5 posted Due Next Class Assignment 6 will be posted by Next class (only two more after!) No Class on Oct 31 and Nov 7  I will be traveling, alternative arrangements will be made Exam 2 Chaps 5-9 will be on Nov. 7 Exam 3 Chap will be on Finals Day No Class On Nov. 11  Veterans Day. Cost Estimation and Budgeting

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Finals Rescheduling Options Do IP Project presentation on Dec 12 Exam 3 done asynchronously sometime during finals week Do both presentation and exam 3 Wednesday, Dec 18 (any time) Thursday, Dec 19 after 2PM Friday, Dec 20 (any time) 3

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Cost Estimation and Budgeting 08-04

8-5

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Chapter 8 Learning Objectives After completing this chapter, students will be able to: Understand the various types of common project costs. Recognize the difference between various forms of project costs. Apply common forms of cost estimation for project work, including ballpark estimates and definitive estimates. Understand the advantages of parametric cost estimation and the application of learning curve models in cost estimation

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Chapter 8 Learning Objectives After completing this chapter, students will be able to: Discern the various reasons why project cost estimation is often done poorly. Apply both top-down and bottom-up budgeting procedures for cost management. Understand the uses of activity-based budgeting and time-phased budgets for cost estimation and control. Recognize the appropriateness of applying contingency funds for cost estimation

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Cost Management Cost management has been defined to encompass data collection, cost accounting, and cost control. Cost accounting and cost control serve as the chief mechanisms for identifying and maintaining control over project costs. Cost estimation processes create a reasonable budget baseline for the project

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Common Sources of Project Cost  Labor  Materials  Subcontractors  Equipment & facilities  Travel 08-09

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Types of Costs  Direct Vs. Indirect  Recurring Vs. Nonrecurring  Fixed Vs. Variable  Normal Vs. Expedited

Cost Classifications Direct LaborXXXX Building LeaseXXXX ExpediteXXXX MaterialXXXX Non-recurring Direc t Indirect Fixed Recurring Variable Normal Expedited Costs Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Cost Estimation  Ballpark (order of magnitude) ±30%  Comparative ±15%  Parametric estimation  Feasibility ±10%  Definitive ±5%

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall FIGURE 8.2 Parametric Estimate for Design Costs for Concorde Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Logarithm Review X =Y Given Y, Determine X Log Y = X e X =Y e = Ln Y = X

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 8-15 Learning Curves Each doubling of output results in a reduction in time to perform the last iteration. Curvilinear Handout.doc Learning curve results.xls USE Excel and log(#,base) functions

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall FIGURE 8.4 Unit Learning Curve Log-Linear Model Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Software Project Estimation – Function Points Function Point Analysis is a system for estimating the size of software projects based on what the software does. Function points are a standard unit of measure that represents the functional size of a software application

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall FIGURE 8.5 Software Project Development Activities as a Function of Size Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Complexity Weighting Table for Function Point Analysis Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Function Point Calculations for Restaurant Reorder System Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Problems with Cost Estimation Low initial estimates Unexpected technical difficulties Lack of definition Specification changes External factors 08-21

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Creating a Project Budget Top-down Bottom-up Activity-based costing (ABC) Project Plan WBS SchedulingBudgeting The budget is a plan that identifies the resources, goals and schedule that allows a firm to achieve those goals 08-22

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 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 08-23

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Sample Project Budget Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Table 8.6

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Sample Budget Tracking Planned and Actual Activity Costs Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Table 8.7

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Example of a Time-Phased Budget Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Table 8.8

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Cumulative Budgeted Cost of the Project Figure Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

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 08-28

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 8-29 Tony’s View of Cost Estimates Much more of an art than a science Experience counts Cost estimates usually turn into actual budgets used for cost control Things you should discover prior to developing a budget What is the highest possible budget you can get away with What the customer/sponsor/management will bear What is the cheapest budget possible All things work out perfectly All budgets must be between these two numbers for the project to be successful Watch Variances! It is the most important part of cost control! Going over in one part of the project is fine if you have banked enough positive variance Example estimate budget csrd budget.xls

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Examples Solved problems on page 267 (1 & 3) 6-30 NameHours NeededOverhead Charge Personal Time Rate Hourly RateTotal Direct Labor Cost John $21/hr. Bill $40/hr. J.P $10/hr. Sonny $32/hr. Total Direct Labor Cost = Functon Point.xlsx

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Examples iterations, learning rate is 0.90, 15 hours to complete the first a = 51, X = 14, b = (log 0.90)/(log 2) Y x =aX b where b = log 2 (learning rate) log X / log 2 == Log 2 X learning curve estimates.xls

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Summary 1. Understand the various types of common project costs. 2. Recognize the difference between various forms of project costs. 3. Apply common forms of cost estimation for project work, including ballpark estimates and definitive estimates. 4. Understand the advantages of parametric cost estimation and the application of learning curve models in cost estimation

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Summary 5. Discern the various reasons why project cost estimation is often done poorly. 6. Apply both top-down and bottom-up budgeting procedures for cost management. 7. Understand the uses of activity-based budgeting and time-phased budgets for cost estimation and control. 8. Recognize the appropriateness of applying contingency funds for cost estimation

08-34 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall