1. 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…

2. Project Management 6e.
Where We Are Now

3. 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.

4. 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

5. 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

6. 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

7. 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

8. 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.

9. 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.

10. 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.

11. 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.

12. 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

13. 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

14. 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

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

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

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

18. 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

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

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

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

22. 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

23. 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

24. 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

25. 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

26. 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

27. Project Management 6e.
Three Views of Cost
FIGURE 5.6

28. 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.

29. 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.

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

31. Project Management 6e.
WBS Figure

32. 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

33. 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 With permission.)

34. 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

35. 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

36. 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

37. 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.

38. 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.

39. 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

40. 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 = (total area + 10%)
(number of rooms)
(number of floors) ( )
0.7
Thrust, engine A
Thrust, engine B

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

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

43. Total = $26,500

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

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

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

47. 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.

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

49. 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

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

51. 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.

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

53. 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

54. 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

55. 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

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

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

60. 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

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

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

63. 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.

64. 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

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

66. 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

67. 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

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

69. 50 40 30 20 10
Actual cost
BCWS
Value of Actual Work

70. 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