1. Project Cost Estimation

2. 2 What is Cost and Project Cost Management? Cost is a resource sacrificed or foregone to achieve a specific objective, or something given up in exchange. Costs are usually measured in monetary units, such as dollars. Project cost management includes the processes required to ensure that the project is completed within an approved budget.

3. 3 Project Cost Management Processes Cost estimating: Developing an approximation or estimate of the costs of the resources needed to complete a project. Cost budgeting: Allocating the overall cost estimate to individual work items to establish a baseline for measuring performance. Cost control: Controlling changes to the project budget.

4. 4 Basic Principles of Cost Management Tangible costs or benefits are those costs or benefits that an organization can easily measure in dollars. Intangible costs or benefits are costs or benefits that are difficult to measure in monetary terms.

5. 5 Cost Estimating Project managers must take cost estimates seriously if they want to complete projects within budget constraints. It’s important to know the types of cost estimates, how to prepare cost estimates, and typical problems associated with cost estimates.

6. Direct costs are costs that can be directly related to producing the products and services of the project. examples of airline direct operating costs are fuel costs and airport charges, because these vary with the number of fights made and the distances traveled

7. Indirect costs are costs that are not directly related to the products or services of the project, but are indirectly related to performing the project. Examples of airline indirect operating costs might include the renting of check-in counters and the salaries of counter staff because, within limits, these costs are fixed and must be absorbed by the business irrespective of the number of fights made.

8. Sunk cost is money that has been spent in the past; when deciding what projects to invest in or continue, you should not include sunk costs

9. Elements of a cost estimate

10. Direct Labor The wages and salaries for labor time that can be directly attributed to the project. Usually costed at standard cost rates applicable to each staff grade.

11. Direct Materials Equipment, materials, and bought-out services used specifically on the project. Direct Expenses Travel, accommodation and other costs chargeable specifically to the project. Can include the hiring of external consultants

12. Indirect Costs Overhead Costs The general costs of running the business, such as general management and accommodation Usually calculated as a proportion of total direct costs. Not applicable if the project is itself charged as an overhead.

13. Contingency sum An addition, usually calculated as a small percentage of the total above-the-line costs, in an attempt to compensate for estimating errors and omissions, unfunded project changes, and other unexpected costs.

14. Escalation An allowance for costs that increase with time with annual cost inflation. Important for long duration projects when national cost inflation rates are high

15. Mark up for profit & Selling Price These two items apply to projects sold to external clients. There are various ways in which they can be calculated. They are often set according to the strength of the competition and what the market will stand. These are management decisions (not part of the cost estimating process) but such decisions are always made easier when there is confidence in the cost estimating accuracy

16. Provisional Sums The estimated costs of items not included in the quoted price which might have to be charged extra if the need for them is subsequently revealed.

17. Classification Of Estimates According To Confidence Ballpark estimates Comparative estimates Feasibility estimates Definitive estimates

18. 18 Table 7-2. Types of Cost Estimates

19. Cost Estimation Techniques Unit Technique Factor Technique Sensitive of a particular item on overall cost C= ∑ (C d ) + ∑ f m U m Indexes Technique C n /C k = I n /I k Composite Indexes Parametric Cost Estimation