Chapter 5 – Estimating Project Times and Costs

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Chapter 5 – Estimating Project Times and Costs. Definition, Types, Influencing factors, Guidelines, Macro vs. Micro, Methods, Cost types . Course Structure. Estimating. Definition The process of forecasting or approximating the time and cost of completing project deliverables

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### Chapter 5 – Estimating Project Times and Costs

Definition, Types, Influencing factors, Guidelines, Macro vs. Micro, Methods, Cost types

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Course Structure

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Estimating
• Definition
• The process of forecasting or approximating the time and cost of completing project deliverables
• The task of balancing the expectations of stakeholders and the need for control while the project is implemented
• 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

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Estimates Are Needed to …(1)
• Support good decisions.
• Schedule work.
• Determine how long the project should take and its cost.
• Determine whether the project is worth doing.

EXHIBIT 5.1

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Estimates Are Needed to …(2)
• Develop cash flow needs.
• Determine how well the project is progressing.
• Develop time-phased budgets and establish the project baseline.

EXHIBIT 5.1

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Planning Horizon

Other (Nonproject)Factors

ProjectDuration

Quality of Estimates

OrganizationCulture

Project Structure and Organization

Factors Influencing the Quality of Estimates

People

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Estimating Guidelines for Times, Costs, and Resources (1)
• 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.

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• Treat each task as independent, don’t aggregate.
• Don’t make allowances for contingencies.
• Adding a risk assessment helps avoid surprises to stakeholders.
• Consider 3-time estimates (O = optimistic, P = pessimistic, M = most likely)

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Macro versus Micro Estimating

Conditions for Preferring Top-Down or Bottom-Up Time and Cost Estimates

Condition Macro Estimates Micro Estimates

(Top-down) (Bottom-up)

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

TABLE 5.1

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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

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Project Estimate Times Costs

Methods for Estimating Project Times and Costs
• Macro (Top-Down) Approaches
• Consensus methods
• Ratio methods
• Apportion method
• Function point methodsfor software and system projects
• Learning curves

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Apportion Method of Allocating Costs Using the WBS

FIGURE 5.1

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Simplified Basic Function Point Count Process for a Prospective Project or Deliverable

TABLE 5.2

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Example:Function Point Count Method

TABLE 5.3

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Methods for Estimating Project Times and Costs (cont’d)
• Micro (Bottom-Up) Approaches
• Template method
• Parametric procedures appliedto specific tasks
• Detailed estimates for the WBS work packages (see SB45)
• Phase estimating: A hybrid (project life cycle)

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SB45 Support Cost Estimate Worksheet

FIGURE 5.2

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Phase Estimating overProduct Life Cycle

FIGURE 5.3

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Level of Detail - (1)
• Level of detail is different for different levels of management.
• Level of detail in the WBS varies with the complexity of the project.

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Level of Detail - (2)
• Excessive detail is costly.
• Fosters a focus on departmental outcomes
• Creates unproductive paperwork
• Insufficient detail is costly.
• Lack of focus on goals
• Wasted effort on nonessential activities

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### Types of Costs

Direct Costs

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Direct Costs
• Costs that are clearly chargeable to a specific work package.
• Labor, materials, equipment, and other

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• Costs incurred that are directly tied to an identifiable project deliverable or work package.
• Salary, rents, supplies, specialized machinery

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• Organization costs indirectly linked to a specific package that are apportioned to the project

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Contract Bid Summary Costs

Direct costs \$80,000

Profit (20%) \$24,000

Total bid \$144,000

FIGURE 5.6

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Three Views of Cost

FIGURE 5.5

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Refining Estimates - (1)
• Interaction costs are hidden in estimates.
• Normal conditions do not apply.
• Things go wrong on projects.
• Changes in project scope and plans.
• Time and cost estimates of specific activities are adjusted as the risks, resources, and situation particulars become more clearly defined.

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Refining Estimates - (2)
• Contingency Funds and Time Buffers
• Are created independently to offset uncertainty
• Reduce the likelihood of cost and completion time overruns for a project
• Can be added to the overall project or to specific activities or work packages
• Can be determined from previous similar projects

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Refining Estimates - (3)
• Changing Baseline Schedule and Budget
• Unforeseen events may dictate a reformulation of the budget and schedule.

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Creating a Database for Estimating

Estimating Database Templates

FIGURE 5.7

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Key Terms

Apportionment methods

Bottom-up estimates

Contingency funds

Delphi method

Direct costs

Function points

Interaction costs

Learning curves