Cost Estimating and Budgeting

1. Cost Estimating and Budgeting

2. Cost Estimating • Initial Cost Estimate • Underestimates are Initially a Big Problem • Contract Buy-in • Risky • Unethical • Relatively Commonplace • Cost Estimates Become Budgets

3. Cost Escalation • Actual Cost overruns the Estimate • Reasons: • Uncertainty and Lack of Accurate Information • Changes in Design or Requirements • Economic and Social Variable in the Environment • Work Inefficiency, Poor Communication, and Lack of Control • Ego Involvement of the Estimator

4. Economic and Social Factors • Forces Beyond Your Control • Labour Strikes • Legal Action • Trade Embargoes • Material Shortages • Inflation • Not Controllable • Manageable

5. Cost Estimating Process • Work Tasks and Costs • Expert Opinion • Analogy Estimate • Obtained from Similar Projects • Parametric Estimate • Scale Cost up or Down • Engineering Estimate • Bottoms Up • Standards Manuals

6. Cost Estimating Process (Continued) • Contingency Amounts • 1. Contingency is Added to Each Activity • Rolled-up for Base Estimate • 2. PM ads a Project Contingency • For Unknown Unknowns • Rolled-up Again for Final Cost Estimate i.e., • Becomes Most Likely Cost • 3. Corporation Adds Overrun Allowance • Controlled by Corporate Management

7. Cost Estimating Process (Continued) • Estimates from Project Bottoms up • Padding Estimates • Final Should be a Compromise

8. Elements of Budgets and Estimates • Direct Labour Expense • Direct Non-Labor Expense • Overhead Expense • General and Administrative Expense • Profit

9. Direct Non-Labour Expense • Subcontractor • Consultants, Computer Time (Support) • Travel, Telephone, • Material Costs (Direct Materials) • Waste and Spoilage • Freight • Purchased Parts

10. How a Overhead Rates are Calculated • Varies from Company to Company • Does include “Cost of Doing Business”

11. Overhead Expense General and Administrative Expense • Cost of Doing Business • Building Rents • Utilities • Clerical Assistance • Insurance • Equipment

12. Overhead Expense (Continued) • In a Project Organization Corporate OH can be Calculated as: • Direct OH • Traceable to Project • Indirect OH • Not Traceable to Project

13. General and Administrative Expense • Taxes • Financing (Cost of Money) • Penalty and Warranty Costs • Accounting and Legal • Proposal Expenses • Marketing • Salaries and Expenses for Corporate Management • Employee Fringe Packages

14. General and Administrative Expense (Continued) • Allocated across All Projects • Indirect Cost Practices are not Uniform Across Industry

15. Profit and Total Billing • Profit • Agreed-to-Fixed Fee • Percentage of Total Expenses • Total Billing • Sum of Total Expense plus Fee

16. Project Cost Accounting (PCAS) &Project Management Information System(PMIS) • PCAS • Computes Estimates • Stores and Process Budgets (Time Phased/Proj Plan)) • Tracks Costs • PMIS • Project Planning • Control • Reporting • Plus all of PCAS

17. Material Expenditures • Cost Schedules and Forecasts used to estimate Cash Requirements • When Needed, payment made before delivery, expense precedes cost of materials • Payment delayed, expense follows when the material is needed

18. Cash Flow • Cash In vs Cash Out • Income (Client) vs Expenses of the Project • PM must do Cash Flow Forecast • Funding Plan for Working Capital