Project Management Gaafar 2007 / 1 Time and Cost Estimation Dr. Lotfi Gaafar Source: PMBOK Guide 2000.

Project Management Gaafar 2007 / 1

Time and Cost Estimation

Dr. Lotfi Gaafar

Source: PMBOK Guide 2000

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Importance of Time and Cost Estimation

Estimates are needed to support good decisions. Estimates are needed to schedule work. Estimates are needed to determine how long the project

should take and its cost. Estimates are needed to determine whether the project is

worth doing. Estimates are needed to develop cash flow needs. Estimates are needed to determine how well the project is

progressing. Estimates are needed to develop time-phased budgets and

establish the project baseline

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Guidelines for Time and Cost Estimation

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. Treat each task as independent, don’t aggregate. Don’t make allowances for contingencies. Account for risks separately.

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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

Condition Macro Estimates Micro 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

A brief comparison

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Estimation Methods

Top-down (macro) estimates: analogy, group consensus, or mathematical relationships

– Consensus methods

– Ratio methods

– Apportion method

– Function point methods for software and system projects

Bottom-up (micro) estimates: estimates of elements of the work breakdown structure

– Template method

– Parametric Procedures Applied to Specific Tasks

– Detailed Estimates for the WBS Work Packages

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Activity Definition

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Activity Sequencing

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Activity Duration Estimation

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Activity Duration Estimation

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Activity Duration Estimation- Inputs

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Activity Duration Estimation- Tools

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Activity Duration Estimation- Tools

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Schedule Development

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Schedule Control

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Activity Cost Estimation

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Activity Cost Estimation- Inputs

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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

General and Administrative Overhead Costs– Organization costs indirectly linked to a specific

package that are apportioned to the project

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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.

Adjusting Estimates– Time and cost estimates of specific activities are

adjusted as the risks, resources, and situation particulars become more clearly defined.

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Look at the history of similar projects to get a rough estimate of costs. Make sure the scope and nature are similar.

Determine the internal resources you have available to use - people, equipment, etc., within your organization.

Determine the external resources - those not currently in your organization - that you will need to get the job done.

Project Budget

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Sample Cost Estimation Tools

Activity Based Costing Benchmarking Target Costing

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Activity Based Costing

Description:– Quantitatively measures the cost and

performance of activities – It is the quantitative aspect of the Activity based

costing that makes it a more efficient tool that improves the quality of the final decision.

When to use it?– Evaluate relative cost of various activities, and

potential effects of modifications– Analyze alternative process flows with

comparative economic evaluation

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Activity Based Costing

Procedure:– Analyze Activities– Gather Costs– Trace Costs to Activities– Analyze Costs

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Activity Based CostingExample

Total expenses $365.7Activity Division

A1 $109.8A11 $54.9A12 $18.3A13 $36.6A2 $182.9

A21 $128A22 $36.6A23 $18.3A3 $73.1

A31 $14.6A32 $43.9A33 $14.6

Activity DivisionA1 30%

A11 15%A12 5%A13 10%A2 50%

A21 35%A22 10%A23 5%A3 20%

A31 4%A32 12%A33 4%

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Benchmarking

Description:– It is the continuous and systematic process of measuring

and assessing products, services, practices against those of high performing organizations to improve performance.

– Two types of benchmarking:

- Benchmarking prices- Benchmarking processes

When to use it ?– Benchmarking is used when a company is suffering

losses in a certain area and wants to improve its performance to overcome these losses.

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Benchmarking

Procedure:– Identify the work process or area to be improved– Analyze the work process– Measure your own performance– Identify benchmarking partners– Determine data collection method– Collect data– Determine performance gap

– Develop action plan– Implement action plan– Monitor results– Recalibrate benchmarks (Repeat process)

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Target Costing

Description4:– Is the cost that can be incurred while still gaining

profit.Target Cost = Estimated Selling Price (Target Price) – Desired Profit

When to use it1?– Dominantly with new products and services– Improve existing products

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Target CostingExample (The Montclair Paper Mill)5

Setting the target price: Per TonCompetitor’s selling price to the merchant $1466Less: freight paid by the mill (30)

Normal sales returns & allowances (60) Montclair capital charge (120)

Ship to the DC (11) DC operating cost (25) DC capital charge (58)Target Manufacturing Cost $1162

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Refining Estimates

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.

Changing Baseline Schedule and Budget– Unforeseen events may dictate a reformulation of

the budget and schedule.

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* This Presentation is Based on information from PMBOK Guide 2000

Project Management

Cost Management*

Dr. Lotfi Gaafar

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Project Cost Management Processes

Resource planning: determining what resources and quantities of them should be used

Cost estimating: developing an estimate of the costs and 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

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Resource Planning

Cost Estimating

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Cost Budgeting

Cost Control

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Resource Planning

The nature of the project and the organization will affect resource planning

Some questions to consider:– How difficult will it be to do specific tasks on the project?– Is there anything unique in this project’s scope

statement that will affect resources?– What is the organization’s history in doing similar tasks?– Does the organization have or can they acquire the

people, equipment, and materials that are capable and available for performing the work?

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Cost Control

Project cost control includes– monitoring cost performance– ensuring that only appropriate project changes are

included in a revised cost baseline– informing project stakeholders of authorized changes

to the project that will affect costs Earned value management is an important tool

for cost control

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Using Software to Assist in Cost Management

Spreadsheets are a common tool for resource planning, cost estimating, cost budgeting, and cost control

Many companies use more sophisticated and centralized financial applications software for cost information

Project management software has many cost-related features