Project Management: Estimating Time And Cost

For any business, the purpose is to make money. That requires that the project either earns more, or saves more, than its cost to do the project. A project costs money until it is done, and only begins to improve the company's bottom line after it is done. Also, each year, a business has only so much money it can spend on projects. So, even before a project begins, executives want answers to four questions:
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How much will the project cost? Are we sure we won't run over budget? How long the projects will take, and when it will be done? Are we sure we will not run late?

Those are very reasonable questions. We ask the same things when we take our car in for repair or get our air conditioner fixed. Yet well over half of all projects - even well-managed ones - run late or go over budget. So answering these questions with estimates we can rely on and commit to is a big challenge. In the project management world, we call executives that commit money and organizational effort towards a project the project sponsors, and their commitment is crucial to our success as project managers. If they don't buy in to the project, stay committed all the way through, deliver necessary resources, and remove roadblocks, our project will fail. And their request for a time and cost estimate is, from their perspective, entirely reasonable. It is also very difficult, sometimes impossible, to provide. By definition, a project is "a unique endeavor undertaken to create a unique product or service" (PMI Lexicon). If each project is unique, and it's never been done before, then how are we going to know how much it will cost to do it? How do we know how long it will take? How do we make an estimate of the cost of the unknown? And how can we be sure we are right? If we're not right, we're going to look bad when we run over budget or deliver late, or both. These are real questions, and they have real answers. So, to address these issues we need to understand what an estimate is? Estimating is a process of furcating or approximating the time and cost of completing project deliverables. Or in other words, it is a task of balancing the expectations of the stakeholders and the need for control while the project is implemented.

executing task. What are the benefits if we get a correct estimation? Well to start with • Helps in creating base for firm and good decesions. In IT. you have two very different projects and two very different estimates. documentation. Parts: Breaking down each “phase” into components ensures that you and the client agree on what’s involved and makes it easier to make accurately estimate and justify your estimates. • Helps in creating the timeline for the project • Helps in determining how long the project should take and its cost. make no assumptions about the definition of done. • Helps in determining whether the project is worth doing. what the client actually expects to receive from you. suggest completing a mini-project to clarify these elements before giving a full project estimate: Phases: You need to understand the high-level stages that will take the project from start to finish. The most important part of project estimation really truly understands what you are estimating. installation. Done: As an outside contractor. testing.So. and your client thinks “done” means the system is in use and supported by internal staff. If the client doesn’t really know what problem they want to solve. • Helps in keeping the track of the project • Helps in developing time-phased budgets and establish the project baseline. design. a small project could include: receiving information from client. delivering items and making changes. test plans. i. • Helps in understanding & developing cash flow needs. this could include an architecture diagram. user training. link matrixes and more! . If you think “done” means installing a system on the server. let alone what they want you to do. For instance.e. A large project could have many more and higher level phases such as: analysis. database tables. Deliverables: Each “part” should also have clearly defined deliverables. visual interface. tech support training and help desk training.

you may need to estimate that it will take you a month and factor in the time and financial cost of contracting out part or the entire project. and who will make time or cost decisions reduces: “I thought you were going to….” blaming or delaying games. An unrealistically low estimate may win you the job but cause you and your .) Tangible Items: Count everything. counts: pages of text. four or five depending on a page’s complexity. Capacity: Recognize your company’s available capacity. such as text. number of links and pieces of functionality (i. But if you’re already at 80 percent capacity for the month. Psychology: If you don’t really have the desire to work on this project. three. She multiplies the estimate for a basic page by two. Don’t spend more time making something perfect that won’t help accomplish your clients’ main objectives. Additions: If a project is large enough to inevitably need additions or you know certain clients just can’t seem to help themselves. you need to have the confidence to still give an accurate estimate. Value Assessment: Be clear on what’s really important to the client and invest the most time in these areas. if one of the largest time risk factors is slow client response time.Factors Considered To Get Accurate & Reliable Estimates: Past Experience: How long has it taken me to complete this type of project. or does it have other functions like sending and receiving e-mail messages). how you will report progress. you really want or need a project. Manage These Estimating Risks Changes: Getting clear project definition at the start will decrease the chance of changes and highlight when changes are requested. But changes do happen so you usually want to add at least 10 percent—or more depending on the client—to your estimate. try negotiating a separate “additions” budget to avoid constantly renegotiating the project estimate. phase. you could schedule in all of the checkpoint meetings at the beginning of the project. Governance: Establishing when you will have checkpoints. If on the other hand. you might just want to pass. Hannah Gornik. Problems: Try to list out the top 5-10 risks. For example. does the page have one dimension. you also need to factor in project management. how issues will be resolved. Then think about what activities could mitigate them. Maybe something could be completed in two weeks by your in-house staff. Intangible Factors: No matter who is working on the project. For instance. And if you’re working with other team members. part or deliverable in the past? (Be honest with yourself about how long activities actually took—not how long you think something “should” have taken. my resident QA expert. you need to budget “communication” and “administrative” time.e.

The top-down estimates are helpful in initial development of complete plan.client incredible frustration later. reviewing previous bridge projects to determine that there are correlations between the cost of the bridge and key factors like size and the primary material used gives the estimator valuable data. there are broadly two categories of methods that are being followed in the industries: 1. For example. it is less likely to uncover potential cost-eating dangers like challenging site conditions or fluctuations in raw material costs. the cost of building two different bridges varies wildly based on numerous projectspecific factors. argue.” your estimate is done. the man hours expended by that carpenter to form a single square yard of a bridge deck will also be fairly consistent across both projects. This approach typically relies on cost histories from past projects. pull out this road map to creating accurate estimates that reduce the risk and increase the happiness of you. Or. The next time you have to estimate a project. To get the best of estimates by balancing time and money. your clients and your business. Firms seeking greater rigor will use the Delphi Method to make these macro estimates. See Snapshot from Practice: The Delphi Method. However. if the new bridge is 10% larger than the previous bridge. it requires money and time and detail. The practical reality is that both approaches are likely to be used by most companies and on most projects. but the cost of an hour of a carpenter’s time on either project will be consistent. This typically involves a meeting where experts discuss. At this level individual work items are not identified. in a few . Top-Down Approaches At the strategic level top-down estimating methods are used to evaluate the project proposal. It helps in a way as in the beginning of the project accurate time and cost estimates are not available. Add that to other line items like “pour deck” or “strip deck. and ultimately reach a decision as to their best guess estimate. It is important to recognize that these first top-down estimates are only a rough cut and typically occur in the “conceptual” stage of the project. Taking time to estimate will give you a huge return on your investment. Top-down may be the only approach possible for a conceptual estimate for an early-stage project. Consensus Methods This method simply uses the pooled experience of senior and/or middle managers to estimate the total project duration and cost. estimating the cost of a distinct line item called “form bridge deck” is only a matter of identifying the size of the deck. all things being equal.In other words. Using the example. It’s best to under promise and over deliver. and knowledge of the specific parameters of those projects. The top-down estimates are used until the tasks in the Work Breakdown structure are clearly defined. While this approach can be fast. Further. such estimates are sometimes significantly off the mark because little detailed information is gathered. its top-down cost estimate might be 10% higher. #####Factors Influencing the Quality of Estimates ## CHECK upper content Estimating Methods: Since accurate and reliable estimates are so crucial for a project. Once the hourly cost of the carpenter and the production rate for forming a deck have been modeled.

Be careful that macro estimates made by senior managers are not dictated to lower level managers who might feel compelled to accept the estimates even if they believe resources are inadequate.000). estimates can be made quickly with little effort and reasonable accuracy. etc. Some examples are building a manufacturing plant. usually in areas where the technology is new and unproven. foundation might represent 3 percent of the total loan. Although your authors prefer to avoid the top-down approach if possible.cases. experience suggests it should take approximately 100 days to complete. plumbing and heating 15 percent. the initial top-down estimates are helpful in determining whether the project warrants more formal planning. Top-down methods can be useful if experience and judgment have been accurate in the past.700 feet 3 $160 per foot equals $432. developing air control for skyscraper buildings. building a distribution warehouse. contractors frequently use number of square feet to estimate the cost and time to build a house. However. Anyone who has borrowed money from a bank to build a house has been exposed to this process. the top-down estimates are not realistic because top management “wants the project. that is. This method is very common in projects that are relatively standard but have some small variation or customization. which would include more detailed estimates. For example. Ratio Methods Top-down methods (sometimes called parametric) usually use ratios. banks and the FHA (Federal Housing Authority) authorize pay to the contractor by completion of specific segments of the house. . Payments are made as these items are completed. Given good historical data. Apportionment is used when projects closely follow past projects in features and costs. a house of 2. to estimate project times or costs. knowing the square feet and dollars per square foot. or a software product estimated by features and complexity. framing 25 percent. Top-down approaches are often used in the concept or “need” phase of a project to get an initial duration and cost estimate for the project.700 square feet might cost $160 per square foot (2. Apportion Methods This method is an extension to the ratio method. Two other common examples of top-down cost estimates are the cost for a new plant estimated by capacity size. and road construction. we have also witnessed some horrendous miscalculations. For example. electric.” Nevertheless. or surrogates. Likewise. we have witnessed surprising accuracy in estimating project duration and cost in isolated cases. Given an estimated total cost for the house.

000. Assuming the total project cost is estimated. Figure 1. the costs apportioned to the “Document” deliverable are 5 percent of the total.a presents an example similar to one found in practice. number of outputs. HP. This latter method assumes adequate historical data by type of software project for the industry—for example.000. In the U. Sears Roebuck. Function Point Methods for Software and System Projects In the software industry. respectively.000 and $15. The total adjusted count provides the basis for estimating the labor effort and cost for a project (usually using a regression formula derived from data of past projects). Such historical data provide a basis for estimating the project duration. the costs are apportioned as a percentage of the total cost. A person working one month can generate on average (across all types of software projects) about five function points.An analogous process is used by some companies that apportion costs to deliverables in the WBS— given average cost percentages from past projects. using a top-down estimate. software industry. For example. and number of interfaces. Of course each organization needs to develop its own average for its specific type of work. or $25. DuPont and many others. GE. Ford Motors.000. AT&T. number of inquiries. These weighted variables are adjusted for a complexity factor and added. software development projects are frequently estimated using weighted macro variables called “function points” or major parameters such as number of inputs. Bank of America. one-person month represents on average five function points. number of data files. to be $500.S. . Variations of this top-down approach are used by companies such as IBM. MIS systems. The subdeliverables “Doc-1 and Doc-2” are allocated 2 and 3 percent of the total—$10.

the duration would be approximately 13 months. the pattern of this improvement has been quantified in the learning curve (also known as improvement curve. The cost is easily derived by multiplying the labor rate per month times 132 person months. currency of data. .c for a simplified example of function point count methodology. the unit labor hours are reduced at a constant rate. group of tasks. Finally. This phenomenon is especially true of tasks that are labor intensive.b Function points are derived from multiplying the number of kinds of elements by weighted complexity. files. For example. experience curve. which is described by the following relationship: Each time the output quantity doubles.See Table 1.b and Table 1.000). From historical data the organization developed the weighting scheme for complexity found in Table 1. the job will require 132 person months (660/5 5 132). the application of the element count is applied and the function point count total is 660. then the estimated cost would be $528. if the monthly programmer rate is $4. Table 1. Although function point metrics are useful. In these circumstances the pattern of improvement phenomenon can be used to predict the reduction in time to perform the task. or product be repeated several times.000. and relevancy of the project/deliverable to past averages. and interfaces along with the expected complexity rating. inquiries. Assuming you have 10 programmers who can work on this task. their accuracy depends on adequate historical data. outputs. Managers know intuitively that the time to perform a task improves with repetition. and industrial progress curve).c shows the data collected for a specific task or deliverable: Patient Admitting and Billing— the number of inputs. Given this count and the fact that one-person month has historically been equal to 5 function points.000 (132 3 4. From empirical evidence across all industries. Learning Curves Some projects require that the same task.

For example. and resources) and changes are made. Bottom-Up Approaches Bottom-up estimating is where the people who were going to do the work participate in the estimating process. for a total cost of $7. Generally. When the estimates of work. If the work package is routine and carries little uncertainty. Template Methods If the project is similar to past projects. The drawback of the bottom-up approach is that it consumes much more time than the other estimating techniques. Obviously. the project manager determined that on average one person could convert three workstations per day. Grouping many tasks into a common basket encourages errors of omission and the use of imposed times and costs. to estimate the wallpapering allowance on a house remodel. using a person most familiar with the work package is usually the best . Bottom-up estimating is the most accurate approach to estimating cost and duration and also usually requires the most time. For example. templates for overhaul. bottom-up estimating tends to develop a much higher level of project team commitment than does top-down or parametric estimating. estimate costs. as part of an MS Office conversion project.That’s typically the project team members and they work with the project manager to develop estimating data at the lowest level in the work breakdown structure. the same technique can be applied to specific tasks. Similarly. representing very large improvement. electrical. the contractor figured a cost of $5 per square yard of wallpaper and $2 per yard to install it.e. the costs from past projects can be used as a starting point for the new project. to 100 percent. By measuring the length and height of all the walls she was able to calculate the total area in square yards and multiply it by $7. Based on past conversion projects. mechanical) that are used as starting points for estimating the cost and duration of any new project. as the difficulty of the work decreases the expected improvement also decreases and the improvement ratio that is used becomes greater. Parametric Procedures Applied to Specific Tasks Just as parametric techniques such as cost per square foot can be the source of top-down estimates.. a lower percentage of improvement can occur only in operations with high labor content. Differences from the appropriate standardized project are noted (for times. Therefore the task of converting the 36 workstations would take three technicians four days [(36/3)/3]. costs. As a result. Development of such templates in a database can quickly reduce estimate errors. Range Estimating When do you use range estimating? Range estimating works best when work packages have significant uncertainty associated with the time or cost to complete. The main disadvantage of top-down approaches to estimating is simply that the time and cost for a specific task are not considered. duration and cost are set at that level they are aggregated upward into estimates of higher level deliverables and the project as a whole. One significant factor to consider is the proportion of labor in the task in relation to machine-paced work. 2. Micro estimating methods are usually more accurate than macro methods. This kind of estimating involves the entire project team and gives people the opportunity to participate in the development of the estimates used to measure their work. a ship repair drydock firm has a set of standard repair projects (i. 36 different computer workstations needed to be converted. representing no improvement at all. and develop a budget in a very short time span. Differences in the new project can be noted and past times and costs adjusted to reflect these differences. This approach enables the firm to develop a potential schedule.In practice the improvement ratio may vary from 60 percent.

newness. and high cost or duration gives best results. average. average. How do we get the estimates? Since range estimating works best for work packages that have significant uncertainty. having a group determine the low. Group estimating tends to refine extremes by bringing more evaluative judgments to the estimate and potential risks. technology. The judgment of others in a group helps to moderate extreme perceived risks associated with a time or cost estimate. when work packages have significant uncertainty associated with the time or cost to complete. and high (borrowed off of PERT methodology that uses probability distributions). The low to high give a range within which the average estimate will fall.approach. familiarity. Determining the low and high estimates for the activity is influenced by factors such as complexity. Involving others in making activity estimates gains buy in and credibility to the estimate. They know from experience or know where to find the information to estimate work ackage durations and costs. . it is a prudent policy to require three ime estimates— low. However.