Pinto Pm3 Ch08

Cost Estimation and
Budgeting
08-01
Department of Chemical
Engineering
Autnoma de Nuevo
Len University
San Nicols de los Garza, N.L.
9 IQ Pedro Pablo Tamez Vargas
Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall
Chapter 8 Learning Objectives
After completing this chapter, students will be able to:
Understand the various types of common project
costs.
Recognize the difference between various forms of
project costs.
Apply common forms of cost estimation for project
work, including ballpark estimates and definitive
estimates.
Understand the advantages of parametric cost
estimation and the application of learning curve
models in cost estimation.

08-02
Chapter 8 Learning Objectives
After completing this chapter, students will be able to:
Discern the various reasons why project cost
estimation is often done poorly.
Apply both top-down and bottom-up budgeting
procedures for cost management.
Understand the uses of activity-based budgeting and
time-phased budgets for cost estimation and control.
Recognize the appropriateness of applying
contingency funds for cost estimation.

08-03
Cost Management
Cost management has been defined to
encompass data collection, cost accounting, and
cost control.
Cost accounting and cost control serve as the
chief mechanisms for identifying and maintaining
control over project costs.
Cost estimation processes create a reasonable
budget baseline for the project.
08-04
Common Sources of Project Cost
Labor
Materials
Subcontractors
Equipment & facilities
Travel

08-05
Types of Costs
Direct Vs. Indirect
Recurring Vs. Nonrecurring
Fixed Vs. Variable
Normal Vs. Expedited
08-06
Cost Classifications
Direct Labor X X X X
Building Lease X X X X
Expedite X X X X
Material X X X X
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Costs
08-07
Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall 9 IQ Pedro Pablo Tamez Vargas
Cost Estimation
Ballpark (order of magnitude) 30%
Comparative 15%
Feasibility 10%
Definitive 5%
08-08
FIGURE 8.2
Parametric Estimate for Design Costs
for Concorde
08-9
Learning Curves
Each doubling of output results in a reduction in
time to perform the last iteration.
x
:
Y = time required for the x unit of output
a = time required for the initial unit of output
X = the number of units to be produced
b = learning curve slope = log(learning %)/log(2)
b
x
Y aX
Where
08-10
FIGURE 8.4
Unit Learning Curve Log-Linear Model
08-11
Software Project Estimation
Function Points
Function Point Analysis is a system for
estimating the size of software projects based on
what the software does.
Function points are a standard unit of measure
that represents the functional size of a software
application.
08-12
FIGURE 8.5
Software Project Development
Activities as a Function of Size
08-13
Complexity Weighting Table for
Function Point Analysis
08-14
Complexity Weighting
Function Low Medium High Total
Number of Inputs 2 x _____ = 4 x _____ = 6 x _____ =
Number of Outputs 4 x _____ = 6 x _____ = 10 x _____ =
Number of Interfaces 3 x _____ = 7 x _____ = 12 x _____ =
Number of Queries 5 x _____ = 10 x _____ = 15 x _____ =
Number of Files 2 x _____ = 4 x _____ = 8 x _____ =

Function Point Calculations for
Restaurant Reorder System
08-15
Complexity Weighting
Function Low Medium High Total
Number of Inputs 4 x 15 = 60
Number of Outputs 10 x 20 = 200
Number of Interfaces 3 x 3 = 9
Number of Queries 10 x 6 = 60
Number of Files 2 x 40 = 80
Total 409

Problems with Cost Estimation
Low initial estimates
Unexpected technical difficulties
Lack of definition
Specification changes
External factors
08-16
Creating a Project Budget
Top-down
Bottom-up
Activity-based costing (ABC)
Project
Plan
WBS
Scheduling Budgeting
The budget is a
plan that identifies
the resources,
goals and schedule
that allows a firm
to achieve those
goals
08-17
Activity-Based Costing
Projects use activities & activities use resources

1. Assign costs to activities that use resources
2. Identify cost drivers associated with this activity
3. Compute a cost rate per cost driver unit or
transaction
4. Multiply the cost driver rate times the volume of
cost driver units used by the project

08-18
Sample Project Budget
08-19
Activity Direct Costs Budget Overhead Total Cost
Survey 3,500 500 4,000
Design 7,000 1,000 8,000
Clear Site 3,500 500 4,000
Foundation 6,750 750 7,500
Framing 8,000 2,000 10,000
Plumb and Wire 3,750 1,250 5,000

Table 8.6
Sample Budget Tracking Planned and
Actual Activity Costs
08-20
Activity Planned Budget Actual Variance
Survey 4,000 4,250 250
Design 8,000 8,000 - 0 -
Clear Site 4,000 3,500 (500)
Foundation 7,500 8,500 1,000
Framing 10,000 11,250 1,250
Plumb and Wire 5,000 5,150 150
Total 38,500 40,650 2,150

Table 8.7
Example of a Time-Phased Budget
08-21
Months
Activity January February March April May
Total by
Activity
Survey 4,000 4,000
Design 5,000 3,000 8,000
Clear Site 4,000 4,000
Foundation 7,500 7,500
Framing 8,000 2,000 10,000
Plumb and Wire 1,000 4,000 5,000
Monthly Planned 4,000 9,000 10,500 9,000 6,000
Cumulative 4,000 13,000 23,500 32,500 38,500 38,500

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall Table 8.8 9 IQ Pedro Pablo Tamez Vargas
Cumulative Budgeted Cost of the Project
Figure 8.7
08-22
Budget Contingencies
The allocation of extra funds to cover uncertainties and
improve the chance of finishing on time.

Contingencies are needed because
Project scope may change
Murphys Law is present
Cost estimation must anticipate interaction costs
Normal conditions are rarely encountered
08-23
Summary
1. Understand the various types of common project
costs.
2. Recognize the difference between various forms
of project costs.
3. Apply common forms of cost estimation for
project work, including ballpark estimates and
definitive estimates.
4. Understand the advantages of parametric cost
estimation and the application of learning curve
models in cost estimation.

08-24
Summary
5. Discern the various reasons why project cost
estimation is often done poorly.
6. Apply both top-down and bottom-up budgeting
procedures for cost management.
7. Understand the uses of activity-based budgeting
and time-phased budgets for cost estimation and
control.
8. Recognize the appropriateness of applying
contingency funds for cost estimation.

08-25

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Cost Estimation and

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