Project Management

THE MANAGERIAL PROCESS

Chapter 5

Estimating Project Times and Costs

Remember
Remember
Project
estimation
is
indeed
yardstick for project cost control.
And if the yardstick is faulty, you
start on the wrong foot .
We exhort you not to underestimate
the estimates

Why
Why Estimating
Estimating Time
Time and
and Cost
Cost Are
Are Important
Important
1. Estimates are needed to support good decisions.
2. Estimates are needed to schedule work.
3. Estimates are needed to determine how long the
project should take and its cost.
4. Estimates are needed to determine whether the
project is worth doing.
5. Estimates are needed to develop cash flow needs.
6. Estimates are needed to determine how well the
project is progressing.
7. Estimates are needed to develop time-phased
budgets and establish the project baseline.

Chapter
Chapter Theme
Theme
1. Quality time and cost estimates are the bedrock of
project control.
2. Past experience is the best starting point for these
estimates.
3. The quality of estimates is influenced by other factors
such as people, technology, and downtimes.
4. The key for getting estimates that represent realistic
average times and costs is to have an organization
culture that allows errors in estimates without
incriminations.
5. The use of teams that are highly motivated can help in
keeping task times and costs near the average. For
this reason, it is crucial to get the team to buy into
time and cost estimates.

Chapter
Chapter Theme
Theme
6. Using top-down (macro) estimates is good for initial
and strategic decision making or in situations where
the costs associated with developing better estimates
have little benefit.
7. However, in most cases the bottom-up approach
(micro) to estimating is preferred and more reliable
because it assesses each work package, rather than
the whole project, section, or deliverable of a project.
8. Estimating time and costs for each work package
facilitates development of the project network and a
time-phased budget, which are needed to control
schedule and cost as the project is implemented.

Chapter
Chapter Theme
Theme
9. Using the estimating guidelines will help eliminate many
common mistakes made by those unacquainted with
estimating times and costs for project control.
10. Establishing a time and cost estimating database fits well
with the learning organization philosophy.
11. The level of time and cost detail should follow the old saying
of "no more than is necessary and sufficient
12. Managers must remember to differentiate between
committed outlays, actual costs, and scheduled costs.
13. Finally, how estimates are gathered and how they are used
can affect their usefulness for planning and control.
14. The team climate, organization culture, and organization
structure can strongly influence the importance attached to
time and cost estimates and how they are used in managing
projects.

Key
Key Terms
Terms
Learning curves
A mathematical curve used to predict a pattern of time
reduction as a task is performed over and over.
Macro and Micro estimating
Macro estimates are topdown, rough estimates that use
surrogates to estimate project time and cost and are used to
determine project selection or go-ahead decisions. Bottom-up
micro estimates are detailed estimates of work packages
usually made by those who are most familiar with the task.
Overhead costs
Typically organization costs that are not directly linked to a
specific project. These costs cover general expenses such as
upper management, legal, market promotion, and accounting.
Overhead costs are usually charged per unit of time or as a
percent of labor or material costs.

Key
Key Terms
Terms
Phase estimating
This estimating method begins with a macro
estimate for the project and then refines
estimates for phases of the project as it is
implemented.
Ratio (parametric) methods
Uses the ratio of past actual costs for similar
work to estimate the cost for a potential project.
This macro method of forecasting cost does
not provide a sound basis for project cost
control since it does not recognize differences
among projects.

Key
Key Terms
Terms
Time and cost databases
Collection of actual versus estimated times and costs
of work packages over many projects that are used for
estimating new project tasks and their expected
possible error.
Time-phased budgets
Planned costs that are broken down by distinct time
periods (e.g., $5,000 per week) for a work package, as
opposed to a budget for a whole job/project (6 months
for a total of $130,000). Time phasing allows better cost
control by measuring the actual rate of expenditure
versus the planned expenditure rate over small pieces
of the project.

Key
Key Terms
Terms
Apportionment method
Costs allocated to a specific segment of a project by using
a percent of planned total costfor example, framing a
house might use 25 percent of the total cost, or coding a
teaching module 40 percent of total cost.
Contingency reserves
Usually an amount of money or time set aside to cover
identified and unforeseen project risks.
Direct costs
Costs that are clearly charged to a specific work package
usually labor, materials, or equipment.
Function points

Chapter
Chapter Summery
Summery
1. Factors influencing the quality of estimates
a) Planning horizon
b) Project duration
c) People
d) Project management structure
e) Padding estimates
f) Organization culture
2. Macro versus micro estimating

Chapter
Chapter Summery
Summery
3. Estimating project time and costs
Macro approaches
a) Ratio methods
b) Apportion methods
c) Function point methods
d) Learning curves
Micro approaches
a) Template method
b) Parametric procedures applied to specific tasks
c) Detailed estimates for the WBS work packages
d) A hybrid: Phase estimating

Chapter
Chapter Summery
Summery
4. Level of detail
5. Developing budgets
6. Types of costs
a) Direct costs
b) Direct overhead costs
c) General and administrative overhead costs
7. Estimating guidelines for time, costs, and resources
8. Refining estimates and contingency funds
9. Creating a database for estimating
10. Summary

Factors
Factors Influencing
Influencing the
the Quality
Quality of
of Estimates
Estimates
Planning
Planning
Horizon
Horizon
Other
Other(Nonproject)
(Nonproject)
Factors
Factors

Organization
Organization
Culture
Culture

Padding
Padding
Estimates
Estimates

Project
Project
Duration
Duration

Quality
Qualityof
of
Estimates
Estimates

People
People

Project
ProjectStructure
Structure
and
andOrganization
Organization

Estimating
Estimating Projects
Projects
Estimating
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

Estimating
Estimating Guidelines
Guidelines for
for Times,
Times,
Costs,
Costs, and
and Resources
Resources
1. Have people familiar with the tasks make the estimate.
2. Use several people to make estimates.
3. Base estimates on normal conditions, efficient methods,
and a normal level of resources.
4. Use consistent time units in estimating task times.
5. Treat each task as independent, dont aggregate.
6. Dont make allowances for contingencies.
7. Adding a risk assessment helps avoid surprises to
stakeholders.

Macro
Macro versus
versus Micro
Micro Estimating
Estimating
Conditions for Preferring Top-Down or Bottom-up
Time and Cost Estimates
Condition
Macro Estimates
Strategic decision making
X
Cost and time important
High uncertainty
X
Internal, small project
X
Fixed-price contract
Customer wants details
Unstable scope
X

Micro Estimates
X

X
X

Estimating
Estimating Projects:
Projects: Preferred
Preferred Approach
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

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

Project Estimate
Times
Costs

Apportion
Apportion Method
Method of
of Allocating
Allocating Project
Project Costs
Costs
Using
Using the
the Work
Work Breakdown
Breakdown Structure
Structure

FIGURE 5.1

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

Example:
Example: Function
Function Point
Point Count
Count Method
Method

TABLE 5.3

Methods
Methods for
for Estimating
Estimating Project
Project
Times
Times and
and Costs
Costs (contd)
(contd)
Micro (Bottom-up) Approaches
Template method
Parametric Procedures Applied
to Specific Tasks
Detailed Estimates for the WBS
Work Packages
Phase Estimating: A Hybrid

SB45
SB45 Support
Support Cost
Cost Estimate
Estimate Worksheet
Worksheet

Phase
Phase Estimating
Estimating over
over Product
Product Life
Life Cycle
Cycle

FIGURE 5.3

Level
Level of
of Detail
Detail
Level of detail is different for different levels of
management.
Level of detail in the WBS varies with the
complexity of the project.
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

Developing
Developing Budgets
Budgets
Time-Phased Budgets
A cost estimate is not a budget unless it is timephased.
Time phasing begins with the time estimate for a
project.
Time-phased budgets mirror how the projects cash
needs (costs) will occur or when cash flows from the
project can be expected.
Budget variances occur when actual and forecast
events do not coincide.

Work
WorkPackage
PackageEstimates
Estimates

FIGURE 5.4

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

(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

Contract
Contract Bid
Bid Summary
Summary Costs
Costs

Direct costs
Direct overhead
G&A overhead (20%)
Profit (20%)
Total bid

$80,000
$20,000
$20,000
$24,000
$144,000

FIGURE 5.6

Refining
Refining Estimates
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.

Refining
Refining Estimates
Estimates (contd)
(contd)
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.

Creating
Creating aa Database
Database for
for Estimating
Estimating

Estimating
Database
Templates
FIGURE 5.7

NOW
NOW YOUR
YOUR TURN
TURN
Open Book Quiz
will be taken in the next class from
this chapter and will be based on
Multiple Choice Questions.