ISQM 410

1
ISQM 410 Project Management

• Chapter 5 Estimating Project Costs and Times

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Estimating Cost Time

• Estimating Project Costs Times
• Estimating process of forecasting or
  approximating the time and cost of completing
  project deliverables
• Unique to the organizations there is no off the
  shelf process
• 2 types
• Macro top-down derived by analogy or
  mathematical relationships (parametric)
• Most useful for strategic decision making, high
  uncertainty, small, internal projects, unstable
  scope
• Micro bottoms-up based on estimates of
  elements found in the WBS
• Most useful when cost/time are important, fixed
  price contracts and when customers want details
• Accuracy increase with time spent e.g., they
  cost
• Cost, time, budget estimates are the lifeline
  to controlling projects prime mechanism to
  control cost, schedule performance

3
Estimating Cost Time

• Factors Influencing Estimate Quality
• Planning horizon accuracy decreases over time
• Project duration new technology expands in a
  nonlinear fashion
• People skill level critical to accuracy
• Project structure organization dedicated
  teams improves accuracy
• Padding estimates accuracy key to
  competitiveness
• Organizational culture value placed on
  estimates and accuracy
• Non-project factors equipment downtime,
  holidays, legal limits, etc

4
Estimating Cost Time

• Macro vs. Micro Estimating
• Macro (parametric) approaches
• Ratio method used in the concept (need)
  phase. Ex. - 110/SF. x 2,700 SF 297,000
• Apportion method extension of ratio method
  based on past projects/costs require good
  historical accuracy to ensure accuracy. Ex.
  Construction loan payouts 3 for foundation,
  25 for framing, 15 for plumbing/heating, etc.
  Can apportion costs to WBS deliverables based on
  history.
• Function Point Methods for SW and IT projects
  function points are weighted macro variables or
  major parameters such as no. of inputs/outputs,
  number of inquiries, data files and interfaces.
  Usually adjusted for complexity and added.
  Provide basis for estimating labor.
• Learning Curves used for repetitious projects
  of similar scope. Recognize that learning occurs
  with repetition. Each time the output quantity
  doubles, the unit labor hours are reduced at a
  constant rate. 60 significant improvement
  100 no improvement.

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Estimating Cost Time

• Macro vs. Micro Estimating
• Micro approaches
• Template methods uses past, similar projects as
  a starting point and then adjusted for
  differences. Permits development of schedule,
  cost and budget estimates in a short period of
  time.
• Parametric methods applied to specific tasks
  similar to parametric techniques, but applied to
  WBS tasks. Ex. Wallpaper estimate (5/SY paper
  x 2SY installation 7SY)
• Detailed estimates for WBS work packages based
  on experience of personnel doing the work. If
  significant uncertainty exist, often use low,
  avg. high estimates
• Phase estimating (hybrid) begins with macro
  estimate and refines it for phases of the
  project. Breakdowns may include concept
  definition, design production, deliverables, work
  package definition, etc.

6
Estimating Cost Time

• Estimating Level of Detail
• Rule 1 Level of detail should be no lower than
  necessary sufficient
• Senior management total project and major
  milestone level generally sufficient
• Middle management project segments (phase) of
  milestone level
• Level of detail in WBS will vary with project
  complexity, need for control (related to risk),
  size, cost, duration
• Can use different levels based on need

7
Estimating Cost Time

• Budget estimates
• Not the same as cost estimates.
• Cost estimate becomes a budget when it is
  time-phased.
• WBS work packages require time-phased budgets
• Includes duration and start/end dates
• Types of costs include direct labor, materials,
  equipment, overhead, GA

8
Estimating Cost Time

• Types of Cost
• Direct Costs
• Clearly chargeable to one or more work packages
  project/work package specific
• Include direct labor, materials, equipment,
  POs/subcontracts, computer SW/HW
• Direct O/H Costs
• Functional organization O/H expenses that benefit
  the project directly (can come from line
  organizations or project organization indirect
  costs
• Generally expressed as a ratio percent or
  rate/hour
• Typically applied to a direct cost (labor or
  materials)
• GA Overhead Costs
• Organizational costs not directly linked to a
  specific project
• Typically applied throughout the project (may
  include marketing, HR, accounting, etc.)
• Generally allocated as a percent of total costs
  or total direct costs

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Estimating Cost Time

• Estimating guidelines
• Responsibility at work package level, should be
  done by person most familiar with work
• Use several people to estimate all should have
  relevant experience
• Normal conditions should be based on normal
  conditions, efficient methods and normal level of
  resources (Ex. 8 hours for shift work)
• Time units all time estimates need consistent
  time units
• Independence should assume independence of
  tasks
• Contingencies should not include allowances for
  contingencies (should be estimated separately at
  a higher level)
• Add risk assessments to estimates to avoid
  surprises new technology vs. proven process.
  Use optimistic, most likely and pessimistic
  estimates.

10
Estimating Cost Time

• Refining Estimates Contingency Funds
• Required (and a god business practice) because of
  unknowns present in all projects
• Adjustments may range from 10 to gt 100
• Why
• Hidden interaction costs dependencies,
  hand-offs, etc.
• Normal conditions do not always apply differing
  site conditions on construction projects
• Things go wrong - Murphys Law
• Changes in scope and plans often resulting from
  better knowledge as project progresses
• Adjusting estimates should be part of normal
  project management activities risks, resource
  availability
• Contingency Funds can be project level, work
  package level, or phase specific gt the more
  specific, the more effective

11
Estimating Cost Time

• Creating an Estimating Database
• Based on the PDCA cycle in TQM
• Utilizes lessons learned
• Accumulates historical data (actuals estimates)
  to provide a knowledge base for improving time
  and cost estimates
• Best practice benchmark