Estimating Project Times and Costs
Chapter 5
Objectives
• Methods of estimating times and costs
• Using Learning curves
• Types of costs
Types of Costs
• Direct Costs
– Costs that are clearly
chargeable to a specific
work package.
• Indirect Costs
– Costs incurred that are
not directly tied to an
identifiable project
deliverable or work
package.
• Special Case Costs
– “estimated costs” usually
assigned to task that has
been done over and
over.
• Sunk Costs
– Those costs that are
unrecoverable.
• Capital Costs
– Assets that have a useful
life, year or more.
Estimating Projects
• Estimating
– The process of forecasting or approximating
the time and cost of completing project
deliverables.
– The task of balancing expectations of
stakeholders and need for control while the
project is implemented.
5–4
Why Estimating Time and Cost Are Important
• To support good decisions.
• To schedule work.
• To determine how long the project should take
and its cost.
• To determine whether the project is worth doing.
• To develop cash flow needs.
• To determine how well the project is progressing.
• To develop time-phased budgets and establish the
project baseline.
EXHIBIT 5.1
5–5
Factors Influencing the Quality of Estimates
Planning Horizon
Other
(Nonproject)
Factors
Organization
Culture
Padding
Estimates
5–6
Project
Duration
Quality of
Estimates
People
Project Structure
and Organization
Estimating Guidelines for Times,
Costs, and 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, don’t aggregate.
6. Don’t make allowances for contingencies.
7. Adding a risk assessment helps avoid surprises
to stakeholders.
5–7
Types of Estimates
• Order of Magnitude
– “seat of your pants” estimate with very little thought or
preparation
– Before it is stated, stress it is very rough and limited in
accuracy
• Budget Estimate
– More accurate and requires some research
– Can use historical data
Cont.
• Definitive Estimate
– Most accurate
– Use the WBS completed and tested for accuracy
– Include contingency allowances – lump sum amt.
– Includes: training, testing, travel, monitoring, etc.
• Pro Forma Assessments
– Initial profile of project costs
– Can be order of magnitude, budget, or definitive
estimates
– Are refined until there is a particular level of
comfort
Cost Estimating Approaches
• Bottom- up
– Most time consuming and most expensive
– Uses WBS where each task is estimated and then added
together as reverse upward.
– Tendency to “pad” as one goes
• Parametric Procedures Applied to Specific Tasks
– Using Industrial Engineering standards and analysis
– Involves cost per sq. ft., linear foot, etc.
Cost Estimating Approaches
• Macro (Top-down) Approaches
– Consensus methods
– Expert judgment
– Apportion method
– Learning curves
Project Estimate
Times
Costs
Estimate duration times
• Fairly certain if done before in other projects
– derive average duration from historical data
• Some projects books available containing
mean tables for typical activities
• Ask around
Estimate Resources
• Four categories of
resources
–
–
–
–
Money
Materials
Machines
People
• Questions to ask?
– Who and what are
needed?
– Who and what can do
the work?
– Who and what are
available?
– What level and
competence is required?
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.
5–14
Project Resource Tools
• WBS
• Resource Matrix
• Gantt chart: a bar chart showing both the
amount of time involved and the sequence in
which activities can be performed
LO 3
Tracking Progress Gantt Chart
Vertical Axis: Always
Activities or Jobs
Horizontal bars used to denote length
of time for each activity or job.
Activity 1
Activity 2
Activity 3
Activity 4
Activity 5
Activity 6
Time
Horizontal Axis: Always Time
Learning Curves
• A person engaged in
a repetitive task will
improve his/her
performance over
time.
• Airline industry was
first industry to use
Learning curves
Formulas
• To determine Learning Curve rate:
T2/T1 = T4/T2=T6/T3=T8/T4
• To determine time to produce nth or n units:
Learning Curves Unit Values
TABLE A5.1
5–19
Learning Curves Cumulative Values
TABLE A5.2
5–20
ANY QUESTIONS?