Project Cost Estimation
What is Cost and Project Cost
Management?
• Cost is a resource sacrificed or foregone to achieve
a specific objective, or something given up in
exchange.
• Costs are usually measured in monetary units, such
as dollars.
• Project cost management includes the processes
required to ensure that the project is completed
within an approved budget.
2
Project Cost Management Processes
• Cost estimating: Developing an approximation
or estimate of the costs of the resources
needed to complete a project.
• Cost budgeting: Allocating the overall cost
estimate to individual work items to establish a
baseline for measuring performance.
• Cost control: Controlling changes to the project
budget.
3
Basic Principles of Cost Management
• Tangible costs or benefits are those costs or benefits that an
organization can easily measure in dollars.
• Intangible costs or benefits are costs or benefits that are
difficult to measure in monetary terms.
4
Cost Estimating
• Project managers must take cost estimates
seriously if they want to complete projects
within budget constraints.
• It’s important to know the types of cost
estimates, how to prepare cost estimates, and
typical problems associated with cost
estimates.
5
• Direct costs are costs that can be directly
related to producing the products and services
of the project.
• examples of airline direct operating costs are
fuel costs and airport charges, because these
vary with the number of fights made and the
distances traveled
• Indirect costs are costs that are not directly
related to the products or services of the project,
but are indirectly related to performing the
project.
• Examples of airline indirect operating costs might
include the renting of check-in counters and the
salaries of counter staff because, within limits,
these costs are fixed and must be absorbed by
the business irrespective of the number of fights
made.
• Sunk cost is money that has been spent in the
past; when deciding what projects to invest in
or continue, you should not include sunk costs
Elements of a cost estimate
Direct Labor
The wages and salaries
for labor time that can be
directly attributed to the
project. Usually costed
at standard cost rates
applicable to each staff grade.
Direct Materials
• Equipment, materials, and
bought-out services used
specifically on the project.
Direct Expenses
• Travel, accommodation
and other costs chargeable
specifically to the project.
Can include the hiring of
external consultants
Indirect Costs
• Overhead Costs
The general costs of running
the business, such as general
management and accommodation
Usually calculated as a proportion
of total direct costs. Not applicable
if the project is itself charged as
an overhead.
Contingency sum
• An addition, usually calculated
as a small percentage of the total
above-the-line costs, in an attempt
to compensate for estimating errors
and omissions, unfunded project
changes, and other unexpected costs.
Escalation
• An allowance for costs that
increase with time with annual
cost inflation. Important for long
duration projects when national
cost inflation rates are high
Mark up for profit & Selling Price
• These two items apply to projects
sold to external clients. There are
various ways in which they can be
calculated. They are often set according
to the strength of the competition and
what the market will stand. These are
management decisions (not part of the
cost estimating process) but such
decisions are always made easier when
there is confidence in the cost estimating
accuracy
Provisional Sums
• The estimated costs of items
not included in the quoted price
which might have to be charged
extra if the need for them is
subsequently revealed.
Classification Of Estimates According
To Confidence
•
•
•
•
Ballpark estimates
Comparative estimates
Feasibility estimates
Definitive estimates
Table 7-2. Types of Cost Estimates
18
Cost Estimation Techniques
• Unit Technique
• Factor Technique
Sensitive of a particular item on overall cost
C= ∑ (Cd) + ∑ fmUm
• Indexes Technique
Cn/Ck= In/Ik
• Composite Indexes
• Parametric Cost Estimation