005810603.pdf

Project Management Gaafar 2007 / 1
Time and Cost Estimation
Dr. Lotfi Gaafar
Source: PMBOK Guide 2000

Importance of Time and Cost Estimation
 Estimates are needed to support good decisions.
 Estimates are needed to schedule work.
 Estimates are needed to determine how long the project
should take and its cost.
 Estimates are needed to determine whether the project is
worth doing.
 Estimates are needed to develop cash flow needs.
 Estimates are needed to determine how well the project is
progressing.
 Estimates are needed to develop time-phased budgets and
establish the project baseline

Guidelines for Time and Cost Estimation
 Have people familiar with the tasks make the estimate.
 Use several people to make estimates.
 Base estimates on normal conditions, efficient methods, and
a normal level of resources.
 Use consistent time units in estimating task times.
 Treat each task as independent, don’t aggregate.
 Don’t make allowances for contingencies.
 Account for risks separately.

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
Condition Macro Estimates Micro Estimates
Strategic decision making X
Cost and time important X
High uncertainty X
Internal, small project X
Fixed-price contract X
Customer wants details X
Unstable scope X
A brief comparison

Estimation Methods
Top-down (macro) estimates: analogy, group consensus,
or mathematical relationships
– Consensus methods
– Ratio methods
– Apportion method
– Function point methods for software and system projects
Bottom-up (micro) estimates: estimates of elements of
the work breakdown structure
– Template method
– Parametric Procedures Applied to Specific Tasks
– Detailed Estimates for the WBS Work Packages

Activity Definition

Activity Sequencing

Activity Duration Estimation

Activity Duration Estimation- Inputs

Activity Duration Estimation- Tools

Schedule Development

Schedule Control

Activity Cost Estimation

Activity Cost Estimation- Inputs

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

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.

Look at the history of similar projects to get a rough
estimate of costs. Make sure the scope and nature are
similar.
Determine the internal resources you have available to
use - people, equipment, etc., within your organization.
Determine the external resources - those not currently in
your organization - that you will need to get the job done.
Project Budget

Sample Cost Estimation Tools
 Activity Based Costing
 Benchmarking
 Target Costing

Activity Based Costing
 Description:
– Quantitatively measures the cost and
performance of activities
– It is the quantitative aspect of the Activity based
costing that makes it a more efficient tool that
improves the quality of the final decision.
 When to use it?
– Evaluate relative cost of various activities, and
potential effects of modifications
– Analyze alternative process flows with
comparative economic evaluation

 Procedure:
– Analyze Activities
– Gather Costs
– Trace Costs to Activities
– Analyze Costs

Example
Total expenses $365.7
Activity Division
A1 $109.8
A11 $54.9
A12 $18.3
A13 $36.6
A2 $182.9
A21 $128
A22 $36.6
A23 $18.3
A3 $73.1
A31 $14.6
A32 $43.9
A33 $14.6

Benchmarking
 Description:
– It is the continuous and systematic process of measuring
and assessing products, services, practices against
those of high performing organizations to improve
performance.
– Two types of benchmarking:
- Benchmarking prices
- Benchmarking processes
 When to use it ?
– Benchmarking is used when a company is suffering
losses in a certain area and wants to improve its
performance to overcome these losses.

Benchmarking
 Procedure:
– Identify the work process or area to be improved
– Analyze the work process
– Measure your own performance
– Identify benchmarking partners
– Determine data collection method
– Collect data
– Determine performance gap
– Develop action plan
– Implement action plan
– Monitor results
– Recalibrate benchmarks (Repeat process)

Target Costing
 Description4
:
– Is the cost that can be incurred while still gaining
profit.
Target Cost = Estimated Selling Price (Target Price) – Desired Profit
 When to use it1
?
– Dominantly with new products and services
– Improve existing products

Target Costing
Example (The Montclair Paper Mill)5
Setting the target price: Per Ton
Competitor’s selling price to the merchant $1466
Less: freight paid by the mill (30)
Normal sales returns & allowances (60)
Montclair capital charge (120)
Ship to the DC (11)
DC operating cost (25)
DC capital charge (58)
Target Manufacturing Cost $1162

Refining Estimates
 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.

* This Presentation is Based on information from PMBOK Guide 2000
Project Management
Cost Management*
Dr. Lotfi Gaafar

Project Cost Management Processes
 Resource planning: determining what
resources and quantities of them should be
used
 Cost estimating: developing an estimate of
the costs and 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

Resource Planning
Cost Estimating

Cost Budgeting
Cost Control

Resource Planning
 The nature of the project and the organization will
affect resource planning
 Some questions to consider:
– How difficult will it be to do specific tasks on the project?
– Is there anything unique in this project’s scope
statement that will affect resources?
– What is the organization’s history in doing similar tasks?
– Does the organization have or can they acquire the
people, equipment, and materials that are capable and
available for performing the work?

Cost Control
 Project cost control includes
– monitoring cost performance
– ensuring that only appropriate project changes are
included in a revised cost baseline
– informing project stakeholders of authorized changes
to the project that will affect costs
 Earned value management is an important tool
for cost control

Using Software to Assist in Cost
Management
 Spreadsheets are a common tool for
resource planning, cost estimating, cost
budgeting, and cost control
 Many companies use more sophisticated and
centralized financial applications software for
cost information
 Project management software has many cost-
related features

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