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Chapter FiveEstimating Project Times and Costs5–1Copyrig
- 1. Chapter Five Estimating Project Times and Costs 5–1 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5–2 Where We Are Now Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-2 Learning Objectives Understand estimating project times and costs are the foundation for project planning and control Describe guidelines for estimating time, cost, and resources Describe the methods, uses, and advantages and disadvantages of top-down and bottom-up estimating methods Distinguish different kinds of costs associated with a project Suggest a scheme for developing an estimating database for future projects Understand the challenge of estimating mega projects and describe steps that lead to better informed decisions Define a “white elephant” in project management and provide examples
- 2. 5–3 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter Outline 5.1 Factors Influencing the Quality of Estimates 5.2 Estimating Guidelines for Times, Costs, and Resources 5.3 Top-Down versus Bottom-Up Estimating 5.4 Methods for Estimating Project Times and Costs 5.5 Level of Detail 5.6 Types of Costs 5.7 Refining Estimates 5.8 Creating a Database for Estimating 5.9 Mega Projects: A Special Case 5–4 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5–5 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 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
- 3. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-5 5–6 EXHIBIT 5.1 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 Why Estimating Time and Cost Is Important Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-6 5–7 Factors Influencing the Quality of Estimates
- 4. Quality of Estimates Project Complexity People Project Structure and Organization Padding Estimates Organization Culture Other (Nonproject) Factors Planning Horizon Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-7 5–8 Estimating Guidelines for Times, Costs, and Resources 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 Do not make allowances for contingencies. Add a risk assessment to avoid surprises to stakeholders Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 5. Project Management 6e. 5-8 5–9 Developing Work Package Estimates Preparing Initial Estimates Use several people to make estimates Assume normal conditions Use consistent time units Assume tasks are independent Make no allowance for contingencies Include a risk assessment Use people familiar with the tasks Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-9 5–10 Top-Down versus Bottom-Up Estimating Top-Down Estimates Are usually derived from someone who uses experience and/or
- 6. information to determine the project duration and total cost. Are sometimes made by top managers who have little knowledge of the processes used to complete the project. Bottom-Up Approach Can serve as a check on cost elements in the WBS by rolling up the work packages and associated cost accounts to major deliverables at the work package level. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-10 5–11 Top-Down versus Bottom-Up Estimating TABLE 5.1 Conditions for Preferring Top-Down or Bottom-up Time and Cost Estimates Top-down Bottom-up Condition Estimates 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 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 7. Project Management 6e. 5-11 5–12 Estimating Projects: Preferred 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 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-12 5–13 Top-Down Approaches for Estimating Project Times and Costs Consensus methods Ratio methods (sometimes called parametric) Apportion method Function point methods for software and system projects Learning curves Project Estimate Times Costs
- 12. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-13 5–14 Apportion Method of Allocating Project Costs Using the Work Breakdown Structure FIGURE 5.1 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-14 5–15 Simplified Basic Function Point Count Process for a Prospective Project or Deliverable TABLE 5.2
- 13. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-15 5–16 Example: Function Point Count Method TABLE 5.3 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-16 5–17 Bottom-Up Approaches for Estimating Project Times and Costs Template methods Parametric procedures applied to specific tasks Range estimates for the WBS work packages Phase estimating: A hybrid Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 14. Project Management 6e. 5-17 5–18 Range Estimating Template FIGURE 5.2 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-18 5–19 Phase Estimating over Product Life Cycle FIGURE 5.3 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-19 5–20 Top-Down and Bottom-Up Estimates FIGURE 5.4 Copyright © 2018 McGraw-Hill Education. All rights reserved.
- 15. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-20 5–21 Level of Detail Level of detail in the WBS varies with the complexity of the project, the need for control, the project size, cost, duration, and other factors. Excessive detail is costly. Fosters a focus on departmental outcomes rather than on deliverable outcomes Creates unproductive paperwork Insufficient detail is costly. Lack of focus on goals Wasted effort on nonessential activities Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-21 5–22 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 project deliverables or work packages.
- 16. Salary, rents, supplies, specialized machinery General and Administrative Overhead Costs Organization costs indirectly linked to a specific package that are apportioned to the project. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-22 5–23 Contract Bid Summary Costs FIGURE 5.5Direct costs $80,000 Direct overhead $20,000 Total direct costs $100,000 G&A overhead (20%) $20,000 Total costs $120,000 Profit (20%) $24,000 Total bid $144,000 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-23 5–24 Three Views of Cost FIGURE 5.6 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 17. Project Management 6e. 5-24 5–25 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 Overly optimistic Strategic misrepresentation Adjusting Estimates Time and cost estimates of specific activities are adjusted as the risks, resources, and situation particulars become more clearly defined. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-25 5–26 Estimating Database Templates FIGURE 5.7 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 18. Project Management 6e. 5-26 Mega Projects: A Special Case Mega Projects Are large-scale, complex ventures that typically cost $1 billion or more, take many years to complete, and involve multiple private and public stakeholders. High-speed rail lines, airports, healthcare reform, the Olympics, development of new aircraft Often involve a double whammy. Cost much more than expected but underdelivered on benefits they were to provide. Are sometimes called “White Elephants” Over budget, under value, high cost of maintaining (exceeds the benefits received) 5–27 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Three Steps of the Reference Class Forecasting (RCF) Process Select a reference class of projects similar to your potential projects. Collect and arrange outcome data as a distribution. Create a distribution of cost overruns as a percentage of the original project estimate. Use the distribution data to arrive at a realistic forecast. Compare the original cost estimate for the project with the reference class projects. 5–28 Copyright © 2018 McGraw-Hill Education. All rights reserved.
- 19. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5–29 Key Terms Apportionment Bottom-up estimates Delphi method Direct costs Function points Learning curves Overhead costs Padding estimates Phase estimating Range estimating Ratio methods Reference class forecasting (RCF) Template method Time and cost databases Top-down estimates White elephant Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-29 5–30 WBS Figure Exercise Figure 5.1 Copyright © 2018 McGraw-Hill Education. All rights reserved.
- 20. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-30 5–31 Learning Curves Unit Values TABLE A5.1 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-31 5–32 Learning Curves Cumulative Values TABLE A5.2 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Project Management 6e. 5-32