1.
Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 5–1
Estimating Project
Times and Costs
CHAPTER FIVE

2.
Where We Are Now

3.
Estimating Projects
Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 5–3
• Estimating
–The process of forecasting or approximating the time
and cost of completing project deliverables.
–The task of balancing the expectations of stakeholders
and the 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

4.
Why Estimating Time and Cost Are Important
EXHIBIT 5.1
• 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.
Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 5–4

5.
Factors Influencing the Quality of Estimates
Quality of
Estimates
Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 5–5
Project
complexity
People
Project Structure
and Organization
Padding
Estimates
Organization
Culture
Other (Nonproject)
Factors
Planning
Horizon

6.
Estimating Guidelines for Times,
Costs, and Resources
Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 5–6
1. Responsibility.
2. Use several people to estimate.
3. Normal conditions.
4. Time units.
5. Independence.
6. Contingencies.
7. Adding a risk assessment helps avoid
surprises to stakeholders.

7.
Top-Down versus Bottom-Up Estimating
• Top-Down Estimates(Macro) are usually
derived from a resource or group of
resources who use prior experience and
information to determine the project
duration and total cost.
• Bottom-Up Estimates (Micro) can serve
as a check on cost elements in the WBS by
rolling up the work package associated
cost accounts to major deliverables at the
work package level.

8.
Macro versus Micro Estimating
Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 5–8
TABLE 5.1
Conditions for Preferring Top-Down or Bottom-up
Time and Cost Estimates
Condition
Strategic decision making
Macro Estimates
X
Micro Estimates
Cost and time important X
High uncertainty X
Internal, small project X
Fixed-price contract X
Customer wants details X
Unstable scope X

9.
Estimating Projects: Preferred Approach
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•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

10.
Methods for Estimating Project
Times and Costs
• Top-down
Approaches
(Macro)
–Consensus methods
–Ratio methods
–Apportion method
–Function point methods for
software and system projects
–Learning curves
Project Estimate
Times
Costs
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10

11.
Apportion Method of Allocating Project Costs Using a
(High Level) Work Breakdown Structure
FIGURE 5.1
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11

12.
Simplified Basic Function Point Count Process for a
Prospective Project or Deliverable: Example
In this approach we are looking at durations, not costs
TABLE 5.2
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13.
Example:
Function Point Count Method
TABLE 5.3
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14.
Methods for Estimating Project
Times and Costs (cont’d)
• Bottom-up
Approaches (Micro)
–Template method
–Parametric Procedures
Applied to Specific Tasks
–Range Estimating
–A Hybrid: Phase Estimating
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15.
Phase Estimating over
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Product Life Cycle
FIGURE 5.3

16.
Level of Detail
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• Level of detail is different for different levels of
management.
• Level of detail in the WBS varies with the
complexity of the project.
• Excessive detail is costly.
–Fosters a focus on departmental outcomes
–Creates unproductive paperwork
• Insufficient detail is costly.
–Lack of focus on goals
–Wasted effort on nonessential activities

17.
Types of Costs
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• 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 that are not directly
linked to a specific project

18.
Example: Contract Bid Summary Costs
FIGURE 5.6
Direct costs $80,000
Direct overhead
Total direct costs
$20,000
$100,000
G&A overhead (20%)
Total costs
$20,000
$120,000
Profit (20%) $24,000
Total bid $144,000
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19.
Three Views of Cost Accrual
FIGURE 5.5
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20.
Refining Estimates
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• 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.

21.
Creating a Database for Estimating
• The best way to improve the accuracy of
estimates is to collect and archive data from
previous projects, both estimates and
actuals.
• Historical data provides a knowledge base for
improving project time and cost estimates.
Creating an estimating database is a “best
practice” among leading project management
organizations.

22.
Creating a Database for Estimating
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FIGURE 5.7
Estimating
Database
Templates