Cost and Time

Estimation
 Project Estimation
• Project estimation is a yardstick for project control
• Estimate is done for time and cost
• Project estimation are needed to:
- Support good decisions
- Schedule work
- Assessing project viability
- Develop cash flows and identifying funding requirements
- Determine how well project is progressing
- Develop time-phased budgets and establish project baseline for
cost monitoring and control

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 Project Estimation
• Top down estimates
- Generally by top management
- Based on analogy, group consensus or mathematical relationship
• Bottom-up estimates
- Typically performed by the people responsible for doing the work
- Based on estimated of work-packages
• Estimate accuracy improves with greater effort in terms of both
time and cost
• Project estimating is a trade-off balancing the benefits of
better accuracy against the cost of securing increased
accuracy

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 Types of Cost Estimates

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Brook’s Law: The Mythical Man-Month
 “Adding manpower to a late project makes it later” – learning
curves, coordination. etc.
 What happens if you:
• Add three people to work at the same computer
• Add people with the wrong skill set.
• Add incompatible equipment.
• Give one person three computers.
• Give a super performer three “assistants”.
Who Should Estimate?
 Initially, it may be estimators or managers.
 Ultimately the people responsible for performance.
 Obtain buy-in and commitment
 People should be accountable for delivering within estimates
 Estimate in small group
Unconstrained vs. Constrained
Estimates
 Avoid working from end date: it tends to skew the estimate
 Estimate without time and cost constraints
 Negotiate to fit the constraints or change them
Establish an Estimation Base

 Describe projects in terms of basic factors:

• Product related – size, complexity, etc.
• Process related – resources, technique, etc.
 Categorize projects by type.
 Record actual effort.
 Compare estimates and actuals on future projects.
 Adjust approach to refine estimates
Reviewing an Estimate
• Review the definition for the project
• Review the resources to be used and the activity costs.
• Focus on the sources of data.
• Determine whether the estimating methodology is acceptable.
• Compare estimate against established industry standards
• Optimize expense plan by analyzing activity and resource cost
drivers
• Make sure the estimate incorporates risk in work packages
and contingency
• Assess validity of estimating assumptions
Project Estimation
Progressive Elaboration Leads to the Reduction of the Margins of
Estimating Error

50% Initiation
+/- 50% or more
Margin of Error

40% Requirements Definition

+/- 30% to 50%

30%
High-Level Design
+/- 15% to 25%

20%
Functional Design
+/- 10%
10%

Project Cycle

Margin of error varies with project type

Effort and Duration
 Effort - the number of person hours, person days, person
weeks it takes to complete a task – resource time
 Duration – the number of business or calendar days over which
the task will be done.
 Manhour rate – the unit hourly rate of resource

Resources commonly give durations when asked for estimates: be

certain to capture and track both effort and duration.
 Factors Influencing Quality of Estimates
• Planning horizon
- Accuracy of estimates improves as we move from conceptual stage to
defining individual work packages
• Product technology
• Interface costs
• Skill of people (Estimators)
• Project structure and organization
• Padding estimates
• Organization culture
- Tolerance to estimates paddling
- Importance of estimates
• Others
- Equipment downtime, holidays, statutory constraints, environment etc.
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Estimate Development Checklist
• Review the project objectives, customer requirement, other data,
and estimating assumptions
• Review the scope and identify functional work to be implemented
• Determine standard, historical, and analogous work times for work
categories identified, where possible, and apply in proportion to the
effort
• Estimate the resource hours required to bring together the efforts
of the functional work categories, and convert to cost
• Estimate any training or support requirements
• Review and estimate subcontracting requirements, as applicable
• Estimate managerial, clerical, and extraordinary expenses
• Total all estimated expenses and capital requirements
 Estimating Guidelines
• Use people most familiar with the task
• Use several people with relevant experience and knowledge of the
task (crowdsourcing) and try to achieve consensus
• Estimates should be based on normal conditions, efficient methods,
and normal level of resources. Any possible conflicts in demand for
resources on parallel or concurrent activities should not be
considered at this time
• All tasks time need consistent time units like calendar days, work
days, workweek, man-days etc.
• Treat each task as independent even if some sequential tasks are
performed by the same group or department
• Work packages should not include contingencies
• Add risk assessment to the estimates
• Aggregate estimates by comparing several models
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 Top-down versus Bottom-up Estimating
• Top-down Estimates
- Usually derived from someone’s experience
- Sometimes made by top managers who have little knowledge about
complete project activities
- Typically occur in the conceptual stage of the project
- Helpful in initial development of a project plan and taking bid-no-bid
decisions
- Poor accuracy
• Bottom-up Estimates
- Estimation at work-package level and rolling up work-packages and
associated cost accounts to major deliverables
- Time, resource and cost estimates from work-packages are consolidated
into time-phased networks, resource schedules and budget
- The approach provides the opportunity for making trade-offs among
project constraints

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 Top-down versus Bottom-up Estimating
• Top-down Estimates
- Usually derived from someone’s experience
• - Sometimes madeestimation
The preferred by top managers who is
approach have little make
to first knowledge about
rough top
complete project activities
down estimates, develop WBS and then do bottom-up
- Typically
estimationoccurto indevelop
the conceptual stageand
schedules of the project and reconcile
budgets
- Helpful in initial
differences development
between of a project plan and taking bid-no-bid
two approaches.
decisions
• - Poor
Both accuracy
top-down and bottom-up are used at the appropriate
time in project life cycle
• Bottom-up Estimates
• - Estimation
Results areat compared andlevel
work-package differences
and rollingreconciled.
up work-packages and
associated cost accounts to major deliverables
- Consolidating time, resource and cost estimates from work-packages to
time-phased networks, resource schedules and budget
- The approach provides the opportunity for making trade-offs among
project constraints

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Estimating
Approaches
100%

Engineering or Definitive Bottom-up

Accuracy

Budget

Top-down
 Parametric
 Analogous
Order of magnitude
Time and / or Effort

Don’t spend more effort estimating than required for the

decision to be made!
 Time and Cost Estimates Accuracy

Information
Bricks and Mortar
Technology

Conceptual stage +60% to –30% +200% to –30%

Deliverables defined +30% to –15% +100% to –15%

Work packages defined +15% to –5% +50% to –15%

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 Top-down versus Bottom-up Estimates
Bottom-up
Condition Top-down Estimates
Estimates
Strategic decision
making

Cost and time important 
High uncertainty 
Internal, small projects 
Fixed-price contracts 
Customer needs details 
Unstable scope 
Quick proposals,
budgetary offers


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 Top-down and Bottom-up Estimates
Top-down Estimates Bottom-up Estimates

• Feasibility/conceptual phase • Budgeting

• Rough estimates • Scheduling
Intended Use • Fund requirement • Resource
assessment requirements
• Resource capacity planning • Fund timing
0.1% to 0.3% of total 0.3% to 1% of total
Preparation Cost
project cost project cost

Accuracy -20% to +60% -10% to +30%

• Consensus
• Ratio • Template
Method • Apportion • Parametric
• Function point • Range estimates
• Learning curves
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 Estimation Approaches

Top-down Bottom-up
• Consensus method • Template methods
• Ratio method • Parametric procedure
• Apportion method • Range estimating
• Function point method
• Learning curves

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 Top-down Approaches
• Consensus method
- Draws upon the pooled experience and insight of senior and/or middle
managers
- Not often realistic and can be seriously off mark in areas of
new/unproven technology
- Delphi method is used for greater rigor
• Ratio method
- Sometimes called parametric methods use ratio or surrogates
- Exp. Cost of new plant by capacity size, software by features and
complexity
• Apportion method
- Costs apportioned as percentage of total project costs
- Used when projects closely follow past projects in features and costs
- More suitable for relatively standard projects with little variations
- Exp. Percentage costs for Design, Procurement, Construction,
Installation, Commissioning, Testing, Training etc.
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 Top-down Approaches
Function Point Method for Software Projects
• Estimates are weighted function points or major parameters like:
- Number of inputs
- Number of outputs
- Number of enquiries
- Number of data files
- Number of interfaces
• Function points are weighted by complexity factor which is developed
based on data from historical projects
• Weighted total function points are the basis of estimating labor effort
and cost usually using regression analysis of data derived from past
projects
• In US software industry one person-month is equivalent to on
average 5 function points

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 Top-down Approaches
Function Point Method for Software Projects

Complexity Weighting

Element Low Average High Total

No. of Inputs X2 X2 X2 =

No. of Outputs X3 X3 X3 =

No. of Inquiries X2 X2 X2 =

No. of Files X5 X5 X5 =

No. of Interfaces X5 X5 X5 =

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 Top-down Approaches
Learning Curves
• Learning curve theory states that when same tasks or products are
produced repetitively, the time to perform them improves with
repetition. Accordingly, unit cost also decreases.
• Pattern of improvement phenomena is quantified in the learning
curve also known as improvement curves, experience curves or
industrial progress curves.
• Useful for projects that require same tasks, group of tasks or product
repeated several times
• Beneficial for labor intensive projects
• Lower difficulty level tasks have less opportunity of improvement
• Improvement ration 60% represent high improvement while 100%
means no improvement

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 Bottom-up Approaches

• Template Methods
- Using costs of past similar projects as reference
- Appropriate adjustments made in standard projects in time, cost
and resources
• Parametric Procedures
- Parametric technique is applied to specific tasks

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 Bottom-up Approaches
Range Estimating
• Works best when work-packages have significant uncertainty
associated in terms of time or cost to complete
• Three estimates low, average and high are made which are
influenced by complexity, technology, newness and familiarity etc.
• Group estimating give best results as extreme perceived risks
associated with time and costs are moderated
• Approach helps to reduce surprises as project progresses
• Provides a basis for assessing risk, managing resources and
determining project contingency fund
• Popular in software and new product development projects where
upfront requirements are fuzzy and not well known

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 Bottom-up Approaches
Range Estimating Template

Low Low Average High Risk

WBS Range
Estimate Estimate Estimate Estimate Level
No. (Days)
(Days) (Days) (Days) (Days)

1.1 Camera

1.1.1 Design 6 8 12 6 Low

1.1.2 Production 2 3 4 2 Medium

1.1.3 Outsourcing 7 10 15 8 High

1.1.4 Testing 1 2 3 2 Low

Risk level indicates the degree of confidence that the actual time will
be very close to estimate.
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Single vs. Multi-Point Estimates
• How many of you can predict the future?
• Does single-point estimating make sense?
• With single-point estimating, is there likely to be more padding?
• Most professional underestimate by 15% to 35% (Barry Boehm,
USC 1988)
• Eli Goldratt – it’s more like 50%
Four Estimating Questions
• What is the longest/largest (pessimistic) value?
• What is the minimum (optimistic) value?
• What is the most likely value, given the expected actual
environment/situation?
• Can you do anything about the events that would cause the
actual value to be larger than the minimum/optimistic value?

Optimistic Assumption
• All resource are fully available
• All information was readily available
• No other responsibilities were assigned
• Work could proceed interrupted, full time
• Etc.
Multi-Point Estimating: PERT Estimates

Most Likely Most Likely

Frequency

Optimistic Pessimistic
Values

Beta Distribution
PERT Estimate Calculation

Estimate Mean Value =

Pessimistic + 4 (Most Likely) + Optimistic

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 Phase Estimating

• Phase estimating is used when there is high amount of uncertainty

and final product is not completely known like aerospace projects, IT
projects, and new technology projects.
• A detailed estimate is developed for the immediate phase and macro
estimate for the remaining phases and so on.
• Commitment of costs is made only to the next phase

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 Project Cost Management Process
Planning Cost Management
• Determining the policies, procedures, and documentation that will be
used for planning, executing, and controlling project cost.
Estimating Costs
• Developing an approximation or estimate of the costs of the
resources (person-hour, material, equipment etc.) for each work-
package needed to complete the project.
Determining the Budget
• Aggregating the work-package cost estimates to establish a time-
phased budget which becomes a baseline for measuring cost
performance of the project.
Controlling Costs
• Monitoring actual costs during project execution vis-à-vis baseline
budget and controlling changes in the costs.
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 Types of Costs
• Direct costs
- Labor
- Material
- Equipment
- Others
• Direct overheads
- Can be directly assigned to project deliverables or work packages
- Selective direct overheads charges provide more accurate estimation
- Direct overheads could be charged as percentage of labour or (labour +
material)
• General and administrative (G&A) overheads
- Costs not directly linked to specific project
- Allocated as percentage of direct total cost or a percentage of specific
direct cost (labor, material etc.).
- Exp. Administrative costs, Sales, HR, Finance etc.
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 Project Reserves

• Reserves are dollars included in a cost estimate to mitigate

cost risk by allowing for future situations that are difficult to
predict
• Contingency reserves allow for future situations that may be
partially planned for (sometimes called known unknowns) and
are included in the project cost baseline
• Management reserves allow for future situations that are
unpredictable (sometimes called unknown unknowns)

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 Probabilistic Estimate of Cost
• Single value cost estimates based on the best guess from available
data and details are definitive in nature
• Probabilistic estimates of cost attempt to take into account the future
uncertainties and provide a clearer picture of the risks and
uncertainty in completing the project
• The outcome of a probabilistic estimate is an array of different cost
estimates and the corresponding probabilities
• Monte Carlo simulation is often used for developing probabilistic
estimates of total project cost while taking into account variability in
the individual cost accounts

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