University of Hong Kong

MEBS6003 Project management

EXAMPLES ON COST ESTIMATION AND BUDGETING

Example on developing direct labour costs

K.F. Chan (Mr.) Page 1 of 8 Feb 2023

 University of Hong Kong
MEBS6003 Project management

K.F. Chan (Mr.) Page 2 of 8 Feb 2023

 University of Hong Kong
MEBS6003 Project management

Parametric Estimation
Boeing Corporation routinely employs a process known as parametric estimation, in which
managers develop detailed estimates of current projects by taking older work (though not
necessarily similar work) and inserting a multiplier to account for the impact of inflation,
labour and material increases, and other reasonable direct costs. This parametric estimate, when
carefully performed, allows Boeing to create highly accurate estimates when costing out the
work and preparing detailed budgets for new aircraft development projects. Even in cases
where the technology is new or represents a signification upgrade over old technologies, it is
often possible to gain valuable insight into the probable costs of development, based on
historical examples.

K.F. Chan (Mr.) Page 3 of 8 Feb 2023

 University of Hong Kong
MEBS6003 Project management

Boeing is not the only firm that has successfully employed parametric cost estimation. The
above figure shows a data graph of the parametric estimation relating to development of the
Concorde aircraft in the 1960’s. The Concorde represented such a unique and innovative
airframe design (not similar to anything developed in the past) that it was difficult to estimate
the amount of design time required to complete the schematics for the airplane. However, using
parametric estimation and based on experiences with other recently developed aircraft, a linear
relationship was discovered between the number of fully staffed weeks (Concorde referred to
this time as “manweeks”) needed to design the aircraft and its projected cruising speed. That
is, the figure demonstrates a direct relationship between the cruising speed of the aircraft and
the amount of design time necessary to complete the schematics. Using these values, it was
possible to make a reasonably accurate cost projection of the expected budget for design,
demonstrating that in spite of significant changes in airplane design over the past decades, the
relationship between cruising speed and design effort has held remarkably steady.

K.F. Chan (Mr.) Page 4 of 8 Feb 2023

 University of Hong Kong
MEBS6003 Project management

Example on learning curve estimates

A construction firm is taking up a new task on the job site. It takes 10 hours to complete a task
in the first run. As the foreman and workers get themselves more familiarized with the job, the
time is reduced to 8.1 hours in the 4th trial. If this learning rate continues, how much time will
it take to complete the same task in the 30th run?

Answer
log(LR )
Now Tx = T1 X b and b =
log 2
where Tx is the time required for the Xth run of the task
T1 is the time required for the first run of the task
X is the number of iterations
b is the learning curve slope
LR is the learning rate

 log(LR )
 slope = log 2 
 

log LR

As T X = T1 X log 2

log LR
TX
=X log 2

T1
T
 log LR
log X  X
 =
 T1
 log 2
log q N
However, log p N = , applying to the left-hand side of above equation, it becomes:
log q p
T 
log X 
 T1  = log LR
log X log 2
T  log 2
Or log X  = log LR
 T1  log X

From the data given in the question, time for the first run is 10 hours, time for the 4th run is 8.1
hours, therefore
 8.1  log 2
log LR = log  
 10  log 4
log LR =-0.04576
or LR=0.9
log LR

Applying to the equation T X = T1 X log 2

T30 = (10)(30)
log 0.9
log 2

K.F. Chan (Mr.) Page 5 of 8 Feb 2023

 University of Hong Kong
MEBS6003 Project management

T30 =5.96, say 6 hours

The learning curve does not only indicate that time and cost required to complete a task will
reduce as number of repetition increases, it also reminds project cost estimator that time and
cost required for previous projects may not be 100% applicable to new projects especially in
the incipient stage of the new project – workers and staff need to get themselves familiarized
in the new project environment and so initial time and cost required for the same type of tasks
but in a new project environment can be higher than that of previous projects.

K.F. Chan (Mr.) Page 6 of 8 Feb 2023

 University of Hong Kong
MEBS6003 Project management

Example on Activities-based Costing and Time-phased Budget

K.F. Chan (Mr.) Page 7 of 8 Feb 2023

 University of Hong Kong
MEBS6003 Project management

[All examples adopted from “Project Management – achieving competitive advantage”

by Jeffrey K. Pinto]

K.F. Chan (Mr.) Page 8 of 8 Feb 2023