Chapter 5: Estimating Project Times &

Costs

Nguyen Nguyen V.P., Ph.D.

Department of Industrial & Systems Engineering, HCMUT, VNU
Email: nguyennvp@hcmut.edu.vn

Where We Are Now

5–2

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 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

5–3

Why Estimating Time and Cost Are Important

• 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.
• To develop time-phased budgets and establish the
project baseline.

EXHIBIT 5.1
5–4

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 Factors Influencing the Quality of Estimates

Equipment down-
time, national
holidays, vacations, Planning Horizon*
and legal limits
Other
Project
(Nonproject)
Duration
Factors

Quality of
Organization Estimates People
Culture
padding estimates is skills
tolerated vs place a of the
premium on accuracy people
Padding Project Structure
Estimates and Organization
dedicated
project team
*(mốc kế hoạch) the amount of time an organization will look into the
5–5
vs. matrix
future when preparing a strategic plan

Padding Estimates

• For example, if you are asked how long it takes

you to drive to the airport, how do you do?
 give an average time of 30 minutes, assuming a 50/50
chance of getting there in 30 minutes.
 If you are asked the fastest you could possibly get
there, you might reduce the driving time to 20 minutes.
 if you are asked how long the drive would take if you
absolutely had to be there to meet your soulmate, it is
likely you would increase the estimate to, say, 80
minutes to ensure not being late.

3
 Estimating Guidelines for Times,
Costs, and Resources
1. Have people familiar with the tasks make the estimate.
2. Use several people to make estimates.
3. Base estimates on normal conditions, efficient methods, and
a normal level of resources.
4. Use consistent time units in estimating task times.
5. Treat each task as independent, don’t aggregate.
6. Don’t make allowances for contingencies.
 a future event or circumstance that is possible but cannot be
predicted with certainty, such as a natural disaster, or employee
theft
7. Adding a risk assessment helps avoid surprises
to stakeholders
 stakeholders (các bên liên quan): project team, project
managers, executives, project sponsors, customers, and users
5–7

Top-Down versus Bottom-Up Estimating

• Top-Down Estimates
 Are usually are derived from someone who uses
experience and/or information to determine the project
duration and total cost.
 Are 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.

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 Top-Down versus Bottom-Up Estimating

Conditions for Preferring Top-Down or Bottom-up

Time and Cost Estimates

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

TABLE 5.1
5–9

Estimating Projects: Preferred Approach

• Make rough top-down estimates.

• Develop the WBS/OBS.
• Make bottom-up estimates.
• Develop schedules and budgets.
• Reconcile (dung hòa) differences between top-
down and bottom-up estimates

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5
 Top-Down Approaches for Estimating Project
Times and Costs Project
• Consensus methods Estimate
Times
 the pooled experience of senior and/or middle managers to estimate the
total project duration and cost; Costs

 The Delphi Method.

• Ratio methods
 use ratios, or surrogates, to estimate project times or costs
• Apportion method
 extension to the ratio method. Apportionment is used when projects
closely follow past projects in features and costs.
• Function point methods for software and system projects
 using weighted macro variables, called as function points
 The weighted variables are adjusted for a complexity factor
 number of inputs, number of outputs, number of inquiries, number of data
files, and number of interfaces.
• Learning curves
 the same task, group of tasks, or product be repeated several times.
5–11

Ratio methods

Ref: https://xaydungso.vn/tu-van/chi-phi-xay-nha
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6
 Ratio methods

13

Apportion Method of Allocating Project Costs

Using the Work Breakdown Structure

FIGURE 5.1
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 Example: Function Point Count Method

In the U.S. software industry, one person-month represents on

average five function points. That means, a person working one
month can generate on average (across all types of software
projects) about five function points.

TABLE 5.2
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Example: Function Point Count Method

The following Table shows the data collected for a specific task or deliverable

Given this count and the fact that 1 person-month has historically
been equal to 5 function points, the job will require 132 person
TABLE 5.3
months (660/5 = 132). 5–16

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 Learning curves

• The pattern of improvement phenomenon can be

used to predict the reduction in time to perform
the task.
• Learning curve (also known as improvement
curve, experience curve, and industrial progress
curve)
 Each time the output quantity doubles, the unit labor
hours are reduced at a constant rate
 60 percent, representing very large improvement
 100 percent, representing no improvement at all.

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Learning Curves Unit Values

TABLE A5.1
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 Learning Curves Cumulative Values

TABLE A5.2
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Bottom-Up Approaches for Estimating Project

Times and Costs
• Template methods
 the project is similar to past projects
 Templates are created based on the costs of previous, similar projects
• Parametric procedures applied to specific tasks
 parametric techniques such as cost per square foot can be applied to
specific tasks
 Paint a house: costs $5 per square meter and $2 per meter for
cleaning, for a total cost of $7. Total area to pain is 170 m2, it wil
cost…
• Range estimates for the WBS work packages
 significant uncertainty associated with the time or cost
 require three time estimates—low, average, and high. Having a group
determine the low, average, and high cost or duration gives best
results
• Phase estimating: A hybrid
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 Template methods, Range estimates: Support
Cost Estimate Worksheet

FIGURE 5.2
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Phase Estimating over Product Life Cycle

• This approach begins with a top-down estimate for the project and then
refines estimates for phases of the project as it is implemented.
• Some projects by their nature cannot be rigorously defined because of
the uncertainty of design or the final product, such as construction
projects
• A detailed estimate is developed for the immediate phase and a macro
estimate is made for the remaining phases of the project. FIGURE 5.3
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 Top-Down and Bottom-Up Estimates

FIGURE 5.4
5–23

Level of Detail
• Level of detail is different for different levels of management.
• Excessive detail is costly.
1. Fosters a focus on departmental outcomes
2. Creates unproductive paperwork
3. If the levelof the WBS is increased by one, the number of cost
accounts may increase geometrically.
• Insufficient detail is costly.
1. Lack of focus on goals
2. Wasted effort on nonessential activities
• Level of detail in the WBS varies with the complexity of the project.
 WBS has built-in flexibility.
 Participating organization units may expand their portion of
the structure to meet their special needs.
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 Types of Costs
• Direct Costs
 Costs that are clearly chargeable to a specific work
package.
– Labor, materials, equipment, and other
• Direct (Project) Overhead Costs
 Fixed operating expenses that aren't linked to a product or
a service.
 Costs incurred that are directly tied to an identifiable project
deliverable or work package.
– Salary, rents, supplies, specialized machinery
• General and Administrative Overhead Costs
 Be organization costs that are not directly linked to a
specific project: advertising, accounting, and senior
management above the project level

5–25

Contract Bid Summary Costs

Direct 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

FIGURE 5.5
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 Three Views of Cost
• Different
perceptions of
costs and
budgets vary
depending on
their users.
• The project
manager must
be very aware to
sett up the
project budget
and to
communicate
these differences
to others.

FIGURE 5.6
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Refining Estimates
• Reasons for Adjusting Estimates
 Interaction costs are hidden in estimates.
– the time necessary to coordinate activities is
typically not reflected in independent estimates
 Normal conditions do not apply.
– Resource shortages, outsource certain tasks can
increase costs
 Things go wrong on projects: Design flaws
 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.
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 Creating a Database for Estimating

Saving historical
data—estimates and
actuals—provides a
knowledge base for
improving project
time and cost
estimating. FIGURE 5.7
5–29

Key Terms

Apportionment methods Overhead costs

Bottom-up estimates Padding estimates
Contingency funds Phase estimating
Delphi method Range estimating
Direct costs Ratio methods
Function points Template method
Learning curves Time and cost databases

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 WBS Figure

TABLE 5.4
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Assignment

• Problem 2, Problem 4 on page 204 and 205

• Problem 5, Problem 6 on page 205 and 206

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