Estimating Project Times

and Costs
 Estimating Projects
• Estimating
– The process of forecasting or approximating the time and cost of
completing project deliverables.
• In order to develop a budget, we must:

WBS

Resource estimating
Requirement methods

Resource
rates
Activity Duration Cost Estimate

estimating
methods
Project schedule
2
 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 (one shift, 5 working
days,..), efficient methods, and a normal level of resources.
4. Treat each task as independent.
5. Don’t make allowances for contingencies.

3
 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
 Top-Down Estimates
• This strategy is based on collecting the opinions and
experiences of top and middle managers, and available past
data concerning similar activities
• The managers estimate the overall project cost and the cost
of major deliverables.
• These cost estimates are then given to lower level managers,
who are expected to continue the breakdown into budget
estimates for the specific sub-deliverables and work
packages
• This process continues to the lowest level
• Advantages: Aggregate estimates can often be developed
quite accurately for repeated projects
5
 Bottom-Up Estimates
• The people doing the work are consulted regarding times and budgets
to ensure the best level of accuracy
• Initially, estimates are made in terms of resources, such as labor hours
and materials. They are later converted to dollar equivalent.
• Bottom-up budgets should be and usually are, more accurate in the
detailed tasks.
• The resulting task estimates are aggregated to give the total direct cost
of the project

• Advantages:
– Individuals closer to the work are apt to have a more accurate idea
of resource requirements
– The direct involvement of low-level managers in estimate
preparation increases the likelihood that they will accept the result
with a minimum of aversion 6
 Estimating Projects: Preferred
Approach
• Develop the WBS/OBS.
• Make rough top-down estimates.
• Make bottom-up estimates.
• Reconcile differences between top-down and
bottom-up estimates

7
 Methods for Estimating Project
Project Estimate
Times and Costs Times
Costs

• Macro (Top-down) Approaches

– Consensus methods
– Analogy method
– Learning curves

8
 Estimation Techniques
• Consensus Methods (Expert Judgment / Delphi
method)
– Expert Judgment: It uses the pooled experience of
senior and/or middle managers to estimate the
total project duration and cost. It involves several
meeting where the experts discuss, argue, and
ultimately reach a decision as to their best guess
estimate.
– Delphi method: Several experts familiar with the
project are consulted. They each estimate the
project cost. These estimates are compared and
discussed. The estimation process iterates until an
agreed estimate is reached. 9
 Estimation Techniques
• Analogy Methods
– These techniques are applicable when other projects in
the same application domain have been completed.
– The cost of a new project is estimated by analogy with
these completed projects.
– The cost of a similar project is analyzed and adjusted for
difference between it and the proposed project.
– The adjustment takes into account factors such as dates,
project scale, location, exchange rates,..

10
 Cost Indexes Method (ratio Method)
An index is a dimensionless number used to indicate how a
cost has changed over time relative to a base year.
Changes usually occur as a result of inflation, technological
advances, availability of labor and materials, changes in
consumer buying patterns
Many indexes are periodically published
Engineering News Record Construction Index
 Marshall and Swift cost index (Equipment)
 Statistical Abstract of the United States (government
indexes on yearly materials, labor, and construction costs)
U.S Department of Labor (output per man-hour by
industry)
 Bureau of Labor and Statistics (Producer Price and
consumer Prices indexes). 11
 Cost Indexes Method (ratio Method)

Using the indexes, if we know the cost of goods in one year, we can
estimate the cost of the same goods in another year by using a simple
ratio.
CN = Ck ( IN / Ik )
IN = Index for current year, N
Ik = Index for base year, k
Ck = cost of item during base year
CN = cost of the item during the current year

12
Example: A certain index for the cost of purchasing and installing utility
boilers is keyed to 1974, where the baseline value was set to 100.
Company XYZ installed a 50,000-lb/hr boiler in 1996 for $525,000
when the index had a value of 468. This same company must install
another boiler of the same size in 1999. The index in 1999 is 542. What
is the approximate cost of the new boiler?

C1999= $525,000 (542/468) = $608,013.

13
 Parametric Cost Estimating Techniques
Relates the cost of an activity to one or more cost
drivers (independent variables)
Cost drivers are design variables that account for a
large portion of the total cost behavior.
Construction : floor space, roof surface area, wall surface area
Trucks / car : horsepower, gross weight
Turbine engine: fuel consumption
Electrical power plant: kilowatts
Computers: megabytes
Software : # of lines of codes

14
 Power -Sizing Technique
Power sizing is a cost estimating technique that uses the relationship
between capacity or size and cost. It is frequently used for estimating the
cost of building industrial plants and equipment.
X
 S New 
C New C  
 S 
 
where CNew is the cost of the new plant, Both in $ as of the point in time
}
C is the cost of the existing plant, for which the estimate is desired
SNew is the capacity of the new plant,
S is the capacity of the existing plant.
X is the cost-capacity factor which varies depending on the type
of plant or equipment being built.
X = 0.68 for nuclear generating plants and 0.79 for fossil-fuel
generating plants
15
Example. Suppose that it is desired to estimate the cost of
building a 600-MW fossil-fuel plant. It is known that a 200-
MW plant cost $100 million 20 years ago when the
approximate cost index was 400, and the cost index is now
1,200. The cost capacity factor for a fossil-fuel plant is 0.79.
1. Update the known cost of the 200 MW plant 20 years ago to
a current cost. C = 100 (1200/400) = $300 million
2. Use the power-sizing model to estimate the cost of the 600
MW plant CNew= $300 million (600-MW/200-MW)0.79=
$714 million 16
 Learning Curves
Studies have shown that human performance usually improves when a
task is repeated
The learning curve effect was first observed in the aircraft and
aerospace industries with respect to labor hours per unit (T.P. Wright,
“Factors affecting the cost of airplanes”, J. of Aeronautical Sciences, Vol 3., 1936.)
In general, performance improves by a fixed percent each time
production doubles (each time the output doubles, the worker hours
per unit decrease to a fixed percentage of their previous value)

17
Most learning curves are based on the assumption that the number of
input resources needed decreases by a constant percentage each time
the number of units produced doubles.
Y1 = labor hours required to produce the first output unit
Yn = labor hours needed to produce the nth output unit , n = 2, 4, 8, 16,…
s = learning curve parameter (improvement rate, e.g., 90% )
Y2 = Y1 s
Y4 = Y2 s = Y1 s2
Y8 = Y4 s = Y1 s3
Yn = Y1 sp for p = 0, 1, 2, …. and n = 2p
Yn
log( )  p log( s ) Yn
Y1 log( ) / log( n)  log( s) / log( 2)  b
 Y1
log( n)  p log( 2)
b = learning curve exponent
Yn  Y1 nb for n = 2, 3, 4, …. Unit Learning curve equation
 Learning Curves Unit Values
Learning curve parameter (improvement rate)
0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95
b -0.736966 -0.621488 -0.514573 -0.415037 -0.321928 -0.234465 -0.152003 -0.074001
Unit
1 1 1 1 1 1 1 1 1
2 0.6000 0.6500 0.7000 0.7500 0.8000 0.8500 0.9000 0.9500
3 0.4450 0.5052 0.5682 0.6338 0.7021 0.7729 0.8462 0.9219
4 0.3600 0.4225 0.4900 0.5625 0.6400 0.7225 0.8100 0.9025
5 0.3054 0.3678 0.4368 0.5127 0.5956 0.6857 0.7830 0.8877
6 0.2670 0.3284 0.3977 0.4754 0.5617 0.6570 0.7616 0.8758
7 0.2383 0.2984 0.3674 0.4459 0.5345 0.6337 0.7439 0.8659
8 0.2160 0.2746 0.3430 0.4219 0.5120 0.6141 0.7290 0.8574
9 0.1980 0.2552 0.3228 0.4017 0.4929 0.5974 0.7161 0.8499
10 0.1832 0.2391 0.3058 0.3846 0.4765 0.5828 0.7047 0.8433
11 0.1708 0.2253 0.2912 0.3696 0.4621 0.5699 0.6946 0.8374
12 0.1602 0.2135 0.2784 0.3565 0.4493 0.5584 0.6854 0.8320
13 0.1510 0.2031 0.2672 0.3449 0.4379 0.5480 0.6771 0.8271
14 0.1430 0.1940 0.2572 0.3344 0.4276 0.5386 0.6696 0.8226
15 0.1359 0.1858 0.2482 0.3250 0.4182 0.5300 0.6626 0.8184
16 0.1296 0.1785 0.2401 0.3164 0.4096 0.5220 0.6561 0.8145
17 0.1239 0.1719 0.2327 0.3085 0.4017 0.5146 0.6501 0.8109
18 0.1188 0.1659 0.2260 0.3013 0.3944 0.5078 0.6445 0.8074
19 0.1142 0.1604 0.2198 0.2946 0.3876 0.5014 0.6392 0.8042
20 0.1099 0.1554 0.2141 0.2884 0.3812 0.4954 0.6342 0.8012
21 0.1061 0.1507 0.2087 0.2826 0.3753 0.4898 0.6295 0.7983
22 0.1025 0.1465 0.2038 0.2772 0.3697 0.4844 0.6251 0.7955
23 0.0992 0.1425 0.1992 0.2722 0.3644 0.4794 0.6209 0.7929
24 0.0961 0.1387 0.1949 0.2674 0.3595 0.4747 0.6169 0.7904
25 0.0933 0.1353 0.1908 0.2629 0.3548 0.4701 0.6131 0.7880
26 0.0906 0.1320 0.1870 0.2587 0.3503 0.4658 0.6094 0.7858
27 0.0881 0.1290 0.1834 0.2546 0.3461 0.4617 0.6059 0.7836
28 0.0858 0.1261 0.1800 0.2508 0.3421 0.4578 0.6026 0.7815
29 0.0836 0.1233 0.1768 0.2472 0.3382 0.4541 0.5994 0.7794
30 0.0815 0.1208 0.1737 0.2437 0.3346 0.4505 0.5963 0.7775
31 0.0796 0.1183 0.1708 0.2405 0.3310 0.4470 0.5933 0.7756
32 0.0778 0.1160 0.1681 0.2373 0.3277 0.4437 0.5905 0.7738
33 0.0760 0.1138 0.1654 0.2343 0.3244 0.4405 0.5877 0.7720
34 0.0744 0.1117 0.1629 0.2314 0.3213 0.4374 0.5851 0.7703
35 0.0728 0.1097 0.1605 0.2286 0.3184 0.4345 0.5825 0.7687
36 0.0713 0.1078 0.1582 0.2260 0.3155 0.4316 0.5800 0.7671
37 0.0699 0.1060 0.1560 0.2234 0.3127 0.4289 0.5776 0.7655
38 0.0685 0.1043 0.1538 0.2210 0.3100 0.4262 0.5753 0.7640
39 0.0672 0.1026 0.1518 0.2186 0.3075 0.4236 0.5730 0.7625
40 0.0660 0.1010 0.1498 0.2163 0.3050 0.4211 0.5708 0.7611
41 0.0648 0.0995 0.1479 0.2141 0.3026 0.4187 0.5687 0.7597
42 0.0636 0.0980 0.1461 0.2120 0.3002 0.4163 0.5666 0.7584
43 0.0625 0.0966 0.1444 0.2099 0.2979 0.4140 0.5646 0.7570
44 0.0615 0.0952 0.1427 0.2079 0.2958 0.4118 0.5626 0.7558
45 0.0605 0.0939 0.1410 0.2060 0.2936 0.4096 0.5607 0.7545
46 0.0595 0.0926 0.1394 0.2041 0.2915 0.4075 0.5588 0.7533
47 0.0586 0.0914 0.1379 0.2023 0.2895 0.4055 0.5570 0.7521 19
48 0.0577 0.0902 0.1364 0.2005 0.2876 0.4035 0.5552 0.7509
49 0.0568 0.0890 0.1350 0.1988 0.2857 0.4015 0.5535 0.7498
50 0.0560 0.0879 0.1336 0.1972 0.2838 0.3996 0.5518 0.7486
 Learning curves Cumulative Values
Learning curve parameter (improvement rate)
0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95
b -0.736966 -0.621488 -0.514573 -0.415037 -0.321928 -0.234465 -0.152003 -0.074001
Unit
1 1 1 1 1 1 1 1 1
2 1.6000 1.6500 1.7000 1.7500 1.8000 1.8500 1.9000 1.9500
3 2.0450 2.1552 2.2682 2.3838 2.5021 2.6229 2.7462 2.8719
4 2.4050 2.5777 2.7582 2.9463 3.1421 3.3454 3.5562 3.7744
5 2.7104 2.9455 3.1950 3.4591 3.7377 4.0311 4.3392 4.6621
6 2.9774 3.2739 3.5928 3.9345 4.2994 4.6881 5.1008 5.5380
7 3.2158 3.5723 3.9601 4.3804 4.8339 5.3217 5.8447 6.4039
8 3.4318 3.8469 4.3031 4.8022 5.3459 5.9358 6.5737 7.2612
9 3.6298 4.1021 4.6260 5.2040 5.8389 6.5332 7.2898 8.1112
10 3.8131 4.3412 4.9318 5.5886 6.3154 7.1161 7.9945 8.9545
11 3.9839 4.5665 5.2229 5.9582 6.7775 7.6860 8.6890 9.7919
12 4.1441 4.7800 5.5013 6.3147 7.2268 8.2444 9.3745 10.6239
13 4.2951 4.9831 5.7685 6.6596 7.6647 8.7925 10.0516 11.4511
14 4.4381 5.1770 6.0257 6.9941 8.0923 9.3311 10.7211 12.2736
15 4.5740 5.3628 6.2739 7.3190 8.5105 9.8611 11.3837 13.0921
16 4.7036 5.5413 6.5140 7.6355 8.9201 10.3831 12.0398 13.9066
17 4.8276 5.7132 6.7467 7.9440 9.3218 10.8977 12.6899 14.7174
18 4.9464 5.8791 6.9727 8.2453 9.7162 11.4055 13.3344 15.5249
19 5.0606 6.0396 7.1925 8.5399 10.1037 11.9069 13.9735 16.3291
20 5.1705 6.1950 7.4065 8.8284 10.4849 12.4023 14.6078 17.1302
21 5.2766 6.3457 7.6153 9.1110 10.8602 12.8920 15.2373 17.9285
22 5.3791 6.4922 7.8191 9.3882 11.2299 13.3765 15.8624 18.7241
23 5.4783 6.6346 8.0183 9.6604 11.5943 13.8559 16.4833 19.5170
24 5.5744 6.7734 8.2132 9.9278 11.9538 14.3306 17.1002 20.3074
25 5.6677 6.9086 8.4040 10.1907 12.3086 14.8007 17.7132 21.0955
26 5.7583 7.0407 8.5910 10.4494 12.6589 15.2666 18.3227 21.8812
27 5.8464 7.1696 8.7745 10.7040 13.0050 15.7283 18.9286 22.6648
28 5.9322 7.2957 8.9545 10.9548 13.3471 16.1861 19.5312 23.4462
29 6.0158 7.4190 9.1313 11.2020 13.6853 16.6402 20.1306 24.2257
30 6.0974 7.5398 9.3050 11.4458 14.0199 17.0907 20.7269 25.0032
31 6.1770 7.6581 9.4759 11.6862 14.3509 17.5377 21.3202 25.7788
32 6.2547 7.7742 9.6439 11.9235 14.6786 17.9814 21.9107 26.5526
33 6.3308 7.8880 9.8094 12.1578 15.0031 18.4219 22.4985 27.3246
34 6.4051 7.9997 9.9723 12.3892 15.3244 18.8593 23.0835 28.0949
35 6.4779 8.1095 10.1328 12.6179 15.6428 19.2938 23.6660 28.8636
36 6.5492 8.2173 10.2910 12.8439 15.9583 19.7254 24.2461 29.6306
37 6.6191 8.3233 10.4469 13.0673 16.2710 20.1543 24.8237 30.3961
38 6.6876 8.4276 10.6008 13.2883 16.5810 20.5805 25.3989 31.1601
39 6.7548 8.5302 10.7526 13.5069 16.8885 21.0041 25.9719 31.9227
40 6.8208 8.6312 10.9024 13.7232 17.1935 21.4252 26.5427 32.6838
41 6.8855 8.7307 11.0504 13.9373 17.4960 21.8438 27.1114 33.4435
42 6.9492 8.8287 11.1965 14.1493 17.7962 22.2601 27.6780 34.2019
43 7.0117 8.9252 11.3409 14.3592 18.0942 22.6741 28.2425 34.9589
44 7.0732 9.0204 11.4835 14.5671 18.3899 23.0859 28.8051 35.7147
45 7.1337 9.1143 11.6245 14.7731 18.6835 23.4955 29.3658 36.4692
46 7.1932 9.2069 11.7640 14.9772 18.9751 23.9030 29.9246 37.2225
47 7.2518 9.2983 11.9019 15.1795 19.2646 24.3085 30.4815 20
37.9745
48 7.3095 9.3885 12.0383 15.3801 19.5522 24.7120 31.0367 38.7254
49 7.3663 9.4775 12.1733 15.5789 19.8379 25.1135 31.5902 39.4752
50 7.4222 9.5654 12.3069 15.7761 20.1217 25.5131 32.1420 40.2239
Example 1: A manufacturer has a new contract for 16 prototype units
and a total of 800 labor hours were required for the first unit. Past
experience has indicated that on similar types of units the improvement
rate was 80%.
How many labor hours are required to produce the 16th unit?
How many labor hours are required to finish the whole project of 16
prototype units?
Y16 = Y1 16b , where b = log(0.8)/log(2) =-0.32193
Y16 = 800 16-0.32193 = 800 (0.4096) = 327.68 labor hours
16

Y
t 1
t = 800 (8.920) = 7,136 hours

The average unit labor hours = 7,136/16 = 446 labor hours per unit

21
Example 2: The assembly department is to start building a new
configuration of computer systems. The first system requires 3.5 hours
to assemble. Past experience indicates that an 85% learning curve
applies in this situation. How many units have to be assembled before a
a system can be built in less than 2 hours?

Yn = Y1 nb , where Y1 = 3.5 hours and b = log(0.85)/log(2) =-0.2345

n =? such that Yn < 2 hours,
3.5 n-0.2345 < 2 => n0.2345 > 1.75 => n > 10.87 or n = 11
The 11th unit will be assembled in less than 2 hours.

22
 Linear Regression
Linear regression is a statistical technique used to estimate the
relationship between two variables.
Actual observation Deviation7

Values of Dependent Variable

Deviation5 Deviation6

Deviation3

Deviation4

Deviation1
LeastTrend
Deviation2squares
line,method
y^= a + bx
minimizes the sum of the
squared errors (deviations)
Value of Independent Variable
For small data sets, this technique can be used by hand. For large data
sets, spreadsheet and statistic packages can be used to estimate23 the
relationship.
 Least Squares Method

The graph shows a data set involving a cost driver, X, and a dependent
cost, Y.
The dataset suggest a linear relationship.

24
 Equations to calculate the regression variables a and b

Y  a  bX
The variables a and b are the ones that minimize the sum of squared
errors
 n n
Minimize  (Yi  Yi )   (a  bX i  Yi )
2 2

i 1 i 1
n

 X Y  nXY
i i
b i 1
n

X
i 1
i
2
 nX 2

a  Y  bX 25
Example 1. Find a linear equation to predict the packaging and
processing cost for an order (y) given its weight x = 250 lb.
Data point xi weight yi (Packaging cost) xiyi xi weight Line Fit Plot
1 230 97 22,310 52,900
2 280 109 30,520 78,400 140

yi (Packaging cost)
3 210 88 18,480 44,100 120
4 190 86 16,340 36,100 100
5 320 123 39,360 102,400 80
6 300 114 34,200 90,000 60
40
7 280 112 31,360 78,400
20
8 260 102 26,520 67,600 0
9 270 107 28,890 72,900 180 230 280 330
10 190 86 16,340 36,100 xi weight
Sum 2530 1024 264320 658900
Average 253 102.4 ∑xy ∑x2

264320  (10)(253)(102.4)
b  0.279
658900  (10)(253) 2

a  102.4  (0.279)(253)  31.813

a  Yn  bX
y  31.813  0.279 x  X Y  nXY
i i
b i 1
n
Y =31.813 +0.279 (250) = $101.563. X
i 1
i
2
 nX 2 26
Example 2. For a certain drilling operation within a flexible machining
cell, data regarding the time (in hours) to drill 1, 2, 3, and 4 holes in a ¼
inch sheet of carbon steel have been obtained.
Data Point xi (No. of holes) yi hours xiyi
1 2 0.0381 0.0762 4 xi (No. of holes) Line Fit Plot
2 3 0.0720 0.2160 9
3 4 0.1078 0.4312 16 0.1400
4 3 0.0815 0.2445 9 0.1200
5 1 0.0360 0.0360 1
0.1000
6 2 0.0605 0.1210 4

yi hours
7 1 0.0382 0.0382 1 0.0800
8 4 0.1318 0.5272 16 0.0600
9 3 0.0985 0.2955 9 0.0400
10 1 0.0468 0.0468 1
0.0200
11 2 0.0721 0.1442 4
12 4 0.0950 0.3800 16 0.0000
Sum 30 0.8783 2.5568 90 0 1 2 3 4 5
Average 2.5 0.0732 ∑xy ∑x2 xi (No. of holes)

2.5568  (12)(2.5)(0.0732)
b  0.0241
90  (12)(2.5) 2

a  0.0732  (0.0241)(2.5)  0.01295

27
y  0.01295  0.0241x
 Model validation
Determine how well the model can estimate the cost/time.
Validation can be accomplished using statistical “goodness of fit”
measures such as standard error and the correlation coefficient
The standard error (SE) measures the average variation between the
actual and estimated cost/time values
n
 2
 i i)
( y  y
SE  i 1
n
The correlation coefficient (R) measures the closeness of the actual
data points to the regression line.
n

(y i  y )(xi  x )
R i 1

 n 2 
n
2
 ( yi  y )   ( xi  x )  28
 i 1   i 1 
 xi (weight in yi (cost in $  
yi ( y i  y i ) 2 ( x i  x ) 2 ( y i  y ) 2 ( yi  y )( xi  x )
Data point lb) million) xiyi
1 400 278 111,200 160,000 312.1772 1168.0797 175002.7778 96203.3611 129753.0556
2 530 414 219,420 280,900 397.9428 257.8325 83136.1111 30334.0278 50218.0556
3 750 557 417,750 562,500 543.0847 193.6351 4669.4444 971.3611 2129.7222
4 900 689 620,100 810,000 642.0451 2204.7634 6669.4444 10167.3611 8234.7222
5 1130 740 836,200 1,276,900 793.7843 2892.7543 97136.1111 23053.3611 47321.3889
6 1200 851 1,021,200 1,440,000 839.9658 121.7527 145669.4444 69081.3611 100314.7222
Sum 4910 3529 3225870 4530300 3529 6838.8176 512283.33 229810.83 337971.6667
Average 818.3333 588.1667
b 0.6597 SE 33.7609676
a 48.2829 R 0.98500839

29
Excel Tutorial: Regression analysis
a

31
 Parametric Estimate of Material Costs
J. Nicholas, Project Management for Business and Engineers, 2nd Ed., Elsevier Inc., 2004.

A warehousing contractor wants a quick way to estimate the material cost of a

facility. The company’s engineers investigate the relationship between several
building parameters and the material costs for eight recent projects comparable
in terms of general architecture, layout and construction material. Using the
method of Least Square Method, they develop the following regression model
that relates material cost (y) to floor space (x1) in terms of 10,000 sq. ft. and the
number of shipping/receiving docks (x2) in a building.
y = 201,978 + 41,490 x1 + 17230 x2
Suppose a proposal is being prepared to construct a new 300,000 sq. ft. facility
with two docks. The estimated material cost is
y = 201,978 + (41,490) (30) + (17230) (2) = $1,481,138 32