Cost and Time

Estimation
 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
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 Basic Definitions

• 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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 Project Estimation
• Project estimation is a yardstick for project control
• Project estimation are needed to:
- Support good decisions
- Schedule work
- Project viability
- Develop cash flow needs
- Determine how well project is progressing
- Develop time-phased budgets and establish project baseline
• 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
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
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.
Factor Influencing Estimates

• Work environment
• Product quality
• Size of product and project
• Complexity of product
• WBS component size, component complexity
• Resources skills and experience level
• The number of resources on the task
• The relationship among resources
 Factors Influencing Quality of Estimates
• Planning horizon
• 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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 Estimating Guidelines
• Use people most familiar with the task
• Use several people with relevant experience and knowledge of the
task
• Estimates should be based on normal conditions, efficient methods,
and normal level of resources
• 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
- 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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 Top-down versus Bottom-up Estimating

• Top-down Estimates
- Usually derived from someone’s experience
- Sometimes made by top
• The preferred managers
approach is who have
to first little knowledge
make rough top about
down
complete project activities
estimates develop WBS, then do bottom-up estimation
- Typically occur in schedules
to develop the conceptual
andstage of the project
budgets
- Helpful in initial development of a project plan and taking bid-no-bid
• Both top-down and bottom-up are used at the
decisions
- Poorappropriate
accuracy time
• Bottom-up
• Results are compared and differences reconciled.
Estimates
- Estimation at work-package level and rolling 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 and Bottom-up Estimates
Top-down Estimates Bottom-up Estimates
• Feasibility/conceptual phase • Budgeting
• Rough estimates • Scheduling
Indented Use • Fund requirement • Resource
assessment requirements
• Resource capacity planning • Fund timing
Preparation Cost
• 1/10 to 3/10 of a percent of • 3/10 to 1 percent of
total project cost total 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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 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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 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 of senior and/or middle managers
- Delphi method is used for more 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
- 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
Learning Curves

• Learning curve theory states that when many items are produced
repetitively, the unit cost of those items decreases in a regular
pattern as more units are produced
• 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

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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 past projects
• Weighted total function points are the basis of estimating labor effort
and cost usually using regression analysis of data derived from past
projects

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 Bottom-up Approaches

• Template Methods
- Using costs of past similar projects as reference
- Appropriate adjustments made in standard projects
• Parametric Procedures
- Parametric technique 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

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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 her 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

• Used when there is high amount of uncertainty and final product is

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

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 Project Budgeting
• Project budgeting is the process of adding up the cost estimates of
the individual project activities or work-packages to develop a time-
phased cost baseline for measuring project cost performance.
• It serves as a standard for monitoring and controlling the project
during execution phase.
• Project budgeting process includes:
- Developing cost estimates for individual activities or work-packages
- Setting down precedence and succession order of the activities to
develop project schedule
- Allocate to different budgetary time periods the cost of work packages
according to schedule
- Aggregating cost of work packages for each budgetary period
- The individual budgetary period costs give cash flows for each period
and the cumulative cost provides project cost baseline

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 Project Budget
Year 1 Year 2 Year 3

• Direct Costs  Indirect Costs

- Hardware  Your people’s time
- Software and effort
- Contractor fees  Estimated time on
• Estimated hours project
• Hourly Rates per  Estimated cost
contractor based on hourly
• Various contractor rate
rates  Other’s time and effort
- Training  Opportunity cost
- Fanfare  What projects or
- Other tasks are NOT
going to get done in
order to get this
TOTALS project done?
 Cost Budgeting Example: Software Project

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 Cost/Budget Estimating
(Effort x Rate) + Capital Costs + Overheads + Supplies +
Other Costs + Reserves = Total Cost

Money Contingency Reserves Cumulative Cost

or Effort

Time
 S- Curves

12000

10000

8000

6000

4000

2000

01 2 3 4 5 6 7 8 9 10 11 12

Commited Cost Scheduled Budget

Actual Cost
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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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