Project Planning 3

Cost Estimating & Budgeting

HERU ANDRAIKO
PM Process Groups vs PM Knowledge Areas
process Initiating Planning Executing Monitoring Closing
knowledge & Control
Scope

Time

Cost

Quality

Human Resource

Communication

Risk

Procurement

Integration
 MENGAPA PERLU PROJECT
COST BUDGETING DALAM
COST PLANNING ?
Untuk memastikan bahwa perencanaan proyek sudah
mencakup :
•Estimasi biaya untuk setiap resource
•Pengalokasian estimasi biaya setiap resource yang
dibutuhkan oleh setiap work item

RZH 2008
 PLANNING FOR COST BUDGETING

• Cost Estimating
• Cost Budgeting

RZH 2008
 Klasifikasi Resources

• Manpower (Direct & Indirect)

• Material (Direct & Indirect)
• Equipment
• Subcontracts
• Critical Information (drawings,
specifications,dll)

RZH 2008
 Contoh Project : Pembuatan Parit
Activity Resource Estimating
Tipe Resource Quantity
Indirect labour 6 orang
Direct labour 50 orang
Selokan precast dan tutupnya 300 m
Semen 100 kantong
Pasir & kerikil 60 m3
Alat gali tanah (manual) 16 set
Alat setting selokan precast 2 set
Alat angkut tanah (manual) 10 set
Alat angkut dan aduk concrete 3 set
RZH 2008
 Cost Estimating
INPUTS TOOLS & OUTPUTS
TECHNIQUES
1. Analogous Estimating
1. WBS 1. Activity cost
2. Parametric Estimating
estimates
2. Enterprise 3. Bottom-up Estimating
environmental 2. Activity cost
4. Determine resource
factors cost rates
estimate
supporting detail
3. Organizational 5. Project management
process assets software 3. Requested
6. Vendor bid analysis changes
4. Project scope
statement 7. Reserve analysis 4. Cost Management
8. Cost of quality Plan
5. WBS dictionary
6. Project
management plan

RZH 2005
 Contoh Project : Pembuatan Parit
Cost Estimating

Tipe Resource Quantity Rupiah

Indirect labour 6 orang 2.000.000
Direct labour 50 orang 8.000.000
Selokan precast & tutupnya 300 m 8.000.000
Semen 100 kantong 6.000.000
Pasir & kerikil 60 m3 3.000.000
Alat gali tanah (manual) 16 set 800.000
Alat setting selokan precast 2 set 500.000
Alat angkut tanah (manual) 10set 700.000
Alat angkut & aduk concrete 3 set 1.000.000
RZH 2008
Apa perbedaan antara
“Cost” dan “Price”?
 Costs and prices
• The cost of developing the system and the price
charged to the customer are different things
• Costs must be accurately estimated to allow a
price for the system to be established
• The price may be less than, equal to or more
than the cost of development. Many non-
technical factors are involved in setting a price
for the system
 Cost estimation objectives
• To establish a budget for a project
• To provide a means of controlling project costs
• To monitor progress against that budget by
comparing planned with estimated costs
• To establish a cost database for future
estimation
• To know in advance the expected cost in varying
degree of accuracy, at different phases of the
project.
 Owner's Purpose of Estimate

1.Making investment decision in the conceptual

stage.
2.Negotiate and finalize the contract at the
implementation phase.
3.To implement cost control measures.

Prof Awad S. Hanna

 Contractor’s Purpose of Estimate

1.Determine project cost and profit.

2.To Implement cost control measure.
3.To develop data base for that can be used for
future project.

Prof Awad S. Hanna

A good estimate depends on our
consideration on:

•Project complexity and size

•Requirements stability
•Past experience
•The moment when the estimate is done
 TYPES OF ESTIMATES
1. Preliminary
2. Unit price
3. Assembly or Conceptual Cost
4. Detailed estimate
2 Million dollars building
Accuracy
within

20% Preliminary

15% Unit Price

10% Assembly

5% Detailed

Time
5min 1hour 1day 3 weeks

• Each phase of a project life cycle requires a different type of

estimate--each estimate requires different types of information.
Prof Awad S. Hanna
 Types of Cost Estimate
WBS Types of Estimates Estimating Data Collection Contingency
Level Methods Accuracy (%)

1 Preliminary cost Parametric Rough project 15 - 30

estimates scope (-30 - +60)
2, 3 Budget Estimates Analogy •Project scope 10 – 15
& capacity (-15 - +30)
•General
specification
•Rough Unit
Price
4, 5, 6 Definitive Cost Project Data •Well-defined 5 – 10
Estimate project plan (-5 - +15)
•Vendor quotes
•Specification
•Unit Price

RZH 2008
Estimation Accuracy vs. Time

[Boehm et al., "Cost Models for Future Software Life Cycle Processes: COCOMO 2.0« , Annals of Software Engineering, 1995]
 1. Preliminary Estimate
“Order of Magnitude”
• A cost prediction based solely on size and/or
capacity of a proposed project.
• Before any engineering or design is completed.
• Rely on broad data from already executed
similar project
 relate cost to the main capacity/size parameter
 number of beds in hospital
 square feet of office space
 number of students in school

Prof Awad S. Hanna

 Preliminary Estimate (cont’)
• Advantageous
– Allows a quick determination of the feasibility of a project
– A quick screening on alternatives, etc. (e.g., should it be a
concrete building or a steel building !).

• Purpose:
1. Ranking alternatives
2. Evaluate economics and financial feasibility
3. As a check on more detailed estimates

Prof Awad S. Hanna

 Example of Preliminary Estimates
• Parking Garage
$15.0/sq. ft or $4500/parking space
• High School
$80 to 110/sq. ft or $40,000/ student seat
• Medical Centers
$90 to 130/sq. ft

Prof Awad S. Hanna

 2. Unit Price Estimate
• Unit prices are obtained from data on projects
already performed.
 Cost of labor, material, and equipment for all units of
work are added together and divided by the number
of units involved.

Prof Awad S. Hanna

 Example of Unit Price Estimating
Technique for Heavy Construction
______________________________________________________
Work Item Estimated Quantity Unit Price Total
______________________________________________________
Site Preparation 50,000 sq. yd $7 $ 350,000
Earth Excavatio 100,000 cu.yd. $ 12 $ 1,200,000
Paving 50,000 sq.yd. $8 $ 400,000
Total bid price $ 1,950,000
______________________________________________________

Prof Awad S. Hanna

 3. Assembly or Conceptual Estimate
• Performed when conceptual design decisions are being
made.
• Work package concept can be used to determine the
element or assembly to be studied
• We need a breakdown of cost of a completed project
into its functional elements to:
1. Find the relationship between element cost and project cost
2. Distribution of cost between constituent elements (sq. feet of _____)

Prof Awad S. Hanna

 Elemental Estimate Analysis
Gross floor Area = 250,000 ft2

Prof Awad S. Hanna

4. Detailed (Definitive )Estimate
• Prepared after drawings and specification are
completed.
• Requires a complete quantity takeoff based on
drawing and the complete set of contract
documents
• Need information on labor rate "productivity",
material cost, cost of renting or purchasing
equipment

Prof Awad S. Hanna

 Variation Factors in Estimating
1. Time

• We base our estimate on the cost of existing projects

that were built in the past
• Price-level changes over time
• We need to project costs of future projects

Prof Awad S. Hanna

 1. Time (Cont.)
Cost Indices
• Published by R.S. Means and ENR
• Used to update old cost information

Uses
1. To update known historical costs for new estimates
2. To estimate replacement cost for specific assets
3. To provide for contract escalation

Limitations
1. They represent composite data, average of many projects.
2. They fail to recognize technological changes.
3. There is a reporting time log.
Prof Awad S. Hanna
To update old cost information to current date

cost of new facility = cost of old facility x new cost index

old cost index

To predict future cost

n
F = P (1 + i)
F = future cost
P = present cost
i = predicted rate of cost escalation per period
n = number of periods (years)

Prof Awad S. Hanna

 2. Location

• Some factors affecting cost in different

locations are:
1. Transport cost
2. Taxes
3. Labor supply and local productivity
4. Codes and local inspection

Prof Awad S. Hanna

 2. Location (Cont.)

ENR Regional Index

City Cost Index
Boston 1120
Chicago 1400
New York 1700

Prof Awad S. Hanna

 3. Size
• As the quantity built increases, the unit cost
decreases,

Proposed Size
Size Factor = Comparison Size

• UCM = Unit Cost Multiplier

E-1
UCM = SF

Prof Awad S. Hanna

 Use This Side for Use This Side for
Unit Cost Mult ipliers Tot a l Cost Mult ipliers
(UCM Me t hod) (TCM Me t hod)
Project

Table for Buildings

1.175
Complex
Project s
1.9 0 4
Size
Fa ct or
0 .2
Buildings
0 .23 5
Complex
Project s
0 .3 8 1

Unit and Total Cost 1.128

1.0 9 6
1.0 72
1.0 52
1.6 19
1.443
1.3 20
1.227
0 .3
0 .4
0 .5
0 .6
0 .3 3 8
0 .43 8
0 .53 6
0 .6 3 1
0 .48 6
0 .577
0 .6 6 0
0 .73 6

Multipliers 1.0 3 6
1.0 23
1.0 11
1.153
1.0 9 3
1.0 43
0 .7
0 .8
0 .9
0 .725
0 .8 8 1
0 .9 10
0 .8 0 7
0 .8 75
0 .9 3 9
1.0 0 0 1.0 0 0 1.0 1.0 0 0 1.0 0 0
0 .9 9 1 0 .9 6 3 1.1 1.0 9 0 1.0 59
0 .9 8 2 0 .9 3 0 1.2 1.178 1.116
0 .9 74 0 .9 0 0 1.3 1.26 6 1.170
0 .9 6 7 0 .8 74 1.4 1.3 54 1.224
0 .9 6 0 0 .8 50 1.5 1.440 1.275
0 .9 54 0 .8 29 1.6 1.527 1.3 26
0 .9 48 0 .8 0 9 1.7 1.6 12 1.3 75
0 .9 43 0 .78 0 1.8 1.6 9 7 1.423
0 .9 3 8 0 .774 1.9 1.78 2 1.470
0 .9 3 3 0 .758 2.0 1.8 6 6 1.516
0 .9 28 0 .743 2.1 1.9 50 1.56 1
0 .9 24 0 .73 0 2.2 2.0 3 3 1.6 0 5
0 .9 20 0 .717 2.3 2.116 1.6 48
0 .9 16 0 .70 5 2.4 2.19 9 1.6 9 1
0 .9 12 0 .6 9 3 2.5 2.28 1 1.73 3
0 .9 0 9 0 .6 8 2 2.6 2.3 6 3 1.774
0 .9 0 5 0 .8 72 2.7 2.445 1.8 15
0 .9 0 2 0 .6 6 2 2.8 2.526 1.8 55
0 .8 9 9 0 .6 53 2.9 2.6 0 7 1.8 9 4
0 .8 9 6 0 .6 44 3 .0 2.6 8 8 1.9 3 3
0 .8 9 3 0 .6 3 6 3 .1 2.76 8 1.9 72
0 .8 9 0 0 .6 28 3 .2 2.8 49 2.0 10
0 .8 8 7 0 .6 20 3 .3 2.9 29 2.0 47
0 .8 8 5 0 .6 13 3 .4 3 .0 0 8 2.0 8 4
0 .8 8 2 0 .6 0 6 3 .5 3 .0 8 8 2.121
0 .8 8 0 0 .59 9 3 .6 3 .16 7 2.157
0 .8 77 0 .59 3 3 .7 3 .246 2.19 2
0 .8 75 0 .58 6 3 .8 3 .3 25 2.228
0 .8 73 0 .58 0 3 .9 3 .40 4 2.26 3
0 .8 71 0 .574 4.0 3 .48 2 2.29 7

Prof Awad S. Hanna

 Chart to Convert Unit Prices

2.000
Unit Price Cost Multiplier

1.500
(UCM)

1.000

0.500

0.000
0.1 1.0 10.0
Size Factor

Buildings Complex Projects

 Chart to Convert Total Project Cost
Total Project Cost Multiplier

4.000
3.500
3.000
2.500
(TCM)

2.000
1.500
1.000
0.500
0.000
0.1 1.0 10.0
Size Factor

Buildings Complex Projects

 4. Shape
40’
50’

Bldg B
Bldg A
Area =1500ft2
30’

40’
Area = 15ooft2
Perimeter = 150ft
Perimeter = 160ft

10’
15’ 15’
Wall height = $10 x 160 x 10 = $16,000
= $10.00 of floor area
Bldg. A
Wall cost = $10 x 160 x 10 = $16,000
= $10.00 of floor area
Bldg B
Wall cost = $10 x 180 x 10 = $18,000
= $11.25 of floor area
 5. "Learning Effect"

• Increased productivity by doing repeated

work.
 6. Other Factors
• Hard to quantify but should be evaluated
– Quality
– Soil condition
– Weather Condition
– Competition
– Productivity
 Estimation—the problems
• Lack of historical data
• Estimates done hurriedly
• Complete specifications not available
• Characteristics of software development
• Rapid changes in methodologies
• Lack of experience (how many projects do you actually manage?)
• Optimism of developers
• Difference in experience levels (who are you estimating for?)
• No linear relation in development (if 1 developer takes 1 year, 2 developers
must only take 6 mo)
• Estimate modification for low bid
 Cost estimation techniques
• Expert judgment
• Delphi method
• Estimation by analogy
• Pricing to win
• Top-down estimation
• Bottom-up estimation
• Algorithmic cost modelling
 Expert judgement
• One or more experts in both system
development and the application domain use
their experience to predict development costs.
Process iterates until some consensus is
reached.
• Advantages: Relatively cheap estimation
method. Can be accurate if experts have direct
experience of similar systems
• Disadvantages: Very inaccurate if there are no
experts!
 Cost Estimation: Delphi
Method
Developed at the Rand Corporation in 1948 for
achieving expert consensus without group conflict:
– a team of experts is formed and asked not to discuss their work with one
another
– a coordinator provides each expert with project information and asks for an
estimate
– coordinator distributes anonymous estimates, with comments, and asks for
revised estimates
– process continues until consensus is reached

Usually works well, but is expensive and time consuming.

 Pricing to win
• The project costs whatever the customer has to
spend on it
• Advantages: You get the contract
• Disadvantages: The probability that the
customer gets the system he or she wants is
small. Costs do not accurately reflect the work
required
 Cost Estimation: Bottom-Up
Technique
• Breaks a project into parts, estimates the cost of the
parts, then combines all estimates to achieve an
overall estimate
• Projects may be broken down by:
– sub-systems or modules
– life cycle phases
– project tasks
– work assignments
 Bottom-Up Techniques
Advantages and
Disadvantages
+ Make all project or product parts explicit, thus
providing a basis for scheduling and resource
assignments
+ Easy and cheap method to apply
– Low level estimates are usually made by
analogy, and so may fail for new products or
tasks
 Cost Estimation: Algorithmic
Cost Models
• Provide computational means for deriving
estimates as functions of important cost
factors
• Functions used contain constants derived from
statistical analysis of data from past projects:
– can only be used if data from past projects is available
– must be calibrated by knowledgeable analysts
– relies on initial size and cost factor estimates which
themselves are questionable
 Algorithmic cost modeling
• Cost is estimated as a mathematical function of
product, project and process attributes whose
values are estimated by project managers
• The function is derived from a study of
historical costing data
• Most commonly used product attribute for software cost
estimation is LOC (code size)
• Most models are basically similar but with
different attribute values
Which estimation method is the best?
• Each method has strengths and weaknesses
• Estimation should be based on several methods
• If these do not return approximately the same result, there is
insufficient information available
• Some action should be taken to find out more in order to
make more accurate estimates
• Pricing to win is sometimes the only applicable method
 Principles of Effective Cost
Estimation
•Principle 1: Divide and conquer.

–To make a better estimate, you should divide the

project up into individual subsystems and then into
tasks and activities required to develop them.
–Next, you make a series of detailed estimates for
each individual activity.
–And sum the results to arrive at the grand total
estimate for the project.
 Principles of Effective Cost
Estimation
•Principle 2: Include all activities when making
estimates.
• Prototyping
• Design
• Inspecting
• Testing
• Debugging
• Documentation
• Deployment
• Project management!
 Principles of Effective Cost
Estimation
•Principle 3: Base your estimates on past
experience combined with knowledge of the
current project.
– If you are developing a project that has many similarities with a past
project:
• You can expect it to take a similar amount of work.
– Base your estimates on the personal judgement of your experts
or
– Use algorithmic models developed in the software industry as a whole by
analyzing a wide range of projects.
• They take into account various aspects of a project’s size and
complexity, and provide formulas to compute anticipated cost.
 Sample Algorithmic Models
–A typical algorithmic model uses a formula like the
following:
• Functions Points:
•S = W1F1 + W2F2 +W3F3 + …

• COCOMO: E = a + bNc
– When C < 1, we get an economy of scale
» Common for factories
– For software, C is usually > 1…
 Principles of Effective Cost
Estimation
•Principle 4: Be sure to account for differences
when extrapolating from other projects.
– Different software developers
– Different development processes and maturity levels
– Different types of customers and users
– Different schedule demands
– Different technology
– Different technical complexity of the requirements
– Different domains
– Different levels of requirement stability
 Principles of Effective Cost
Estimation
•Principle 5: Anticipate the worst case and plan
for contingencies.

– Develop the most critical use cases first

• If the project runs into difficulty, then the critical features are more
likely to have been completed
– Make three estimates:
• Optimistic (O)
– Imagining everything going perfectly
• Likely (L)
– Allowing for typical things going wrong
• Pessimistic (P)
– Accounting for everything that could go wrong
– E = ( O + 4L + P ) / 6 (or some other weighted average)
 Principles of Effective Cost
Estimation
•Principle 6: Combine multiple independent
estimates.
–Use several different techniques and compare the
results.
–If there are discrepancies, analyze your calculations
to discover what factors are causing the differences.
–Use the Delphi technique
 Principles of Effective Cost
Estimation
•Principle 7: Revise and refine estimates as work
progresses
–As you add detail.
–As the requirements change.
–As the risk management process uncovers problems.
 Cost Budgeting

INPUTS TOOLS & OUTPUTS

TECHNIQUES

1. Project scope 1. Cost aggregation

1. Cost Baseline
statement
2. Reserve analysis
2. WBS 2. Project funding
3. Project Schedule 3. Parametric requirements
estimating
4. WBS dictionary 3. Cost management
5. Activity cost estimates 4. Funding limit plan
6. Activity cost estimate
reconciliation
4. Requested
supporting detail
changes
7. Resource calendars
8. Contract
9. Cost management plan

RZH 2008
 Contoh Project : Pembuatan Parit
Cost Budgeting
Rupiah
30.000.000

15.000.000

0 8 15
RZH 2008
Waktu (hari)
 Group Discussion
• Menggunakan data Proyek Pembuatan Parit
yang ada di dalam bahan presentasi
Schedule Development dan Cost Estimating
& Budgeting ini, buatlah cost baseline
proyek tersebut. Diskusikan dan tulislah:
1. Asumsi-asumsi yang perlu diambil agar cost
baseline dapat dibentuk.
2. Langkah-langkah kerja untuk menghasilkan
cost baseline

RZH 2008
 Inter-korelasi dalam Cost Management
Planning Phase
Resource Schedule
Estimating Development

Scope Cost Cost

management Estimating Project
Budgeting
Plan

OPA, EEF,
PMP

RZH 2008
 WRAP UP

RZH 2008
 Charter PLANNING STAGE Scope Mgt

Scope Scope Project

definition Create WBS
planning Plan

OPA, EEF, Cost

PMP estimating
Scope Mgt Time Mgt
Activity
Sequencing

Activity
Activity Schedule
Resource Project
Definition Development
Estimating Plan
Activity
Duration
OPA, EEF, Estimating Cost
PMP Budgeting

Resource
Estimating
Schedule
Development
Cost Mgt

Scope Cost Cost Budgeting

management Estimating Project
Plan

RZH 2008 OPA, EEF, PMP

 Charter PLANNING STAGE

Scope Scope
definition Create WBS
planning

Scope Mgt

Time Mgt
Activity
Sequencing

Activity Project
Activity Schedule Plan
Resource
Definition Development
Estimating
Activity
Duration
Estimating

OPA, EEF,
PMP

Cost
Estimating Cost Budgeting

RZH 2008
Cost Mgt