INSTITUTE – University School of Business

DEPARTMENT - Management
M.B.A.
Project Management - BAT 783

UNIT-2 Lecture: Cost Estimation in Project DISCOVER . LEARN . EMPOWER

Management
1
 Project Management
BAT-783

Course Outcomes

CO
Title Level Will Will
be covered
be covered in
Number
To describe the basics of project management
Understand
in this this lecture
lecture
CO1 and project planning
 
To apply project evaluation techniques on real Apply
CO2 life business proposals  
To analyze the risk involved in the internal and
CO3 external project control management Analyze

To enable students in evaluating the

CO4 performance of the project through project Analyze
information management system
To create network diagrams for project
CO4 Analyze
planning and scheduling 2
What Is Cost Estimation in Project Management?

• A project lives and dies by its budget. Just think: a project can only come
together with all the necessary materials and labor, and those materials
and labors cost money.
• And in this new economic reality, businesses are looking to pay less and
less for those materials and labor while maintaining—or even increasing
—quality and scope.
• So how do you put together a budget that will bring the project to fruition
while keeping costs to a minimum?
• That’s why proper cost estimation is important.
Cost Estimation

• Cost estimation in project management is the process of forecasting the

financial and other resources needed to complete a project within a
defined scope.

• Cost estimation accounts for each element required for the project—from
materials to labor—and calculates a total amount that determines a
project’s budget.
Elements of cost estimation in project management

• There are two key types of costs addressed by the cost estimation
process:

• Direct costs: These are the costs associated with a single area, such as a
department or this particular project itself. Examples of direct costs
include fixed labor, materials and equipment.

• Indirect costs: These are costs incurred by the organization at large, such
as utilities and quality control.
Some typical Elements:

Within these two categories, some typical elements that a cost estimation
will take into account include:
• Labor: the cost of project team members working on the project, both in
terms of wages and time.
• Materials and equipment: The cost of resources required for the project,
from physical tools software to legal permits.
• Facilities: the cost of using any working spaces not owned by the
organization.
• Vendors: the cost of hiring third-party vendors or contractors.
• Risk: the cost of any contingency plans implemented to reduce risk.
Project Cost Estimation Process

• The process of cost estimation determines an amount of resources

required to accomplish project activities.
• It involves the approximation and development of costing alternatives to
plan, perform and deliver the project.
• It focuses on finding and allocating optimal expenses for the job.
The project becomes successful if it meets the following success criteria.

•The scope is developed and on-budget and on-schedule;

•The quality expectation are met; and
•The expected benefits are received by stakeholders
Analogous Review

• This technique is also known as “Historical Data Analysis.”

• It assumes using the actual cost of previous or analogues projects as the
foundation for estimating the cost of the current project.
• This technique is usually applied to separate segments of the project and
in combination with other methods and tools.
Parametric Model

• It allows using historical and statistical data to make a model of activity

parameters (like scope, budget and duration).
• It may provide a higher degree of accuracy depending on the data
included in the parametric model.
• The technique can be used separately as well as in combination with
other approaches and tools.
Bottom-up Analysis

• This analysis supports the idea that the individual cost of each activity or
entire work package is of prime importance.
• By using the method, individual scheduled activities, or a work package,
can be estimated to the smallest detail.
• All estimates are grouped and sorted by categories, and then gathered
into a summary table that is used for tracking, control and reporting
purposes.
Top-down Analysis
• This technique is opposite to Bottom-up Analysis.
• It assumes that the overall budget is determined at the project’s beginning
and the expert team needs to identify the costs of each work item (task or
job).
• The technique allows determining the number of required activities and
tasks referring to the WBS (Work Breakdown Structure) which reflects the
necessary work items and work packages.
• By using the WBS, the expert team can determine the quantity of the
work items that can be delivered within the fixed budget.
• They may decide to add or remove certain items in the WBS in order to fit
the fixed budget.
Reserve Estimating

• Since Quality Assurance and Quality Control are integrated parts of the
cost estimation process,
• This technique is used to deal with uncertainties (which may overstate or
understate project costs) by making reviews.
• It assumes that costs may include reserves (or contingency allowances)
which can be used for mitigating uncertainties and responding to threats.
• Reserves should be estimated and then added to cost estimates in order
to allow applying the critical chain method and risk mitigation strategies.
Budgeting in Project Management

• The process of creating plans to spend and use money in an organization

makes up budgeting. Budgeting helps determine the spread of money
available for project consumption.
• The project manager holds responsibility for the streamlined working of
the project. This ensures that project efficiency, standards, time and
quality are not overlooked.
• Under project management, three important factors play a role in
success. These are:
1. Budget.
2. Time.
3. Quality.
Project Budget

• A good project budget would include the following cost planning:

1. Labour costs.
2. Material costs.
3. Operating costs.
• Budgeting can assist in the right and appropriate allocation of costs. The
following factors usually affect the planning of  Project Budget:
1. Estimated changes in the scope of the project.
2. Better and more realistic forecasted cost budget.
3. Insufficient funds for an ongoing project.
Steps to Create a Project Budget

1. Create a task list to focus on requisite cost elements for the project.
2. Use historical data to research similar projects and the costing involved.
3. Estimate components based on project requirements, market research and
find cost-effective and efficient alternatives.
4. Use market references to understand how competitors and seasoned
companies manage budgetary control of their projects.
5. Take advise of experts to curb down doubts and obtain opinions to improve
decision making.
6. Confirm accuracy of report with internal research and discussion with
respective departmental heads.
7. Streamline the budget based on research and planning done in the above
steps.
8. Test the budget on pilot projects for sample usage to understand
efficiency and practicality.
9. Get approval from respective authorities.
Importance of Budgeting in Project Management

The business can focus on making the project reach successful completion,
with good returns on investment.
To sum up the importance of budgeting, we can lay down the following points:
1. Budgeting helps restrict unnecessary expenditure to balance revenue
against cash flow.
2. With budgeting, it is ensured that money is appropriately allocated to
prioritized objectives of the project at hand.
3. A properly drafted budget plan ensures that all levels of management are
aware of how the project should be conducted. This ensures good
communication and a shared vision.
4. Sharing of budget forecasts with all members of the project can ensure that
inputs are received from all levels of the hierarchy.
 References

• Tools and techniques for project management: Newton, R., Brilliant Checklists for Project
Managers, 2nd Edition, Pearson Education, 2014

• Overview of project management methodologies: Newton, R., The Practice and Theory of
Project Management, Palgrave MacMillan, 2008

• Chandra, Prasanna, Projects: Planning, Analysis, Selection, Implementation & Review, Tata
McGraw Hill.

• Clifford Gray & Erik Larson, Project Management, Tata McGraw-Hill.

• Nicholas, John M., Project Management for Business & Technology (Principles & Practice),
Pearson Education.

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 Assessment Pattern

Scaled
Components HT-1 HT-2 Assignment Surprise Test Business Quiz GD Forum Attendance
Marks

Max. Marks 10 10 6 4 4 4 2 40

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 THANK YOU

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