Project Management for Software Engineers (Summer 2017) LECTURE 6 Project Estimation & Budgeting Friday, July 6, 2017 (9:00 am – 11:40 pm PST) University of Southern California, Industrial & Systems Engineering 9/17/2018

Project Planning based on P.O. Today’s Discussion University of Southern California, Industrial & Systems Engineering 9/17/2018

Why do we need a Budget? A plan for the costs of project resources A budget implies constraints; you cannot get everything you want or need, it has to be justified The budget for an activity also implies management support for that activity Higher the budget, relative to cost, higher the managerial support (risk buffer) The budget is also a control mechanism Constantly & continuously compare project actual expenditures (ACWP) against the budget point (BCWP) Without a budget, you are relying on chances, not choices Budget very closely ties with schedule (and scope) University of Southern California, Industrial & Systems Engineering 9/17/2018

How to Develop Budget? Activities (Tasks) Work Packages (WPs) Project Direct Costs Indirect Costs Activity Risk (Buffers) Work Packages (WPs) Indirect / Overhead Work Package Risks (Contingency Reserve) Project Indirect / Overhead / G&A Project Risks (M.R.) Profit University of Southern California, Industrial & Systems Engineering 9/17/2018

How is the budget constructed? On most projects Material + Labor + Equipment + Overhead + Profits = Budget Cost of Resources (direct & indirect) + Profits = Budget  So we are left with the task of forecasting resources Like any forecast, this includes some uncertainty Uncertainty about usage and price (for material and labor) Uncertainty about non-derivable costs (Overhead, profit, etc.) Experience counts! standardized projects and components have less uncertainty The more experienced the cost estimator, the lower the uncertainty Rules of thumb from experience reduce uncertainty Even similar projects could have significant differences Other risks: Escalation, waste, bad luck, etc. Productivity: Keep in mind the learning curve Trade-off: The pump productivity (23 CY/Hr) is compromised for less human resources. University of Southern California, Industrial & Systems Engineering 9/17/2018

How to calculate direct costs? Top-Down Estimating Based on Management experience & corporate memory (Implicit & Explicit knowledge) Bottom-Up Estimating Based on Resource Requirements Productivity estimates quality defines accuracy Do you sense potential for conflict? When the two extremes meet! With good leadership, this can be a constructive conflict Refer to the book for pros & cons University of Southern California, Industrial & Systems Engineering 9/17/2018

Example: Bottom-Up Estimating Example: Pour 5,000 SF pad concrete (4” thick) Material: Concrete Volume (include 5% waste) ~ 62 CY From experience or data we know to pour 6 CY concrete in 1 hour (i.e. 6 CY/Hr production rate), on average Total DIRECT Cost = 169.00 x 130 ~ $22,000 TIME: 62 CY/(6 CY/hr) = 10.33 hrs  10.33/7 hrs/day ~ 2 days How to manage Time & Cost RISKs? Statistical Technics: Time= 2+st , Cost = $22,000+sc Contingency Productivity: Keep in mind the learning curve Trade-off: The pump productivity (20 CY/Hr) is compromised for less human resources. Discuss learning curve Buffer University of Southern California, Industrial & Systems Engineering 9/17/2018

But it’s not JUST THAT! Project Budget Components (PMBOK®, P. 213) Each industry has its norms University of Southern California, Industrial & Systems Engineering 9/17/2018

Indirect / LofE / Overhead Fact-based or Intuitive? It’s a leadership decision (based on experience & resources) Delicate Differences (in construction industry) Indirect Costs: Relate to the project, the WP, or the task, but can’t directly derive from resources, but can be specified (e.g. housing & food a construction project, WP, or task crew) –continuous Overhead: The burden of the project on the organization (e.g. services by functional units to the project) – The most subjective G&A: The burden of the project office administrative services on the project – based on past similar projects data LofE: pre-defined Specific services by a functional unit to the project, more tangible & quantifiable than overhead (e.g. IT services to preject) – Budget constrained Each industry has its norms University of Southern California, Industrial & Systems Engineering 9/17/2018

Example: Integrated Estimating Refer to handout University of Southern California, Industrial & Systems Engineering 9/17/2018

Projects Simplifying Assumptions Direct Costs (Human Resource ONLY) Project Leader: $120,000/Year Designer & Programmers: $80,000/Year Software Tester: $65,000/Year IMPORTANT: ASSUME 40% “burden”, e.g. a programmer who gets paid $80K/year cost you 80x1.40 = $112K/year Indirect/Overhead/G&E: Task: 10%, Work Package: 15%, Project: 20% Level of Effort: Assume certain services (e.g. IT) are constantly provided throughout the project. Explain your assumptions and show as a project-long activity on the schedule Profit: Assume expected profit based on your long-term strategy Refer to handout University of Southern California, Industrial & Systems Engineering 9/17/2018