Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall o P.I.I.M.T o American University of Leadership Ahmed Hanane, MBA, Eng, CMA, Partner

Cost Estimation and Budgeting 08-02

After completing this chapter, students will be able to: Understand the various types of common project costs. Recognize the difference between various forms of project costs. Apply common forms of cost estimation for project work, including ballpark estimates and definitive estimates. Understand the advantages of parametric cost estimation and the application of learning curve models in cost estimation

After completing this chapter, students will be able to: Discern the various reasons why project cost estimation is often done poorly. Apply both top-down and bottom-up budgeting procedures for cost management. Understand the uses of activity-based budgeting and time-phased budgets for cost estimation and control. Recognize the appropriateness of applying contingency funds for cost estimation

FIGURE 8.1 James Webb Space Telescope Copyright 2013 © Pearson Education Inc., Publishing as Prentice Hall

o Cost management has been defined to encompass data collection, cost accounting, and cost control. o Cost accounting and cost control serve as the chief mechanisms for identifying and maintaining control over project costs. o Cost estimation processes create a reasonable budget baseline for the project

 Labor  Materials  Subcontractors  Equipment & facilities  Travel 08-07

 Direct Vs. Indirect  Recurring Vs. Nonrecurring  Fixed Vs. Variable  Normal Vs. Expedited 08-08

Cost Classifications Direct LaborXXXX Building LeaseXXXX ExpediteXXXX MaterialXXXX Non-recurring Direc t Indirect Fixed Recurring Variable Normal Expedited Costs Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

 Ballpark (order of magnitude) ±30%  Comparative ±15%  Feasibility ±10%  Definitive ±5%

FIGURE Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Each doubling of output results in a reduction in time to perform the last iteration

FIGURE Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

o Function Point Analysis is a system for estimating the size of software projects based on what the software does. o Function points are a standard unit of measure that represents the functional size of a software application

FIGURE Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

08-16 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

08-17 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Low initial estimates Unexpected technical difficulties Lack of definition Specification changes External factors 08-18

o Top-down o Bottom-up o Activity-based costing (ABC) Projec t Plan WBS SchedulingBudgeting The budget is a plan that identifies the resources, goals and schedule that allows a firm to achieve those goals 08-19

Projects use activities & activities use resources 1. Assign costs to activities that use resources 2. Identify cost drivers associated with this activity 3. Compute a cost rate per cost driver unit or transaction 4. Multiply the cost driver rate times the volume of cost driver units used by the project 08-20

08-21 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Table 8.6

08-22 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Table 8.7

08-23 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Table 8.8

Figure Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

The allocation of extra funds to cover uncertainties and improve the chance of finishing on time. Contingencies are needed because o Project scope may change o Murphy’s Law is present o Cost estimation must anticipate interaction costs o Normal conditions are rarely encountered 08-25

1. Understand the various types of common project costs. 2. Recognize the difference between various forms of project costs. 3. Apply common forms of cost estimation for project work, including ballpark estimates and definitive estimates. 4. Understand the advantages of parametric cost estimation and the application of learning curve models in cost estimation

5. Discern the various reasons why project cost estimation is often done poorly. 6. Apply both top-down and bottom-up budgeting procedures for cost management. 7. Understand the uses of activity-based budgeting and time-phased budgets for cost estimation and control. 8. Recognize the appropriateness of applying contingency funds for cost estimation