1. Cost Estimation and Budgeting
Chapter 8
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2. Common Sources of Project Cost
Labor
Materials
Subcontractors
Equipment & facilities
Travel
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3. Types of Costs Direct Vs. Indirect Recurring Vs. Nonrecurring
Fixed Vs. Variable
Normal Vs. Expedited
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4. Cost Classifications Direct Indirect Fixed Recurring Variable Normal
Expedited
Costs
Non-recurring
Direct Labor X
Building Lease
Expedite
Material
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5. Cost Estimation Ballpark (order of magnitude) ±30% Comparative ±15%
Feasibility ±10%
Definitive ±5%
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6. Learning Curves
Each doubling of output results in a reduction in time to perform the last iteration.
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7. Problems with Cost Estimation
Low initial estimates
Unexpected technical difficulties
Lack of definition
Specification changes
External factors
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8. Creating a Project Budget
The budget is a plan that identifies the resources, goals and schedule that allows a firm to achieve those goals
Project Plan
WBS
Scheduling
Budgeting
Top-down
Bottom-up
Activity-based costing (ABC)
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9. Top-Down Budgeting
Based on collecting the judgments and experiences of top and middle managers and available past data concerning similar activities.
These managers estimate overall project cost as well as the costs of the magor subprojects.
These costs estimates are then given to lower-level, who expected to continue to the breakdown into budget estimates for specific tasks.
This process continues to the lowest level.
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10. Bottom-Up budgeting
Elemental tasks, their schedules, and their individual budgets are constructed following WBS.
The people doing the work are consulted regarding time and budget.
Estimates are made in terms of resources.
The resulting task budgets are aggregated to give the total direct costs
The PM adds indirect costs as general and admin. Costs
It is more accurate than top-down
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11. Activity-Based Costing
Projects use activities & activities use resources
Assign costs to activities that use resources
Identify cost drivers associated with this activity
Compute a cost rate per cost driver unit or transaction
Multiply the cost driver rate times the volume of cost driver units used by the project
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12. Work Element costing
Suppose a work element is estimated to require 25 hours of labor. The labor is paid 17.5$/hr
Overhead changes to the project are 84% of direct labor changes.
The cost will be = 25 hr X 17.5 X 1.84 = 805$
A typical allowance for personal time is 12% of total work time.
The cost will be = 1.12 X 25 hr X 17.5 X 1.84 = 901.6$
PM will add the indirect cost for G&A costs.
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13. Contingencies are needed because
Budget Contingencies
The allocation of extra funds to cover uncertainties and improve the chance of finishing on time.
Contingencies are needed because
Project scope may change
Murphy’s Law is present
Cost estimation must anticipate interaction costs
Normal conditions are rarely encountered
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14. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall