1. 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

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

3. 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

4. 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

5. 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

6. 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

7. 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 = x 130 ~ $22,000
TIME: 62 CY/(6 CY/hr) = 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

8. 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

9. 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

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

11. 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