1. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-1 Cost Estimation and Budgeting Chapter 8

2. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-2 Common Sources of Project Cost  Labor  Materials  Subcontractors  Equipment & facilities  Travel

3. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-3 Types of Costs  Direct Vs. Indirect  Recurring Vs. Nonrecurring  Fixed Vs. Variable  Normal Vs. Expedited

4. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-4 NameHours Needed Overhead Charge Personal Time Rate Hourly Rate Total Direct Labor Cost John401.801.12$21/hr.$1,693.44 Bill401.801.12$40/hr. 3,225.60 J.P.601.351.05$10/hr. 850.50 Sonny251.801.12$32/hr. 1,612.80 Total Direct Labor Cost = $7,382.34

5. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-5 Cost Classifications Direct LaborXXXX Building LeaseXXXX ExpediteXXXX MaterialXXXX Non-recurring Direct Indirect Fixed Recurring Variable Normal Expedited Costs

6. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-6 Cost Estimation  Ballpark (order of magnitude) ±30%  Comparative ±15%  Feasibility ±10%  Definitive ±5%

7. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-7

8. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-8 Learning Curves Each doubling of output results in a reduction in time to perform the last iteration.

9. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-9

10. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-10 Problems with Cost Estimation Low initial estimates Unexpected technical difficulties Lack of definition Specification changes External factors

11. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-11

12. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-12 Creating a Project Budget Top-down Bottom-up Activity-based costing (ABC) Project Plan WBS SchedulingBudgeting The budget is a plan that identifies the resources, goals and schedule that allows a firm to achieve those goals

13. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-13 Activity-Based Costing 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

14. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-14

15. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-15 Months ActivityJanuaryFebruaryMarchAprilMayTotal by Activity Survey4,000 Design 5,0003,000 8,000 Clear Site 4,000 Foundation 7,500 Framing 8,0002,00010,000 Plumb & Wire 1,0004,0005,000 Monthly Planned 4,0009,00010,5009,0006,000 Cumulative4,00013,00023,50032,50038,500

16. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-16 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

17. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-17