1. 8-1 ELC 347 project management Week 9

2. 8-2 Agenda Assignment 4 ReGraded Integrative Project –First part Graded A few problems –2nd part Due –Outline of deliverables (posted in WebCT)Outline of deliverables (posted in WebCT) Quiz 2 will be posted Nov 2 and must be completed by Nov 9 –Chapters 5-9, 20 short essays (4 from each chapter) –Take home exam with 48 hours time limit –Three will only be 3 Quizzes instead of the 4 mentioned in the syllabus Today we will discuss Cost Estimation and Budgeting

3. 8-3 Cost Estimation and Budgeting Chapter 8 © 2007 Pearson Education

4. 8-4

5. 8-5 Big Dig YearBudget (billions) 19832.56 19894.44 19926.44 199610.84 200014.08 200314.63 http://www.masspike.com/bigdig/index.html

6. 8-6 Common Sources of Project Cost  Labor  Materials  Subcontractors  Equipment & facilities  Travel

7. 8-7 Types of Costs  Direct Vs. Indirect  Recurring Vs. Nonrecurring  Fixed Vs. Variable  Normal Vs. Expedited

8. 8-8 Cost Classifications Direct LaborXXXX Building LeaseXXXX ExpediteXXXX MaterialXXXX Non-recurring Direct Indirect Fixed Recurring Variable Normal Expedited Costs

9. 8-9 Cost Estimation  Ballpark (order of magnitude) ±30%  Comparative ±15%  Parametric estimation  Feasibility ±10%  Definitive ±5%

10. 8-10

11. 8-11 Learning Curve

12. 8-12 Learning Curves Each doubling of output results in a reduction in time to perform the last iteration. Curvilinear Handout.doc Learning curve results.xls Examples in Text Book are WRONG! Author used natural Logarithms. ln(2)=0.693

13. 8-13 Problems with Cost Estimation Low initial estimates Unexpected technical difficulties Lack of definition Specification changes External factors

14. 8-14 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

15. 8-15 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

16. 8-16 Example of ABC

17. 8-17 Time-Phased budget

18. 8-18

19. 8-19 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

20. 8-20 Tony’s View of Cost Estimates Much more of an art than a science –Experience counts Cost estimates usually turn into actual budgets used for cost controls Things you should discover prior to developing a budget –What is the highest possible budget you can get away with What the customer/sponsor/management will bear –What is the cheapest budget possible All things work out perfectly All budgets must be between these two numbers for the project to be successful Watch Variances! –It is the mosty important part of cost control! –Going over in one part of the project is fine if you have banked enough positive variance Example estimate budget –csrd budget.xlscsrd budget.xls