1. Time and Cost Estimation*
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Time and Cost Estimation
Dr. Lotfi Gaafar
Gaafar 2007 / 1
Source: PMBOK Guide 2000 *

2. Importance of Time and Cost Estimation*
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Importance of Time and Cost Estimation
Estimates are needed to support good decisions.
Estimates are needed to schedule work.
Estimates are needed to determine how long the project should take and its cost.
Estimates are needed to determine whether the project is worth doing.
Estimates are needed to develop cash flow needs.
Estimates are needed to determine how well the project is progressing.
Estimates are needed to develop time-phased budgets and establish the project baseline
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3. Guidelines for Time and Cost Estimation*
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Guidelines for Time and Cost Estimation
Have people familiar with the tasks make the estimate.
Use several people to make estimates.
Base estimates on normal conditions, efficient methods, and a normal level of resources.
Use consistent time units in estimating task times.
Treat each task as independent, don’t aggregate.
Don’t make allowances for contingencies.
Account for risks separately.
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4. Types of Estimates A brief comparison*
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Types of Estimates
Top-down (macro) estimates: analogy, group consensus, or mathematical relationships
Bottom-up (micro) estimates: estimates of elements of the work breakdown structure
A brief comparison
Condition Macro Estimates Micro Estimates
Strategic decision making X
Cost and time important X
High uncertainty X
Internal, small project X
Fixed-price contract X
Customer wants details X
Unstable scope X
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5. *
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Estimation Methods
Top-down (macro) estimates: analogy, group consensus, or mathematical relationships
Consensus methods
Ratio methods
Apportion method
Function point methods for software and system projects
Bottom-up (micro) estimates: estimates of elements of the work breakdown structure
Template method
Parametric Procedures Applied to Specific Tasks
Detailed Estimates for the WBS Work Packages
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6. Activity Definition *
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7. Activity Sequencing *
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8. Activity Duration Estimation*
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9. Activity Duration Estimation*
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10. Activity Duration Estimation- Inputs*
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11. Activity Duration Estimation- Tools*
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12. Activity Duration Estimation- Tools*
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13. Schedule Development *
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14. Schedule Control *
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15. Activity Cost Estimation*
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16. Activity Cost Estimation- Inputs*
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17. Types of Costs Direct Costs Direct (Project) Overhead Costs*
Types of Costs
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Direct Costs
Costs that are clearly chargeable to a specific work package.
Labor, materials, equipment, and other
Direct (Project) Overhead Costs
Costs incurred that are directly tied to an identifiable project deliverable or work package.
Salary, rents, supplies, specialized machinery
General and Administrative Overhead Costs
Organization costs indirectly linked to a specific package that are apportioned to the project
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18. Refining Estimates Reasons for Adjusting Estimates Adjusting Estimates*
Refining Estimates
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Reasons for Adjusting Estimates
Interaction costs are hidden in estimates.
Normal conditions do not apply.
Things go wrong on projects.
Changes in project scope and plans.
Adjusting Estimates
Time and cost estimates of specific activities are adjusted as the risks, resources, and situation particulars become more clearly defined.
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Project Budget
Look at the history of similar projects to get a rough estimate of costs. Make sure the scope and nature are similar.
Determine the internal resources you have available to use - people, equipment, etc., within your organization.
Determine the external resources - those not currently in your organization - that you will need to get the job done.
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20. Sample Cost Estimation Tools*
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Sample Cost Estimation Tools
Activity Based Costing
Benchmarking
Target Costing
The four tools were studied, but only the first three will be presented.
As for Should Cost Analysis:
Description: A review and evaluation cost elements; to develop a position of what the contract should cost, assuming reasonable economy and efficiency.
It’s a tool used to solve problems through a bidding process. It is used to review and evaluate the elements of cost in each bid and analyze them to determine the total project cost.
When to use it:I t’s not only used in the case of production, but also in projects involving acquisition.
Procedure:
In order to apply should cost analysis the following key areas have to be checked in each bid, in addition to other aspects like: Computer hardware and software used to support contract performance and Methods used in contract performance; as for the contractor management and operating systems (how the contractor manages his facility)
There are no special variations or considerations to this tool
Examples:
Is it cost effective to invest in the new facility considering projected requirements?
If you consider the projected 38 system requirement, the new facility would decrease costs by $4,700,000.
Should you only consider the current contract, or should you consider projected requirements.?
In the example above, if you only consider the current contract, the investment would not be cost effective. If you consider all 38 systems, the savings would substantially outweigh the cost of the investment. When evaluating which results to use in your analysis, you should consider the viability and direction of the entire program
The cost of fabricating a system component could be reduced by $150,000 per unit if a new $1,000,000 facility were placed in operation. The current proposal is for six systems and the facility would not be operational until the fourth system. However, the total program calls for production of 38 systems over the next five years.
If you only consider the six remaining systems under the current contract, the new facility would increase costs by $100,000.
Net Benefit = (Savings per Unit * Units) - (Cost of Change)
= ($150,000 * 6) - $1,000,000
= - $100,000
= ($150,000 * 38) - $1,000,000
= $4,700,000
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21. Activity Based Costing*
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Activity Based Costing
Description:
Quantitatively measures the cost and performance of activities
It is the quantitative aspect of the Activity based costing that makes it a more efficient tool that improves the quality of the final decision.
When to use it?
Evaluate relative cost of various activities, and potential effects of modifications
Analyze alternative process flows with comparative economic evaluation
It is the quantitative aspect of the Activity based costing that makes it a more efficient tool that improves the quality of the final decision.
There are no special variations or considerations in applying this tool
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22. Activity Based Costing*
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Activity Based Costing
Procedure:
Analyze Activities
Gather Costs
Trace Costs to Activities
Analyze Costs
-Analyze Activities: the activity interacts with other activities in the process flow. It processes input from other activities and has outputs that are used as predecessors for other activities. The node tree can be used to describe the activities and their relationship. It is a hierarchical model that consists of multiple levels of increasing details.
-Gather Costs: that means getting all the expenses that pertain to the activities. The costs should be gathered at the lowest possible level. Here costs represent the best professional estimates that might be determined. These costs are credible for comparative analysis.
-Tracing Costs to Activities: the costs identified for the higher level activities are divided among all the activity levels. The team members define the best selection of representative costs and decide the procedural priorities then track costs to every activity. The cost of each activity represents resources used by the activity to convert input into output.
-Analyze Costs: the activity model and process flow with its cost will be analyzed deeply to determine the candidates for improvement.
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23. Activity Based Costing Example*
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Activity Based Costing Example
These are a set of activities performed by a division (it might be a division in a sales department, planning department, or any other department that deals with these set of activities in an aspect)
A1,A2,A3 are zero level activities and A11,A12…are sub-level activities.
The employees in the division are asked about what percentage of effort they spend on each activity. The percentages reflect totals at the nodes.
The total expenses of the division is specified then it is distributed to activities according to their percentages.
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24. Benchmarking Description: When to use it ? - Benchmarking prices*
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Benchmarking
Description:
It is the continuous and systematic process of measuring and assessing products, services, practices against those of high performing organizations to improve performance.
Two types of benchmarking:
- Benchmarking prices
- Benchmarking processes
When to use it ?
Benchmarking is used when a company is suffering losses in a certain area and wants to improve its performance to overcome these losses.
Benchmarking is a process adopted by organizations to improve their performance.
Benchmarking prices: this type is used to support price analysis and evaluation of supplier pricing. It allows organizations to assess reasonableness of prices, assess price increase request and understand trends.
Benchmarking processes: this type is centered on understanding cost structures and processes rather than prices. It focuses mainly on examining effective methods across competitive companies and industries to understand best practices. It also helps in identifying opportunities for cost and process improvement both internally and externally.
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25. Benchmarking Procedure: Develop action plan Implement action plan*
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Benchmarking
Procedure:
Identify the work process or area to be improved
Analyze the work process
Measure your own performance
Identify benchmarking partners
Determine data collection method
Collect data
Determine performance gap
Develop action plan
Implement action plan
Monitor results
Recalibrate benchmarks (Repeat process)
There are no special variations or considerations in applying this tool
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26. Target Costing Description4: When to use it1?*
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Target Costing
Description4:
Is the cost that can be incurred while still gaining profit.
Target Cost = Estimated Selling Price (Target Price) – Desired Profit
When to use it1?
Dominantly with new products and services
Improve existing products
Target costing doesn’t use the traditional approach: Design product, determine the cost, set the price. Costs are determined from the start based on the consumer needs [4].
Target cost represents the cost that can be incurred on a product while still earning the desired profit. The price is set by the customer, and cost control has to be implemented to achieve the set price so the key feature is that cost is controlled from the beginning of the process[4].
The product, manufacturing process and delivery process are designed simultaneously.
Target costing is dominantly used in the case of new products or services, but it can also be used to improve existing products and services to provide ongoing tracking of performance to monitor planned versus actual supplier committed price reductions and to encourage suppliers to remain competitive [1].
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27. Target Costing Example (The Montclair Paper Mill)5*
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Target Costing Example (The Montclair Paper Mill)5
Setting the target price: Per Ton
Competitor’s selling price to the merchant $1466
Less: freight paid by the mill (30)
Normal sales returns & allowances (60)
Montclair capital charge (120)
Ship to the DC (11)
DC operating cost (25)
DC capital charge (58)
Target Manufacturing Cost $1162
The Montclair paper mill produces different kinds of paper.
The internal operations include: paper making for different grades and weights, converting into different sizes, coatings and colors, and distribution.
To set the target cost: the competitors selling price is determined, with the Montclair's expenses subtracted from it. The capital charge is based on the initial investment, and in the case of Montclair mill, the customer receives the product from the mill’s distribution center (DC) so the DC operating and capital charges are further deducted.
Assuming the operations at Montclair’s (paper machine, converting process and materials) have perfect efficiency, the ideal cost will be $1342. the cost allowances (material loss, machine time loss and shipping cost) are added to the ideal cost to determine the mill’s standard cost.
The mill still loses $1738/ton. So in order to improve their performance they focused on: changing the fiber mix, improving the paper machine efficiency.
Target costing forces the management to take a proactive cost management approach and to think about improvements that may fundamentally change the way how value is delivered to the end customer
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28. Refining Estimates Contingency Funds and Time Buffers*
Refining Estimates
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Contingency Funds and Time Buffers
Are created independently to offset uncertainty.
Reduce the likelihood of cost and completion time overruns for a project.
Can be added to the overall project or to specific activities or work packages.
Can be determined from previous similar projects.
Changing Baseline Schedule and Budget
Unforeseen events may dictate a reformulation of the budget and schedule.
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29. Project Management Cost Management*
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Project Management Cost Management*
Dr. Lotfi Gaafar
* This Presentation is Based on information from PMBOK Guide 2000
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30. Project Cost Management Processes*
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Project Cost Management Processes
Resource planning: determining what resources and quantities of them should be used
Cost estimating: developing an estimate of the costs and resources needed to complete a project
Cost budgeting: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance
Cost control: controlling changes to the project budget
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31. *
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Resource Planning
Cost Estimating
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32. *
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Cost Budgeting
Cost Control
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33. *
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Resource Planning
The nature of the project and the organization will affect resource planning
Some questions to consider:
How difficult will it be to do specific tasks on the project?
Is there anything unique in this project’s scope statement that will affect resources?
What is the organization’s history in doing similar tasks?
Does the organization have or can they acquire the people, equipment, and materials that are capable and available for performing the work?
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34. Cost Control Project cost control includes*
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Cost Control
Project cost control includes
monitoring cost performance
ensuring that only appropriate project changes are included in a revised cost baseline
informing project stakeholders of authorized changes to the project that will affect costs
Earned value management is an important tool for cost control
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35. Using Software to Assist in Cost Management*
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Using Software to Assist in Cost Management
Spreadsheets are a common tool for resource planning, cost estimating, cost budgeting, and cost control
Many companies use more sophisticated and centralized financial applications software for cost information
Project management software has many cost-related features
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