1. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Day 13

2. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Ch 1 -2 Agenda Questions? IP Part 2 Corrected, Feedback Posted in Group section in Blackboard IP Part 3 (Risk Management) Due Oct 24 (Next Class) Assignment 5 posted Due Next Class Assignment 6 will be posted by Next class (only two more after!) No Class on Oct 31 and Nov 7  I will be traveling, alternative arrangements will be made Exam 2 Chaps 5-9 will be on Nov. 7 Exam 3 Chap 10-14 will be on Finals Day No Class On Nov. 11  Veterans Day. Cost Estimation and Budgeting

3. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Finals Rescheduling Options Do IP Project presentation on Dec 12 Exam 3 done asynchronously sometime during finals week Do both presentation and exam 3 Wednesday, Dec 18 (any time) Thursday, Dec 19 after 2PM Friday, Dec 20 (any time) 3

4. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Cost Estimation and Budgeting 08-04

5. 8-5

6. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Chapter 8 Learning Objectives After completing this chapter, students will be able to: Understand the various types of common project costs. Recognize the difference between various forms of project costs. Apply common forms of cost estimation for project work, including ballpark estimates and definitive estimates. Understand the advantages of parametric cost estimation and the application of learning curve models in cost estimation. 08-06

7. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Chapter 8 Learning Objectives After completing this chapter, students will be able to: Discern the various reasons why project cost estimation is often done poorly. Apply both top-down and bottom-up budgeting procedures for cost management. Understand the uses of activity-based budgeting and time-phased budgets for cost estimation and control. Recognize the appropriateness of applying contingency funds for cost estimation. 08-07

8. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Cost Management Cost management has been defined to encompass data collection, cost accounting, and cost control. Cost accounting and cost control serve as the chief mechanisms for identifying and maintaining control over project costs. Cost estimation processes create a reasonable budget baseline for the project. 08-08

9. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Common Sources of Project Cost  Labor  Materials  Subcontractors  Equipment & facilities  Travel 08-09

10. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Types of Costs  Direct Vs. Indirect  Recurring Vs. Nonrecurring  Fixed Vs. Variable  Normal Vs. Expedited 08-010

11. Cost Classifications Direct LaborXXXX Building LeaseXXXX ExpediteXXXX MaterialXXXX Non-recurring Direc t Indirect Fixed Recurring Variable Normal Expedited Costs 08-011 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

12. Cost Estimation  Ballpark (order of magnitude) ±30%  Comparative ±15%  Parametric estimation  Feasibility ±10%  Definitive ±5% 08-012

13. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall FIGURE 8.2 Parametric Estimate for Design Costs for Concorde 08-13 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

14. Logarithm Review 14 10 X =Y Given Y, Determine X Log Y = X e X =Y e = 2.718281828 Ln Y = X

15. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 8-15 Learning Curves Each doubling of output results in a reduction in time to perform the last iteration. Curvilinear Handout.doc Learning curve results.xls USE Excel and log(#,base) functions

16. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall FIGURE 8.4 Unit Learning Curve Log-Linear Model 08-16 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

17. Software Project Estimation – Function Points Function Point Analysis is a system for estimating the size of software projects based on what the software does. Function points are a standard unit of measure that represents the functional size of a software application. 08-17

18. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall FIGURE 8.5 Software Project Development Activities as a Function of Size 08-18 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

19. Complexity Weighting Table for Function Point Analysis 08-19 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

20. Function Point Calculations for Restaurant Reorder System 08-20 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

21. Problems with Cost Estimation Low initial estimates Unexpected technical difficulties Lack of definition Specification changes External factors 08-21

22. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 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 08-22

23. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 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 08-23

24. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Sample Project Budget 08-24 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Table 8.6

25. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Sample Budget Tracking Planned and Actual Activity Costs 08-25 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Table 8.7

26. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Example of a Time-Phased Budget 08-26 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Table 8.8

27. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Cumulative Budgeted Cost of the Project Figure 8.7 08-27 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

28. 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 08-28

29. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 8-29 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 control 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 most 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.xls

30. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Examples Solved problems on page 267 (1 & 3) 6-30 NameHours NeededOverhead Charge Personal Time Rate Hourly RateTotal Direct Labor Cost John401.801.12$21/hr. Bill401.801.12$40/hr. J.P.601.351.05$10/hr. Sonny251.801.12$32/hr. Total Direct Labor Cost = Functon Point.xlsx

31. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Examples 31 14 iterations, learning rate is 0.90, 15 hours to complete the first a = 51, X = 14, b = (log 0.90)/(log 2) Y x =aX b where b = log 2 (learning rate) log X / log 2 == Log 2 X learning curve estimates.xls

32. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Summary 1. Understand the various types of common project costs. 2. Recognize the difference between various forms of project costs. 3. Apply common forms of cost estimation for project work, including ballpark estimates and definitive estimates. 4. Understand the advantages of parametric cost estimation and the application of learning curve models in cost estimation. 08-32

33. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Summary 5. Discern the various reasons why project cost estimation is often done poorly. 6. Apply both top-down and bottom-up budgeting procedures for cost management. 7. Understand the uses of activity-based budgeting and time-phased budgets for cost estimation and control. 8. Recognize the appropriateness of applying contingency funds for cost estimation. 08-33

34. 08-34 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall