1. Jeff Sestokas Estimating the Budget and Cost (Part 2) Project Management for ARA Engineers and Scientists Developing an Estimate from the Top Down

2. Copyright 2009. All rights reserved. Applied Research Associates, Inc. 2 Introduction  Another approach to developing a budget is to start from the “total” and allocate effort (“top down”) Understanding customer budget and priority is generally critical to determining “total” Allocation based on difficulty, duration and amount of ODCs required  Most appropriate for: ROM estimates Vaguely defined tasks/requirements  Effectiveness can improve with experience

3. Copyright 2009. All rights reserved. Applied Research Associates, Inc. 3 Desired Learning Objectives  How to construct a simplified estimate or budget  Importance of understanding customer budget and priorities to accuracy of estimate  Know when a ROM estimate is most appropriate  Importance of continuing evaluation Requires measurable milestones Allows early adjustment Improves subsequent estimates

4. Copyright 2009. All rights reserved. Applied Research Associates, Inc. 4 Significant Considerations  Procurement Requirements What do we have to deliver and when?  Evaluation Criteria Customer emphasis should be basis of cost strategy  Critical Personnel, Facilities or Equipment  Customer Cost Expectations For government contracts – government estimated level of effort Cost is proportional to quality and (often) inversely proportional to required delivery time Generally, specifying any two will determine the third

5. Copyright 2009. All rights reserved. Applied Research Associates, Inc. 5 Step 1 – Organize the Project  Define the major tasks to be accomplished Clearly define the milestones and deliverables associated with each task (analogous to WBS and IMS steps)  Determine leader, type of personnel required, materials and ODCs for each major task (analogous to RLN step)

6. Copyright 2009. All rights reserved. Applied Research Associates, Inc. 6 Step 2 – Allocate Resources  Allocate a percentage of total resources to each major task If a price objective is established (such as Government Estimate), this defines total resources Otherwise, build to total based on effort in each major task What is missing from allocation?

7. Copyright 2009. All rights reserved. Applied Research Associates, Inc. 7 Step 3 – Refine Resources  Allocate hours (or dollars) within resources assigned to each task  Check for reasonableness and adjust  Determine task milestones and percent of task effort to reach each milestone  Check for reasonableness and adjust Don’t forget ODCs if significant

8. Copyright 2009. All rights reserved. Applied Research Associates, Inc. 8 Labor Fringe & OH Fringe Holiday and Leave Retirement & Bonus Insurance OH - Sector & Division Operations Marketing Recruiting & Relocation Training Offices & Utilities Field & Office Supplies Determine Cost  Individual Elements of cost must be appropriately loaded, then accumulated New! Add G&A on Purchase Load (+PLODC*P&S*G&A)

9. Copyright 2009. All rights reserved. Applied Research Associates, Inc. 9 Aligning your budget with Deltek  Understanding the Deltek database structure: Up to 5 levels, each level has 5 alphanumeric characters Typically only 3 levels used Only one item at level 2 – this is the invoice level

10. Copyright 2009. All rights reserved. Applied Research Associates, Inc. 10 Building a Cost Estimate Direct Labor Labor Overhead Travel Other ODCs Purchasing & Subcontracts Load with G&A Load with P&S and G&A on P&S load Load with Fee Taxes (If Applicable) See Handout Escalation discussed on next chart Fringe

11. Copyright 2009. All rights reserved. Applied Research Associates, Inc. 11 Escalation of Current Rates  Particularly important for long duration contracts  Adjust rates to the midpoint of the contract Accounts for inflation, salary increases and promotions  Allowable rate may be set in procurement Otherwise, use 4% (R esc =.04) or as directed

12. Copyright 2009. All rights reserved. Applied Research Associates, Inc. 12 Step 4 – Continuing Evaluation  As project proceeds, evaluate budget estimation What was expected cost at milestone? ▪Milestones may be set by customer or PM ∙Define measurable accomplishments ∙Should be frequent enough to allow easy adjustment ▪You must determine budget to reach milestone  If variance is unfavorable: Use management reserve? Adjust other task budgets?

13. Copyright 2009. All rights reserved. Applied Research Associates, Inc. 13 Summary  Top Down budget estimate is most appropriate when: A ROM estimate is required Tasking is vague and difficult to price  Allocate percent of total tasks, then refine to resources  Must organize project in a similar fashion to Bottoms Up approach Generally in much less detail Still requires “frequent” milestones for continuing assessment  Continuing assessment important for: Manageable adjustment Improved subsequent estimation