1. Cost Estimating and Budgeting

2. Cost Estimating Initial Cost Estimate Initial Cost Estimate Underestimates are Initially a Big Problem Underestimates are Initially a Big Problem Contract Buy-in Contract Buy-in –Risky –Unethical –Relatively Commonplace Cost Estimates Become Budgets Cost Estimates Become Budgets

3. Cost Escalation Actual Cost overruns the Estimate Actual Cost overruns the Estimate Reasons: Reasons: –Uncertainty and Lack of Accurate Information –Changes in Design or Requirements –Economic and Social Variable in the Environment –Work Inefficiency, Poor Communication, and Lack of Control –Ego Involvement of the Estimator

4. Economic and Social Factors Forces Beyond Your Control Forces Beyond Your Control –Labour Strikes –Legal Action –Trade Embargoes –Material Shortages Inflation Inflation –Not Controllable –Manageable

5. Cost Estimating Process Work Tasks and Costs Work Tasks and Costs Expert Opinion Expert Opinion Analogy Estimate Analogy Estimate –Obtained from Similar Projects Parametric Estimate Parametric Estimate –Scale Cost up or Down Engineering Estimate Engineering Estimate –Bottoms Up –Standards Manuals

6. Cost Estimating Process (Continued) Contingency Amounts Contingency Amounts –1. Contingency is Added to Each Activity »Rolled-up for Base Estimate –2. PM ads a Project Contingency »For Unknown Unknowns »Rolled-up Again for Final Cost Estimate i.e., »Becomes Most Likely Cost –3. Corporation Adds Overrun Allowance »Controlled by Corporate Management

7. Cost Estimating Process (Continued) Estimates from Project Bottoms up Estimates from Project Bottoms up Padding Estimates Padding Estimates Final Should be a Compromise Final Should be a Compromise

8. Elements of Budgets and Estimates Direct Labour Expense Direct Labour Expense Direct Non-Labor Expense Direct Non-Labor Expense Overhead Expense Overhead Expense General and Administrative Expense General and Administrative Expense Profit Profit

9. Direct Non-Labour Expense Subcontractor Subcontractor Consultants, Computer Time (Support) Consultants, Computer Time (Support) Travel, Telephone, Travel, Telephone, Material Costs (Direct Materials) Material Costs (Direct Materials) –Waste and Spoilage Freight Freight Purchased Parts Purchased Parts

10. How a Overhead Rates are Calculated Varies from Company to Company Varies from Company to Company Does include “Cost of Doing Business” Does include “Cost of Doing Business”

11. Overhead Expense General and Administrative Expense Cost of Doing Business Cost of Doing Business –Building Rents –Utilities –Clerical Assistance –Insurance –Equipment

12. Overhead Expense (Continued) In a Project Organization Corporate OH can be Calculated as: In a Project Organization Corporate OH can be Calculated as: –Direct OH »Traceable to Project –Indirect OH »Not Traceable to Project

13. General and Administrative Expense Taxes Taxes Financing (Cost of Money) Financing (Cost of Money) Penalty and Warranty Costs Penalty and Warranty Costs Accounting and Legal Accounting and Legal Proposal Expenses Proposal Expenses Marketing Marketing Salaries and Expenses for Corporate Management Salaries and Expenses for Corporate Management Employee Fringe Packages Employee Fringe Packages

14. General and Administrative Expense (Continued) Allocated across All Projects Allocated across All Projects Indirect Cost Practices are not Uniform Across Industry Indirect Cost Practices are not Uniform Across Industry

15. Profit and Total Billing Profit Profit –Agreed-to-Fixed Fee –Percentage of Total Expenses Total Billing Total Billing –Sum of Total Expense plus Fee

16. Project Cost Accounting (PCAS) &Project Management Information System(PMIS) PCAS PCAS –Computes Estimates –Stores and Process Budgets (Time Phased/Proj Plan)) –Tracks Costs PMIS PMIS –Project Planning –Control –Reporting –Plus all of PCAS

17. Material Expenditures Cost Schedules and Forecasts used to estimate Cash Requirements Cost Schedules and Forecasts used to estimate Cash Requirements –When Needed, payment made before delivery, expense precedes cost of materials –Payment delayed, expense follows when the material is needed

18. Cash Flow Cash In vs Cash Out Cash In vs Cash Out Income (Client) vs Expenses of the Project Income (Client) vs Expenses of the Project PM must do Cash Flow Forecast PM must do Cash Flow Forecast Funding Plan for Working Capital Funding Plan for Working Capital