Chapter 5: Estimating Time and Project Costs

Estimating

The process of forecasting or approximating the time and cost of completing project deliverables

Top-down (macro) estimations

Analogy, group consensus, or mathematical relationships

Bottom-up (micro) estimations

Based on estimates of elements found in the work breakdown structure

Why is estimating time and costs important?

• Needed to support good decisions

• Needed to schedule work

• Needed to determine how long a project should take and its cost

• needed to determine whether the project is worth doing

• Needed to develop cash flow needs

• Needed to determine how well the project is progressing

Four aspects of estimating

1. Range - the number of potential outcomes that could be expected to occur

2. Accuracy - the correctness of an estimate

3. Precision - the degree of exactness associated with the estimate

4. Confidence - The degree of trust one has in the estimate

Factors that influence the quality of estimates

• Planning Horizon

• Project Complexity

• People

• Project Structure and Organization

• Padding Estimates

• Organizational Culture

• Other Factors

Estimating guidelines for times, costs and resources

1. Responsibility.

2. The use of several people to estimate.

3. Normal conditions.

4. Time units.

5. Independence.

6. Contingencies.

7. Risk assessment added to the estimate to avoid

surprises to stakeholders.

Top-Down Estimates

Estimates are often based on experience or available information to determine project duration and cost, but may also be made by top managers with limited knowledge of the component activities

Bottom-Up Estimates

Estimating can occur after the project is fully defined, serving as a check on WBS cost elements by rolling up work packages to major deliverables, while also giving the customer a chance to compare efficient approaches with imposed restrictions.

Top-Down Approaches

• Consensus Method.

• Ratio Method.

• Apportion Method.

• Function Point Methods for Software and System Projects.

• Learning Curves.

Bottom-Up Approaches

• Template Method

• Parametric Procedures Applied to Specific Tasks

• Range Estimating

Direct Costs

Are clearly chargeable to a specific work package.

• Examples: Labor, materials, equipment, and other.

Direct Project Overhead Costs

Can be tied to project deliverables or work packages.

• Examples: Salary of the project manager, temporary rental

space for the project team, supplies, specialized machinery.

General and Administrative (G&A) Overhead Costs

Are not directly linked to a specific project.

• Examples: Advertising, accounting, salary of senior

management above the project level

Reasons for adjusting estimates

• Interaction costs are hidden in estimates

• Normal conditions do not apply

• Things go wrong on projects

• Project scope and plans change

• People are overly optimistic

• People engage in strategic misrepresentation

Mega Projects

Are large-scale, complex ventures that typically cost $1 billion or

more, take many years to complete, and involve multiple private

and public stakeholders.

• Examples: High-speed rail lines, airports, healthcare reform, the

Olympics, development of new aircraft.

Often involve a double whammy.

• Projects cost much more than expected and under-deliver on benefits

the projects were to provide.

Are sometimes referred to as “white elephant.”

• Projects are over budget and under value and the costs of maintaining

the project exceed the benefits received.

Steps for Reference Class Forecasting

1. Select a reference class of projects similar to your potential project.

2. Collect and arrange outcome data as a distribution. Create a distribution of

cost overruns as a percentage of the original project estimate (low to high).

3. Use the distribution data to arrive at a realistic forecast. Compare the original

cost estimate for the project with the reference class projects.

Benefits of Reference Class Forecasting

• Outside empirical data mitigate human bias.

• Politics, strategic, and promoter forces have difficulty ignoring outside RCF information

• RCF serves as a reality check for funding large projects

• RCF helps executives avoid unsound optimism

• RCF leads to improved accountability

• RCF provides a basis for project contingency funds

The views of Costs

• Committed cost

• Actual Cost

• Scheduled Budget