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Work Authorization

Cost EstimationCost Budgetting

#3PM3_T_B Planning TimeCost EstimatingThe cost estimate is prepared as follows:The types of estimate required is determined from the RFP, RFQ or other requestor.The estimating method(s) appropriate to the type of estimate, the program phase and information available are selected.The estimating team is formed, briefed on the estimate requirements and statement of work.Estimates are prepared using a Basis of Estimate (BOE) Form, and collected by the estimate manager usually the proposal manager before contract award, and project manager afterwards. Usually these estimates are expressed in a mixture of labour hours and dollars.The BOE forms are compiled, summarized, and submitted to the Pricing or control accounting function for the application of all additional Elements of Cost (EOC). If prepared for a proposal, Profit is applied to yield the proposal priced estimate. Otherwise, this forms the basis for the program budget.

#3PM3_T_B Planning TimeTypes of Cost Estimates

#3PM3_T_B Planning TimeEstimating MethodsSimilar approaches as used for schedule estimatingExpert judgment AnalogousParametricProbabilisticEstimates include both internal estimates and quotes from suppliers and sub-contractorTake care to subject external estimates to the same level of scrutiny as internal

#3PM3_T_B Planning TimeKicking off the Estimate Team Preparing an estimate is a project within a project, with the following steps:The estimate manager possibly marketing or business development for proposal, project manager after contract award performs an initial review of the required RFP/SOW.Depending on the level of estimate required and complexity of work, manager pulls together estimating team of experts

Team performs review and estimates on BOE sheets, often supplemented by completion of a SOW compliance matrix for their aspects ROMAnalagousProject Manager; Senior ManagerBudgetaryExpert Judgement (general)Project Manager; Team LeadsDefinitiveExpert Judgement (detailed); ProbabilisticTeam Leads; Functional Experts; Team members

#3PM3_T_B Planning TimeTypical Basis-of-Estimate (BOE) FormatSpecific reference to proposal, contract or purchase order numberWBS reference: estimates are usually done at the lowest level of WBS definition available at the time of the estimateOccasionally, BOEs may be done by functional group rather than WBS in order to provide clear accountability for the estimate, however, this is not preferredEstimators certification, and approval by related functional managementAssures ownership of estimates by those who will need to support themSummary of the work being estimated, as well as applicable specificationsEstimate methods usedEstimates by task, activity or deliverable, broken out into impacted functionsAllows for use in early resource planningAllows follow-up comparison to actuals to assess estimate accuracyEstimate assumptionsMay be derived from the SOW/RFP compliance matrix, but should be on the BOE in order to provide a standalone reference

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#3PM3_T_B Planning Time6If estimates are collected from the people doing the work, they will have a sense of commitment to make the estimate good. Shortcomings of this method include undue optimism or pessimism, gold plating, and failure to estimate the time required for integration of project components.

Turning the Estimate into a Contract PriceThe estimates developed on the various Basis of Estimate forms are collected and added together this gives the total labour, material and other costs exclusively associated with completing the project (ie. the Direct Costs)However, when deciding what price to charge the customer, these costs must be supplemented by the other Elements of CostIndirect Costs the cost of doing businessProfit the charge for the added value delivered

#3PM3_T_B Planning TimeElements of CostDirect: (estimated by team) These are usually directly accounted against the program. Examples:Work conducted by dedicated program teamMaterial purchased to build program equipment and deliverablesContract costs of sub-contracts performed for the programIndirect: (applied by Pricing function)The cost of doing business for the business as a whole must be paid for by its revenue generating activities. This is done by calculating and applying Overhead rates to the Direct costs. Examples:Total annual costs of secretarial, accounting, HS&E etc. staff divided by annual direct costs of all projects rate applied against future project direct costs (eg. Add 50% to all direct labour hours)Total material handling costs (labour, facilities, equipment) applied as an overhead to direct material costsProfit: Not a cost, but an amount (usually %ge) applied to final estimated cost total in order to ensure project price proposed to customer meets company financial goals

#3PM3_T_B Planning TimeTypical Cost Estimating ProcedureDuring the Concept Phases, the proposal manager and/or project manager may be asked to produce a ROM estimate:by senior management to support long term business planning, and/or the development of a business case model (Week 10) for determining whether the project is feasible at all, and its priority for investment relative to other projects; and/or by the client to support preliminary Not to Exceed funding proposals aimed at mutually developing requirements or performing early phase project work in advance of a full contract award.During the preliminary planning phase, the project manager prepares Budgetary estimates to support:customer proposals for project work;forecasting costs for annual enterprise business planning; obtaining high level budget allocations for project workDuring the planning phase, the team leads prepare Definitive estimates in order to support development of the project budget, and the initial authorization of work.

#3PM3_T_B Planning TimeTypical Estimate Process (cont)

J5 Systems IntegrationProject EngineeringJ5 - Project Engineering4.During project execution, the team leads revise the Definitive estimates as part of the periodic integrated schedule review and integrated change control processes, to support:Detailed measurement of budgetary performance against the planrevise budget allocation and work authorization

#3PM3_T_B Planning TimeType of EstimateWhen DoneWhy DoneHow AccurateTypical Estimating Method

Rough Order of Magnitude (ROM)During conceptual and early planning phases Support proposals requests for Not to exceed funding; Provides rough ballpark of cost for project selection decisions25%, +75%Analagous; Parametric

BudgetaryPlanning phaseFirm Fixed Price Proposals; Puts dollars in the budget plans10%, +25%Expert Judgement; Parametric

DefinitiveDetailed planning throughout program lifeProvides details for purchases and resource allocation. Estimates actual costs and revenue for operating plan5%, +10%Expert Judgement; Parametric; Probabilistic