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Cost Estimation and Budgeting

W S William

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Copyright 2010 PearsonEducation, Inc. Publishing as

Prentice Hall

8-2

Cost Estimation

Ballpark (order of magnitude) 30%

Comparative 15%

Feasibility 10%

Definitive

5%

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Copyright 2010 PearsonEducation, Inc. Publishing as

Prentice Hall

8-3

Problems with Cost Estimation

Low initial estimates

Unexpected technical difficulties

Lack of definition

Specification changes

External factors

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Cost Estimating and the Systems Development Life

Cycle

Cost

estimate

Contingency

fund

C

umulativeco

st

Time

Regions of time-

cost uncertainty

At project

initiation

At project

definitionAt project

execution

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Estimating Process

Estimating Methods

1. Expert opinion

2. Analogy + compensation for differences

3. Parametric: Formula or Cost Function, e.g.,

Cost, engine A = (Cost, engine B)

Cost, cabling = 150 (total area + 10%)+ 300 (number of rooms)

+ 125 (number of floors)

Thrust, engine A

Thrust, engine B( )0.7

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Estimating Methods (contd)

4. Cost engineering

Detailed cost breakdown of labor, materials, etc.

at the work package or task level.

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Estimation Process

1. PM: Uses WBS to identify work packages

2. FM: Subdivide work packages into identifiable

tasks; determine labor, material, facilities, andresources requirements for each

3. Supervisors/team leads: Estimate number of labor

hours and quantities of materials needed

Functional Management

Work team

Project Management

WBS

information

2.

3.

1.

Procedure for larger projects, steps 1-3

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Functional Management

Work team

Project Management

WBS

informationEstimation Process

4. FM: check and aggregate time and material

estimates

5. FM: convert time estimates into costs

6. PM: checks over and approves all estimatesaggregates costs; added in overhead costs:

Project cost = direct costs + overhead costs

6.

4., 5.Procedure for larger projects, steps 4-6

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Estimating Process (contd)

7. PM: Adds in contingency amounts.

Two possible contingencies

1. Base estimate = (WP estimates + WP contingency)

(to handle known-unknowns)

2. Final estimate = Base estimate + overheads + project contingency

(to handle unknown unknowns; PM controls this)

8. PM: Compares bottom-up estimates to top-down targets or

goals. Attempt to reconcile differences.

Functional Management

Work team

Project Management

WBS

information

7., 8..

Procedure for larger projects, steps 7-8

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Estimating Process

Estimates can be made at any level

project

work package

task

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Project Budget

Specific for each project

Subdivided into Control Accounts, one for each work

package

Each control account is a portion of the project total

budget

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Project budget subdivided into control accounts

ROSEBUD

$ 356,755

Projectmanagement

Basicdesign

Hardware Software FinalTests

$ 12,550$31,362 $179,868 $122,118

$10,857

Assembly

InstallationMaterials

Procedures

Specifications SystemTest

User

Test

$138,571

$20,945 $21,272

$4,235

$6,622$20,352$100,846

J

M

V

L W

Y Q X

Project Budget

Cost

Accounts

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Project Budget

The best project budgets are time-phased to allow

cost tracking vs. time

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Copyright 2010 Pearson

Education, Inc. Publishing as

Prentice Hall

8-14

Budget Contingencies

The allocation of extra funds to cover

uncertainties and improve the chance of finishingon time.

Contingencies are needed because

Project scope may change

Murphys Law is present Cost estimation must anticipate interaction costs

Normal conditions are rarely encountered

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Estimating Pitfalls

Misinterpretation of the statement of work

Improperly defined scope

Overly optimistic schedule Inaccurate WBS

Applying improper skill level to tasks

Failure to account for risks

Failure to account for cost escalation and inflation

Failure to use correct estimating technique

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Thank you