Session36-37

7/30/2019 Session36-37

1/19

SESSIONS 36 & 37

Cost Estimation & Budget

7/30/2019 Session36-37

2/19

DR ASSEM AL-HAJJ, Univation, RGUProject Management and Economics. SITP-SPDC, NIGERIA

Not an exact science

WBS cost is a good starting point

Do not leave anything out Estimating forms

Estimators:Optimistic estimators

Pessimistic estimators

Inconsistent estimators

Accurate estimators

7/30/2019 Session36-37

3/19


Estimates for material and equipment costs

Contingency allowances

Cost escalation (changes in prices) Changes in staff

Provisional sums

Foreign currencies

Reviewing of estimates

The learning curve

Pressure for low estimates

7/30/2019 Session36-37

4/19


Use of widely optimistic estimates

Unawareness of good cost or time estimate

practices Number of things producing errors in cost

estimates are unlimited

Allowance for waste and spoilage

Bad luck: unpredicted delays

7/30/2019 Session36-37

5/19


Consider a project that requires 25 units of a

complex electronic device to be assembled.

The firm is experienced in building electronic

equipment but has never before made this specific

device.

If the firm is to make many such devices, it would

use about 70 hrs of direct labour per unit.

7/30/2019 Session36-37

6/19

If labour is paid a wage of $12 per hr, and ifbenefits equal 28% of the wage rate, the estimated

labour cost for 25 units is

(1.28)($12/hr)(25 units)(70 hr/unit) = $26,880

Is this an underestimate or overestimate of actual

labour cost?

7/30/2019 Session36-37

7/19

Studies shown that human performance usually

improves when a task is repeated.

In general, performance improves by a fixed

percent each time production doubles.

This is called the LEARNING RATE

If an individual requires 10 minutes to accomplish

a certain task the first time it is attempted and only8 minutes the second time, that person has 80%

learning rate.

7/30/2019 Session36-37

8/19


If the output doubles again from 2 to 4 we would

expect the 4th item to be produced in

8(0.8) = 6.4 minutes

Similarly the 8th item will be produced in

6.4(0.8) = 5.12 minutes

7/30/2019 Session36-37

9/19


Tn = time required for the nth unit of output

T1 = time required for the initial unit of output

n = number of units to be produced

r = log decimal learning rate/log 2

Total time required for all units of a production run of size N is

r

nnTT

1

N

n

r

nTtimetotal1

1

7/30/2019 Session36-37

10/19

Assuming that after producing the 20th unit, there is no

significant further improvement.

If Tn=70 hrs, the time required for the first unit is

r

n

n

TT 1

r = log 0.85/log 2 = -0.235

T1 = 141.3 hr

The multiplier = 12.40

(12.40)(141.3 hr) = 1752.12

The last five units were produced in the stead-state time

of 70 hrs each

1752.12 + 5(70 hr) = 2102.12 hr

7/30/2019 Session36-37

11/19

Direct labour cost =2101.12($12)!1.28) = $32,288.56

Difference with first estimate =

$32,288.56 - $26,880 = $5,408.56

Accuracy = about 17%

7/30/2019 Session36-37

12/19

Number of units

Time

Additional time

used for learning

Effects of ignoring learning curve

Time chargedwithout allowance

for learning

7/30/2019 Session36-37

13/19


3Definitive

estimate/Detaile

d estimating

1Order-ofmagnitude

2Approximateestimate or

top-downestimate

Made without

detailed

engineering data

May use past

experience, scale

factors,parametric curves

or capacity

estimates

Made without detailed

engineering dataProrated from

previous projectssimilar in scope and

capacityThis is estimating byanalogue, parametric

curves, rule of thumband indexed cost ofsimilar activities

adjusted for capacityand technology.

Prepared from well-

defined engineering

data including vendorquotes, fairly

complete plans,

specifications, unit

prices, and estimate to

complete.

Type of

Estimates

7/30/2019 Session36-37

14/19


Standard Project Estimating

WBS Level Type of Estimate Estimate Method Accuracy

1 Rough order of magnitude Parametric -25%, +75%

2,3 Approximate estimating Analogy -10%, +25%

4,5,6 Definitive Engineering buildup -5%, +10%

7/30/2019 Session36-37

15/19


Definition

An agreed and approved sum of moneyallocated for expenditure on a specific

work scope

7/30/2019 Session36-37

16/19


Budgets are the means by which project

costs can be compared with financial

resources, and they enable decisions to betaken concerning the provision and

deployment of Company funds

(Shell Project Management Guidelines)

Budgetary control enables activities to be

matched to financial capabilities

7/30/2019 Session36-37

17/19


A budget requires a forecast of resources

needed for the project, quantities, when

needed, how much they will cost ..

The influence of history is strong in the

budget of ongoing activity.

7/30/2019 Session36-37

18/19


Many entries may become last years

figure plus X percent

Guidance can be used from similar projects

Project budgets are based on forecasts of

resource usage and associated costs. Thisinvolves risk.

7/30/2019 Session36-37

19/19

DR ASSEM AL-HAJJ, Univation, RGUP j t M t d E i SITP SPDC NIGERIA

BUDGET TYPES

TOP-DOWNBOTTOM-UP

Collecting judgements &experiences of top and middlemanagers, and available past

data concerning similaractivities

Managers estimate overallproject cost as well as costs of

major subprojects.Budget is broken down into

successively finer detail,starting from

top

following

the WBS

Follows the WBS

People doing the work are

consulted regarding times andbudgets

Estimates are made in terms of

resources e.g. labour hours

and materials

Task budgets are aggregated to

give the total direct costsUsually a more accurate

method

Top-

down is

commo

n

Botto

m-up

is rare

Advantage 1

budgets

can be

developed

quite

accurately

Advantage 2

small yet

costly tasks

need not be

individuall

y identified

Session36-37

Documents

Transcript of Session36-37