Time and Cost Estimation Dr Lotfi Gaafar Project

Time and Cost Estimation Dr. Lotfi Gaafar Project Management Source: PMBOK Guide 2000 Gaafar 2007 / 1

Importance of Time and Cost Estimation n n n Estimates are needed to support good decisions. Estimates are needed to schedule work. Estimates are needed to determine how long the project should take and its cost. Estimates are needed to determine whether the project is worth doing. Estimates are needed to develop cash flow needs. Estimates are needed to determine how well the project is progressing. Estimates are needed to develop time-phased budgets and establish the project baseline Project Management Gaafar 2007 / 2

Guidelines for Time and Cost Estimation n n n Have people familiar with the tasks make the estimate. Use several people to make estimates. Base estimates on normal conditions, efficient methods, and a normal level of resources. Use consistent time units in estimating task times. Treat each task as independent, don’t aggregate. Don’t make allowances for contingencies. Account for risks separately. Project Management Gaafar 2007 / 3

Types of Estimates – Top-down (macro) estimates: analogy, group consensus, or mathematical relationships – Bottom-up (micro) estimates: estimates of elements of the work breakdown structure A brief comparison Condition Strategic decision making Cost and time important High uncertainty Internal, small project Fixed-price contract Customer wants details Unstable scope Project Management Macro Estimates X Micro Estimates X X X Gaafar 2007 / 4

Estimation Methods Top-down (macro) estimates: analogy, group consensus, or mathematical relationships – Consensus methods – Ratio methods – Apportion method – Function point methods for software and system projects Bottom-up (micro) estimates: estimates of elements of the work breakdown structure – Template method – Parametric Procedures Applied to Specific Tasks – Detailed Estimates for the WBS Work Packages Project Management Gaafar 2007 / 5

Activity Definition Project Management Gaafar 2007 / 6

Activity Sequencing Project Management Gaafar 2007 / 7

Activity Duration Estimation Project Management Gaafar 2007 / 8

Activity Duration Estimation Project Management Gaafar 2007 / 9

Activity Duration Estimation- Inputs Project Management Gaafar 2007 / 10

Activity Duration Estimation- Tools Project Management Gaafar 2007 / 11

Activity Duration Estimation- Tools Project Management Gaafar 2007 / 12

Schedule Development Project Management Gaafar 2007 / 13

Schedule Control Project Management Gaafar 2007 / 14

Activity Cost Estimation Project Management Gaafar 2007 / 15

Activity Cost Estimation- Inputs Project Management Gaafar 2007 / 16

Types of Costs n Direct Costs – Costs that are clearly chargeable to a specific work package. < Labor, n materials, equipment, and other Direct (Project) Overhead Costs – Costs incurred that are directly tied to an identifiable project deliverable or work package. < Salary, n rents, supplies, specialized machinery General and Administrative Overhead Costs – Organization costs indirectly linked to a specific package that are apportioned to the project Project Management Gaafar 2007 / 17

Refining Estimates n Reasons for Adjusting Estimates – – n Interaction costs are hidden in estimates. Normal conditions do not apply. Things go wrong on projects. Changes in project scope and plans. Adjusting Estimates – Time and cost estimates of specific activities are adjusted as the risks, resources, and situation particulars become more clearly defined. Project Management Gaafar 2007 / 18

Project Budget Look at the history of similar projects to get a rough estimate of costs. Make sure the scope and nature are similar. Determine the internal resources you have available to use - people, equipment, etc. , within your organization. Determine the external resources - those not currently in your organization - that you will need to get the job done. Project Management Gaafar 2007 / 19

Sample Cost Estimation Tools n n n Activity Based Costing Benchmarking Target Costing Project Management Gaafar 2007 / 20

Activity Based Costing n Description: – Quantitatively measures the cost and performance of activities – It is the quantitative aspect of the Activity based costing that makes it a more efficient tool that improves the quality of the final decision. n When to use it? – Evaluate relative cost of various activities, and potential effects of modifications – Analyze alternative process flows with comparative economic evaluation Project Management Gaafar 2007 / 21

Activity Based Costing n Procedure: – – Analyze Activities Gather Costs Trace Costs to Activities Analyze Costs Project Management Gaafar 2007 / 22

Activity Based Costing Example Project Management Gaafar 2007 / 23

Benchmarking n Description: – It is the continuous and systematic process of measuring and assessing products, services, practices against those of high performing organizations to improve performance. Two types of benchmarking: – - Benchmarking prices - Benchmarking processes n When to use it ? – Project Management Benchmarking is used when a company is suffering losses in a certain area and wants to improve its performance to overcome these losses. Gaafar 2007 / 24

Benchmarking n Procedure: – – – – Identify the work process or area to be improved Analyze the work process Measure your own performance Identify benchmarking partners Determine data collection method Collect data Determine performance gap – – Develop action plan Implement action plan Monitor results Recalibrate benchmarks (Repeat process) Project Management Gaafar 2007 / 25

Target Costing n Description : 4 – Is the cost that can be incurred while still gaining profit. Target Cost = Estimated Selling Price (Target Price) – Desired Profit n When to use it ? 1 – Dominantly with new products and services – Improve existing products Project Management Gaafar 2007 / 26

Target Costing Example (The Montclair Paper Mill) Setting the target price: Competitor’s selling price to the merchant Less: freight paid by the mill Normal sales returns & allowances Montclair capital charge Ship to the DC DC operating cost DC capital charge Target Manufacturing Cost Project Management 5 Per Ton $1466 (30) (60) (120) (11) (25) (58) $1162 Gaafar 2007 / 27

Refining Estimates n Contingency Funds and Time Buffers – Are created independently to offset uncertainty. – Reduce the likelihood of cost and completion time overruns for a project. – Can be added to the overall project or to specific activities or work packages. – Can be determined from previous similar projects. n Changing Baseline Schedule and Budget – Unforeseen events may dictate a reformulation of the budget and schedule. Project Management Gaafar 2007 / 28

Project Management Cost Management* Dr. Lotfi Gaafar * This Presentation is Based on information from PMBOK Guide 2000 Project Management Gaafar 2007 / 29

Project Cost Management Processes n n Resource planning: determining what resources and quantities of them should be used Cost estimating: developing an estimate of the costs and resources needed to complete a project Cost budgeting: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance Cost control: controlling changes to the project budget Project Management Gaafar 2007 / 30

Resource Planning Cost Estimating Project Management Gaafar 2007 / 31

Cost Budgeting Cost Control Project Management Gaafar 2007 / 32

Resource Planning n n The nature of the project and the organization will affect resource planning Some questions to consider: – How difficult will it be to do specific tasks on the project? – Is there anything unique in this project’s scope statement that will affect resources? – What is the organization’s history in doing similar tasks? – Does the organization have or can they acquire the people, equipment, and materials that are capable and available for performing the work? Project Management Gaafar 2007 / 33

Cost Control n Project cost control includes – monitoring cost performance – ensuring that only appropriate project changes are included in a revised cost baseline – informing project stakeholders of authorized changes to the project that will affect costs n Earned value management is an important tool for cost control Project Management Gaafar 2007 / 34

Using Software to Assist in Cost Management n n n Spreadsheets are a common tool for resource planning, cost estimating, cost budgeting, and cost control Many companies use more sophisticated and centralized financial applications software for cost information Project management software has many costrelated features Project Management Gaafar 2007 / 35