Chapter 9

Question 1

Cost estimates

Answer 1

The process of forecasting/estimating the time and cost of completing project deliverables
- the task of balancing the expectations of stakeholders and the need for control while the project is implemented

Question 2

types of estimates

Answer 2

1. top-down (macro) estimates:
   - analogy
   - group consensus
   - mathematical relationships
2. bottom-up (micro) estimates:
   - estimates of elements of the work breakdown structure

Question 3

method for cost estimation

Answer 3

duration = (a + 4m + b)/6

a: optimistic
m: most likely
b: pessimistic

Question 4

Cost escalation

Answer 4

The amount by which the actual costs grow to exceed the initial estimates

the ratio that costs are more than the estimate
“normal” to occur on projects = +- 20%

Question 5

Sources of Cost Escalation and Overruns

Answer 5

• Uncertainty and Lack of Accurate Information
• Changes in Requirements or Design
• Economic and social factors
• inefficiency, Poor Communication, and Poor Lack of Control
• ego Involvement of the Estimator
• project contract
• bias and ambition

Question 6

Uncertainty and Lack of Accurate Information

Answer 6

• information needed for cost estimation not available when estimations are make
• only available when designs finalised and work activities are well defined

Question 7

Changes in Requirements or Design

Answer 7

• when discretionary, nonessential changes get made to the system requirements
• provisions made for changes in contract
• managed with change control and configuration management

Question 8

Economic and social factors

Answer 8

• costs can escalate, independent of the quality of planning (due to forces beyond project control: strikes, material shortage etc)
• inflation should be taken into consideration –> causes cash flow difficulties

Question 9

Inefficiency, Poor Communication, and Poor Lack of Control

Answer 9

• Especially in bigger projects with lots of team members

- management has a substantial influence on this

Question 10

Ego Involvement of the Estimator

Answer 10

• Overly optimistic = underestimate the time and cost
• lack of experience
• important for all workers to give input into cost estimates

Question 11

project contract

Answer 11

1. fixed price
   - forces contractors to control costs
2. cost plus
   - has not obligation to control costs

Question 12

accuracy vs precision

Answer 12

Accuracy: the closeness of the estimated value to the actual value
Precision: the number of decimal places in the estimate
–> accuracy is more important than precision

Question 13

System Life Cycle costs

Answer 13

All costs of a system throughout its full cradle-to-grave life cycle

• all costs incurred during the project life cycle phases of Definition and Execution
• PLUS all costs associated with the Operations phase (Maintenance and Renewal) and the eventual Disposal of the system

Question 14

Purpose of life cycle cost analysis

Answer 14

• To anticipate the realities of operating, maintaining, and (ultimately) disposing of the end-item system
• To establish target costs for operating, maintaining, and disposing of the end- item system
• To design the system so it will meet those target costs

Question 15

Estimating process: Estimate versus Target or Goal

Answer 15

Estimate
a realistic assessment based upon known facts about the work, required resources, constraints, and the environment, derived from estimating methods

Target or goal
a desired outcome, commitment, or promise.

Question 16

the estimating process

Answer 16

is directed at producing good estimates, not restating targets or goals

Question 17

estimating methods

Answer 17

1. expert opinion
2. analogy and compensation for differences
3. parametric: formula or cost function
4. cost engineering

Question 18

Cost engineering

Answer 18

Detailed cost breakdown of labor, materials, etc. at the work package or task level

Question 19

Rule of thumb for estimating process

Answer 19

the smaller the work package/portion of the end-item estimated, the better the estimate

Question 20

Contingency amount

Answer 20

added to estimates to offset uncertainty

• more uncertainty, the higher the amount
• include allowance for design changes, increases in scope, size or function of end item and delays

Question 21

estimating process: top-down estimates

Answer 21

estimating costs by looking at the project as a whole

• typically based on expert opinion or analogy

Question 22

estimating process: bottom-up estimated

Answer 22

estimating costs based on looking at elements of the project

- every activity is estimated separately and aggregated

Question 23

2 types of cost elements

Answer 23

1. fixed costs
   - Rent
   - Labour
   - Overheads
2. variable costs
   - increase with loading

Question 24

Direct costs

Answer 24

• Costs in the contents of an activity are clearly chargeable to a specific work package
• Directly related to the work and changes with the volume of the work
• Costs are spent as the project proceeds
• Examples: Labour, Materials, Equipment, Management

Question 25

Direct (Project) Overhead Costs

Answer 25

• Costs of the organisation resources that are used in the project
• Related to project deliverables
• Can be determined by basing it on a specific percentage of direct costs
• Allocated to summary activities
• Changes with the time duration of the project and not the volume

Question 26

General and Administrative Overhead Costs

Answer 26

• Organisation costs indirectly linked to a specific package
• Organisation costs of all products and projects (e.g., advertising, book keeping and senior managers above project level)
• Differs from organisation to organisation
• Head office makes strategic decisions

Question 27

Profits and Total Billing (External projects)

Answer 27

• maximise this rate in order to pay the shareholders
• profits must be added to the project costs as per the company policy
• PM does not have to manage (but profit is influenced by the success and quality of PM)

Question 28

Bias and ambition

Answer 28

optimism may lead to over estimating benefits and underestimating costs