Chapter 9 Flashcards
Cost estimates
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
types of estimates
- top-down (macro) estimates:
- analogy
- group consensus
- mathematical relationships - bottom-up (micro) estimates:
- estimates of elements of the work breakdown structure
method for cost estimation
duration = (a + 4m + b)/6
a: optimistic
m: most likely
b: pessimistic
Cost escalation
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%
Sources of Cost Escalation and Overruns
- 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
Uncertainty and Lack of Accurate Information
- information needed for cost estimation not available when estimations are make
- only available when designs finalised and work activities are well defined
Changes in Requirements or Design
- when discretionary, nonessential changes get made to the system requirements
- provisions made for changes in contract
- managed with change control and configuration management
Economic and social factors
- 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
Inefficiency, Poor Communication, and Poor Lack of Control
- Especially in bigger projects with lots of team members
- management has a substantial influence on this
Ego Involvement of the Estimator
- Overly optimistic = underestimate the time and cost
- lack of experience
- important for all workers to give input into cost estimates
project contract
- fixed price
- forces contractors to control costs - cost plus
- has not obligation to control costs
accuracy vs precision
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
System Life Cycle costs
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
Purpose of life cycle cost analysis
- 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
Estimating process: Estimate versus Target or Goal
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.
the estimating process
is directed at producing good estimates, not restating targets or goals
estimating methods
- expert opinion
- analogy and compensation for differences
- parametric: formula or cost function
- cost engineering
Cost engineering
Detailed cost breakdown of labor, materials, etc. at the work package or task level
Rule of thumb for estimating process
the smaller the work package/portion of the end-item estimated, the better the estimate
Contingency amount
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
estimating process: top-down estimates
estimating costs by looking at the project as a whole
- typically based on expert opinion or analogy
estimating process: bottom-up estimated
estimating costs based on looking at elements of the project
- every activity is estimated separately and aggregated
2 types of cost elements
- fixed costs
- Rent
- Labour
- Overheads - variable costs
- increase with loading
Direct costs
- 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
Direct (Project) Overhead Costs
- 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
General and Administrative Overhead Costs
- 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
Profits and Total Billing (External projects)
- 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)
Bias and ambition
optimism may lead to over estimating benefits and underestimating costs
