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project management > cost estimating > Flashcards

cost estimating Flashcards

1
Q

define cost estimating

A

collecting and analysing historical data and applying quantitative models, tools and techniques, and norms databases to predict the cost of a project

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2
Q

what must our cost estimates be?

A

estimates must be credible (i.e. believable) and timely (to support business decisions), which means it has to be: robust (based on sound data), accurate, comprehensive, replicable, auditable

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3
Q

approx 6

what are some reasons to develop cost estimates?

A
  • support decision making for annual budgeting, resource planning, and investment appraisals
  • estimate total project cost
  • determine whether a project is financially worth doing (ROI)
  • determine cash flow
  • use as the basis for project control: measures project progress
  • assess impacts of changing technology, new equipment, or new operating or maintenance concepts
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4
Q

define cash flow

A

timing of money flow into and out of the project

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5
Q

approx 10

what are some challenges and limitations of cost estimation

A
  • historical data is subject to estimator interpretation and so supporting assumptions must be provided
  • cannot produce results that are better than input data
  • cannot predict political impacts, particularly with government-related projects
  • cannot substitute for sound judgment, management, or control
  • cannot make the final decisions (cost estimates support decisions)
  • incomplete project scope and requirements
  • unreliable or unavailable data – too much or too little data
  • time constraints
  • inadequate systems can make data inaccessible
  • documenting the estimate
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6
Q
A
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7
Q

what does documenting a cost estimate need to include?

A
  • reason for development / stage in project life cycle
  • who estimate is for / decisions it will support
  • scope included/excluded
  • assumptions, exclusions, and dependencies (AEDs)
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8
Q

what does the total project cost consist of?

A

total direct costs + total indirect costs = total project cost

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9
Q

what are direct costs and provide some examples

A
  • are directly attributable/chargeable to a project or activity
  • represent real cash outflows
  • must be paid as project progresses

examples:

  • labour: cost of people directly employed (expressed in monetary terms or person-hours)
  • materials: material in final product (raw or machined/fabricated) and additional material
  • plant and equipment: machinery, tools etc (used or hired)
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10
Q

define indirect costs and how do we allocate indirect labour costs?

A
  • indirect costs (overheads) cover all resources within an organisation being used by the project, i.e. they are attributable/allocated to (shared across) all projects
  • ratio percentages are often used to allocate indirect labour costs (non-touch labour, e.g. management) to a project – ratio used is arbitrary and depends on project/industry sector
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11
Q

give some examples of indirect costs

A

rent, lighting, heating, insurance, admin, hr, marketing, advertising

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12
Q

what would a ratio percentage of 15% mean if the total direct labour costs were £1m?

A

a ratio percentage of 15% adds a 15% indirect labour cost to the estimate, i.e. if direct labour costs were £1m then indirect labour costs would be £150k and so total labour costs would be £1,150,000

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13
Q

give reasons for cost increases

A
  • complexity
  • Scope/requirements changes - we need to prevent scope creep (adding new scope without budgeting for it)
  • Making decisions with incomplete information (uncertainty)
  • Long project durations
  • Loss of experience / time between projects - firing staff, staff stopping and working on other projects
  • Concurrent engineering - common in complex projects = entering manufacturing phase when design phase not completed
  • poor risk and supply chain management
  • People: skill sets and mentality (optimistic or pessimistic)
  • Lack of knowledge management and lessons learned - reinforcing failure by not learning from mistakes
  • Legislation - new regulations can have impacts on the way we work
  • Politics - highly political projects influence decisions
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14
Q

define what is meant by concurrent engineering

A

starting the manufacturing phase when design not completed

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15
Q

what is scope creep?

A

adding new scope without budgeting for it

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16
Q

what are the different types of cost estimating?

A
  • life cycle cost estimate (LCCE)
  • independent cost estimate (ICE)
  • estimate at completion (EAC) / latest revised estimate (LRE)
  • rough order of magnitude estimate (ROM)
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17
Q

describe the life cycle cost estimate (LCCE)

A
  • ‘cradle-to-grave’ estimate covering all costs associated with the project for its complete life cycle from concept through to disposal
  • should be performed as early in the life cycle as possible as the opportunity to minimise total project costs diminishes rapidly as the design and development of a system proceeds
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18
Q

describe the independent cost estimate (ICE)

A
  • an ICE is an LCCE developed by an estimator who is not associated with the project in question
  • based on identical information used for the original estimate, a different estimating methodology is used to develop an unbiased estimate to test the original estimate for accuracy and reasonableness
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19
Q

describe the estimate at completion (EAC) / latest revised estimate (LRE)

A
  • used for projects that have already started
  • provides update on what project is likely to cost based on what has already happened
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20
Q

describe the rough order of magnitude estimate (ROM)

A
  • used when little specific information is known about the project
  • more likely to overestimate rather than underestimate costs, and so it is sometimes called a maximum or not-to-exceed estimate
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21
Q

what are cost models?

A

cost estimates are used to build cost models that are run through simulation software to obtain statistical outputs that indicate levels of confidence (between 0% and 100%) in achieving the estimate

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22
Q

what does a 70% figure in a cost model mean?

A

70% confident that the estimate will not exceed the figure provided by the cost model

23
Q

describe the cost estimating process

A
  1. develop work breakdown structure
  2. develop project baseline
  3. data collection and analysis
  4. determine cost estimating technique(s)
  5. model development and validation
  6. results and report generation
24
Q

in the cost estimating process, why must we develop the work breakdown structure?

A
  • establishes a common frame of reference for relating tasks to each other and relating project costs at the summary level of detail
  • should be developed as soon as possible in the project and encompass complete life cycle of theproject, although this can depend on duration, size, and complexity
25
Q

in the cost estimating process, why must we develop the project baseline?

A
  • should include AEDs and correspond to the baseline that is set up in the EVM system
  • provides basis of estimate (BOE) and should identify resources required (personnel, hardware, software etc.) and any specific milestones
26
Q

what does AED stand for?

A

assumptions, exclusions, dependencies

27
Q

in the cost estimating process, why must we collect and analyse the data?

A

data collected must be normalised (adding inflation) so that it is consistent and comparable to other data

28
Q

in the cost estimating process, why must we determine the cost estimating techniques?

A
  • use the most appropriate technique for each task based on available data and project phase
  • multiple techniques should be used, depending on: data availability, stage of the life cycle, time
29
Q

in the cost estimating process, why must we develop and validate our model?

A
  • develop cost estimates for each element in WBS
  • cost model must be verified (calculations correct) and validated (data is accurate) by an independent party to ensure estimate is reasonable and complete
30
Q

in the cost estimating process, why must we generate a report?

A
  • estimate must be documented for auditing purposes as it shows how estimate was developed, tools and techniques used, and AEDs
  • final result is a defendable cost estimate that can be used by management to support decisions
31
Q

what do we have to bear in mind before choosing a cost estimating technique?

A

project scope, intended purpose of estimate, stage of project maturity, time available, information available, availability of cost estimation resources and skill sets

32
Q

what are the two different types of cost estimating techniques?

A

top-down and bottom-up

33
Q

which of the two cost estimating techniques is better?

A

bottom-up is more reliable and robust than top-down

34
Q

describe how a top-down estimate works

A

uses known top-level requirements (weight, power, speed, thrust etc.) or parameters to develop an estimate for an entire system.

35
Q

give an example of how a top-down estimate can be used

A

if we have an aircraft weighing 100 tonnes, and we want to increase weight to 125 tonnes, need to find costs to do this

36
Q

what is the analogy of a top-down estimate

A

make direct comparison with historical data on similar components of existing systems

37
Q

what is meant by ‘parametrics’ in top-down estimates?

A

uses mathematical cost estimating relationships (CERs) developed from historical performance characteristics (weight, size, power) data to predict the cost of a new project or system

38
Q

what is meant by ‘extrapolation from actuals’ for top-down estimates?

A

uses actual costs from past or current items to predict future costs for the same item that has undergone minimal design changes from the original

39
Q

what is meant by ‘expert opinion’ for top down estimates?

A

uses an expert or group of subject-matter experts to estimate the cost of a system using approaches such as one-to-one interviews, round-table discussion, and the DELPHI technique

40
Q

what are some advantages of the top-down estimate?

A
  • can be used early in project life cycle before detailed requirements are known
  • quick and easy to develop when sufficient data is available
  • typically based on actual values achieved in current or previous projects and so should provide reliable estimates
  • can be used to cross-check bottom-up estimates
41
Q

what are some disadvantages of the top-down estimate?

A
  • can be subjective if there is typically insufficient cost, technical, and project data available developing estimates
  • current project might be very different to previous projects and so no relevant data exists with which to make valid comparisons
  • data used to develop estimates typically needs to be normalized
42
Q
A
43
Q

how is a bottom-up estimate constructed?

A
  • detailed estimates developed for lower-level cost elements are ‘rolled up’ (added together) to provide an estimate for an entire system or product
  • labour hours are multiplied by labour rates to determine costs
  • for materials, parts required for a task are identified at the lowest level possible, while consideration is also given to quantity and schedule to capture the effects of learner and production rate
  • non-touch support labour is usually estimated as a percentage of the touch labour
44
Q

what is meant by non-touch labour?

A

not direct labour work, example = manager, supervisor, etc

45
Q

advantages of bottom-up estimates

A
  • estimate should be highly robust and easily defendable
  • developing an estimate at a low level indicates exactly what it covers and, by default, what is excluded
46
Q

disadvantages of bottom-up estimates

A
  • time-consuming, resource-intensive process that requires lots of data
  • product specification needs to be well known and stable, and all product/process changes must be reflected in the estimate
  • many costs are calculated as a percentage of touch labour, and so small errors at the touch labour level can be greatly magnified
  • omissions are likely as difficult to anticipate all actual costs beforehand
47
Q

approx 6

what are some of the problems associated with data collection?

A
  • availability = does the data exist? is it sufficient?
  • accessibility = is the data readily accessible?
  • validity = is the data sufficiently recent and comparable to our project?
  • time constraints = do we have enough time to obtain the data?
  • estimating requirements = what is the estimate being developed for?
  • normalisation = is the data normalised?
48
Q

what are the different types of deterministic estimates?

A

single point, and three point estimating

49
Q

4

issues of single point estimates

A
  • provide no measure of uncertainty and no information on process variability
  • fail to consider quality of input data
  • ignore existence of a range of possible outturns
  • give no indication if optimistic (aggressive) or pessimistic (cautious)
50
Q

describe three point estimates

A
  • minimum: optimistic estimate of what might happen, assuming everything goes as well as possible;includes opportunities.
  • maximum: pessimistic extreme estimate, assuming that worst tends to happen, but excluding the very remote (‘acts of god’); includes threats.
  • most likely (point): estimator has greatest confidence. located between the minimum and maximum extremes
  • all three points must be demonstrably achievable
51
Q

define risk

A

specific, objective, with an assessed probability of occurrence, with technical aspect to it

52
Q

define uncertainty

A

broad, subjective, impact understood but poorly quantified, no technical aspect to it

53
Q

what can be said about risks and uncertainties in cost estimating?

A
  • only genuine risks should be included in the risk register
  • uncertainty can exist for labour man-hours, labour and profit rates, materials etc.
  • each element should have its own 3PE or range estimate
  • uncertainty is included in the base estimate for the minimum and maximum estimates but not the point/most likely.
  • uncertainty should not be included in the risk register

project management (5 decks)

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