cost estimating Flashcards
define cost estimating
collecting and analysing historical data and applying quantitative models, tools and techniques, and norms databases to predict the cost of a project
what must our cost estimates be?
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
approx 6
what are some reasons to develop cost estimates?
- 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
define cash flow
timing of money flow into and out of the project
approx 10
what are some challenges and limitations of cost estimation
- 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
what does documenting a cost estimate need to include?
- reason for development / stage in project life cycle
- who estimate is for / decisions it will support
- scope included/excluded
- assumptions, exclusions, and dependencies (AEDs)
what does the total project cost consist of?
total direct costs + total indirect costs = total project cost
what are direct costs and provide some examples
- 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)
define indirect costs and how do we allocate indirect labour costs?
- 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
give some examples of indirect costs
rent, lighting, heating, insurance, admin, hr, marketing, advertising
what would a ratio percentage of 15% mean if the total direct labour costs were £1m?
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
give reasons for cost increases
- 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
define what is meant by concurrent engineering
starting the manufacturing phase when design not completed
what is scope creep?
adding new scope without budgeting for it
what are the different types of cost estimating?
- life cycle cost estimate (LCCE)
- independent cost estimate (ICE)
- estimate at completion (EAC) / latest revised estimate (LRE)
- rough order of magnitude estimate (ROM)
describe the life cycle cost estimate (LCCE)
- ‘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
describe the independent cost estimate (ICE)
- 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
describe the estimate at completion (EAC) / latest revised estimate (LRE)
- used for projects that have already started
- provides update on what project is likely to cost based on what has already happened
describe the rough order of magnitude estimate (ROM)
- 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
what are cost models?
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
what does a 70% figure in a cost model mean?
70% confident that the estimate will not exceed the figure provided by the cost model
describe the cost estimating process
- develop work breakdown structure
- develop project baseline
- data collection and analysis
- determine cost estimating technique(s)
- model development and validation
- results and report generation
in the cost estimating process, why must we develop the work breakdown structure?
- 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
in the cost estimating process, why must we develop the project baseline?
- 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
what does AED stand for?
assumptions, exclusions, dependencies
in the cost estimating process, why must we collect and analyse the data?
data collected must be normalised (adding inflation) so that it is consistent and comparable to other data
in the cost estimating process, why must we determine the cost estimating techniques?
- 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
in the cost estimating process, why must we develop and validate our model?
- 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
in the cost estimating process, why must we generate a report?
- 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
what do we have to bear in mind before choosing a cost estimating technique?
project scope, intended purpose of estimate, stage of project maturity, time available, information available, availability of cost estimation resources and skill sets
what are the two different types of cost estimating techniques?
top-down and bottom-up
which of the two cost estimating techniques is better?
bottom-up is more reliable and robust than top-down
describe how a top-down estimate works
uses known top-level requirements (weight, power, speed, thrust etc.) or parameters to develop an estimate for an entire system.
give an example of how a top-down estimate can be used
if we have an aircraft weighing 100 tonnes, and we want to increase weight to 125 tonnes, need to find costs to do this
what is the analogy of a top-down estimate
make direct comparison with historical data on similar components of existing systems
what is meant by ‘parametrics’ in top-down estimates?
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
what is meant by ‘extrapolation from actuals’ for top-down estimates?
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
what is meant by ‘expert opinion’ for top down estimates?
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
what are some advantages of the top-down estimate?
- 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
what are some disadvantages of the top-down estimate?
- 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
how is a bottom-up estimate constructed?
- 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
what is meant by non-touch labour?
not direct labour work, example = manager, supervisor, etc
advantages of bottom-up estimates
- 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
disadvantages of bottom-up estimates
- 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
approx 6
what are some of the problems associated with data collection?
- 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?
what are the different types of deterministic estimates?
single point, and three point estimating
4
issues of single point estimates
- 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)
describe three point estimates
- 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
define risk
specific, objective, with an assessed probability of occurrence, with technical aspect to it
define uncertainty
broad, subjective, impact understood but poorly quantified, no technical aspect to it
what can be said about risks and uncertainties in cost estimating?
- 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
