Module 21 Terms Flashcards
Top-Down Estimation
The top-down method presented earlier serves two purposes. First, top-down estimates support the project during the definition phase. Someone with experience with similar projects can provide an estimate of the overall project cost. This estimate can be used to develop the project proposal and support the project proposal evaluation process. This top-down estimate is only a rough estimate but it should have sufficient accuracy to support the defining phase. It is key to document all the assumptions made during the process to help understand variances if they occur.
Parametric Estimation
When these top-down methods are based on the relationship between the current project and historical data, they are often referred to as parametric estimating. Two applications of parametric estimating are the ratio and apportion methods.
Ratio Method
The ratio method uses experience from prior projects to estimate the overall cost of the current project.
Apportion Method
The apportion method is based on the ratio method but takes into consideration specific functionality or types of work that will be required. The apportion method requires that an overall project cost be provided based on the customer’s budget or similar projects. The overall budget is then allocated to the major work areas required in the project (design, programming, testing, documentation, user training).
Bottom-Up Estimation
Bottom-up estimation methods require that estimates be made at the detailed work activity level of the WBS. These estimates are generated by functional experts with knowledge of the resources required and available to complete the activity. The individual work activity estimates are aggregated to the project level to develop the overall project budget. Due to the project expertise needed and effort required to develop bottom-up estimates, these are normally developed during the detailed planning phase of a project when the knowledge is greater than at the start of the project.
Cost Management
Cost management is the process of measuring how close actual costs are to the budget and then making changes in project execution as needed.
Baseline Budget
The project budget is an important measure of project performance. When the planning process is complete, the project manager will take a snapshot of the project budget. This snapshot is called the baseline budget. Baselining means freezing the planned budget so that actual costs can be compared to it throughout the remainder of the project. The baseline budget is the approved budget and will be used as the standard for comparison of actual costs throughout the life of the project and identifying variances.
Direct Costs
Direct costs are costs that are directly attributable to completing the project work.
Direct Overhead Costs
Direct overhead costs (Also known as indirect cost) are costs from the project that are shared across the work activities. If workspace, supervision, project administration, equipment, or other resources are not related to a specific work activity, they are included as overhead and will be allocated to all work activities. These are also called indirect costs because they cannot be directly attributed to a specific project work activity.
General & Administrative Costs
General and administrative costs (G&A) are overhead costs from the project organization. These are outside of the project team but often include expenses from corporate services such as legal, human resources, and payroll.
Padding
A difficulty often encountered in budget estimates is padding. Regardless of whether top-down or bottom-up estimating methods are used, people tend to add in extra time or money “just in case.” This is particularly a problem in bottom-up budgeting where potentially every person estimating a work activity could pad in an extra 10% to provide a buffer if costs are higher than anticipated. If all of those 10% buffers are aggregated up to the overall project budget, the project cost could be grossly overestimated. Not only does this provide an inaccurate estimate to the customer, it encourages waste during execution, it will allocate resources to the project that could be used elsewhere, and it can create an estimate so high that the customer will cancel the project.
Contingency Reserve
Contingency reserves are costs included in the budget to cover situations that may occur.
If the project requires the use of lumber, and lumber prices are known to fluctuate, then some portion of the lumber costs may be included in a contingency reserve. In a restaurant, food costs are very volatile and so the project must budget for those variances that can occur. The project manager has authority to use the contingency reserve as needed.
Management Reserve
A management reserve is an amount added to the overall project budget to cover unknown risks.
A percentage of the overall cost of the project is often included in the project budget to cover unforeseen situations. If a cost variance is a possibility then it will be included in the contingency reserve; the management reserve is only to cover things that were not anticipated. The management reserve can only be used with the approval of the project organization’s leadership. Documenting these assumptions is important in case changes to the project plan are identified or activities need to be expedited (crashed) during execution.
Calendarized Budget
a calendarized budget is one where the costs are distributed across the time periods of the project.
Simple Budget
A simple budget provides overall costs and some level of cost breakdown between project expense areas.
