Cost Estimation and Budgeting

W S William

Cost Estimation
Ballpark (order of magnitude) 30% Comparative 15% Feasibility 10% Definitive 5%

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Problems with Cost Estimation

Low initial estimates Unexpected technical difficulties Lack of definition Specification changes

External factors
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Cost Estimating and the Systems Development Life Cycle

Regions of timecost uncertainty At project initiation

Cumulative cost

At project execution Contingency fund Cost estimate

At project definition

Time

Estimating Process Estimating Methods 1. Expert opinion 2. Analogy + compensation for differences 3. Parametric: Formula or Cost Function, e.g.,
Cost, engine A = (Cost, engine B)

Thrust, engine A
Thrust, engine B

0.7

Cost, cabling = 150 (total area + 10%) + 300 (number of rooms) + 125 (number of floors)

Estimating Methods (contd)

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

Estimation Process
Procedure for larger projects, steps 1-3

1. PM: Uses WBS to identify work packages 2. FM: Subdivide work packages into identifiable tasks; determine labor, material, facilities, and resources requirements for each 3. Supervisors/team leads: Estimate number of labor hours and quantities of materials needed
Project Management WBS 1. information 2. Functional Management

3. Work team

Project Management

Procedure for larger projects, steps 4-6

Estimation Process

WBS information
Functional Management

6.

4., 5.

4. FM: check and aggregate time and material estimates 5. FM: convert time estimates into costs

Work team

6. PM: checks over and approves all estimates aggregates costs; added in overhead costs:

Project cost = direct costs + overhead costs

Estimating Process (contd)

Procedure for larger projects, steps 7-8 7. PM: Adds in contingency amounts.
WBS information

Project Management

7., 8..

Functional Management

Work team

Two possible contingencies

1. Base estimate = (WP estimates + WP contingency) (to handle known-unknowns) 2. Final estimate = Base estimate + overheads + project contingency (to handle unknown unknowns; PM controls this)

8. PM: Compares bottom-up estimates to top-down targets or goals. Attempt to reconcile differences.

Estimating Process Estimates can be made at any level

project
work package

task

Project Budget Specific for each project

Subdivided into Control Accounts, one for each work package

Each control account is a portion of the project total budget

Project budget subdivided into control accounts

ROSEBUD

Project Budget

$ 356,755

Project management $ 12,550

Basic design

Hardware $179,868

Software $122,118

J $31,362

Final Tests

$10,857
User Test

Cost Accounts

Materials

Installation

Procedures

M $138,571 V

Y $20,352
Assembly $20,945

Q $100,846
Specifications

X $6,622
System Test

$21,272

W $4,235

Project Budget The best project budgets are time-phased to allow cost tracking vs. time

Budget Contingencies
The allocation of extra funds to cover uncertainties and improve the chance of finishing on time.

Contingencies are needed because

Project scope may change Murphys Law is present Cost estimation must anticipate interaction costs Normal conditions are rarely encountered
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Estimating Pitfalls

Misinterpretation of the statement of work Improperly defined scope Overly optimistic schedule Inaccurate WBS Applying improper skill level to tasks Failure to account for risks Failure to account for cost escalation and inflation Failure to use correct estimating technique

Thank you