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Time and Cost Estimation


Time and Cost Estimation Dr. Lotfi Gaafar Gaafar 2007 / * Source: PMBOK Guide 2000 * 07/16/96 * ## * 07/16/96 * ## * 07/16/96 * ## * 07/16/96 * ## * 07/16/96 ... – PowerPoint PPT presentation

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Title: Time and Cost Estimation

Time and Cost Estimation
Dr. Lotfi Gaafar
Source PMBOK Guide 2000
Importance of Time and Cost Estimation
  • Estimates are needed to support good decisions.
  • Estimates are needed to schedule work.
  • Estimates are needed to determine how long the
    project should take and its cost.
  • Estimates are needed to determine whether the
    project is worth doing.
  • Estimates are needed to develop cash flow needs.
  • Estimates are needed to determine how well the
    project is progressing.
  • Estimates are needed to develop time-phased
    budgets and establish the project baseline

Guidelines for Time and Cost Estimation
  • Have people familiar with the tasks make the
  • Use several people to make estimates.
  • Base estimates on normal conditions, efficient
    methods, and a normal level of resources.
  • Use consistent time units in estimating task
  • Treat each task as independent, dont aggregate.
  • Dont make allowances for contingencies.
  • Account for risks separately.

Types of Estimates
  • Top-down (macro) estimates analogy, group
    consensus, or mathematical relationships
  • Bottom-up (micro) estimates estimates of
    elements of the work breakdown structure

A brief comparison
Condition Macro Estimates Micro
Estimates Strategic decision making X Cost and
time important X High uncertainty X Internal,
small project X Fixed-price contract
X Customer wants details X Unstable scope X
Estimation Methods
  • Top-down (macro) estimates analogy, group
    consensus, or mathematical relationships
  • Consensus methods
  • Ratio methods
  • Apportion method
  • Function point methods for software and system
  • Bottom-up (micro) estimates estimates of
    elements of the work breakdown structure
  • Template method
  • Parametric Procedures Applied to Specific Tasks
  • Detailed Estimates for the WBS Work Packages

Activity Definition
Activity Sequencing
Activity Duration Estimation
Activity Duration Estimation
Activity Duration Estimation- Inputs
Activity Duration Estimation- Tools
Activity Duration Estimation- Tools
Schedule Development
Schedule Control
Activity Cost Estimation
Activity Cost Estimation- Inputs
Types of Costs
  • Direct Costs
  • Costs that are clearly chargeable to a specific
    work package.
  • Labor, materials, equipment, and other
  • Direct (Project) Overhead Costs
  • Costs incurred that are directly tied to an
    identifiable project deliverable or work package.
  • Salary, rents, supplies, specialized machinery
  • General and Administrative Overhead Costs
  • Organization costs indirectly linked to a
    specific package that are apportioned to the

Refining Estimates
  • Reasons for Adjusting Estimates
  • Interaction costs are hidden in estimates.
  • Normal conditions do not apply.
  • Things go wrong on projects.
  • Changes in project scope and plans.
  • Adjusting Estimates
  • Time and cost estimates of specific activities
    are adjusted as the risks, resources, and
    situation particulars become more clearly defined.

Project Budget
Look at the history of similar projects to get a
rough estimate of costs. Make sure the scope and
nature are similar. Determine the internal
resources you have available to use - people,
equipment, etc., within your organization. Determi
ne the external resources - those not currently
in your organization - that you will need to get
the job done.
Sample Cost Estimation Tools
  • Activity Based Costing
  • Benchmarking
  • Target Costing

Activity Based Costing
  • Description
  • Quantitatively measures the cost and performance
    of activities
  • It is the quantitative aspect of the Activity
    based costing that makes it a more efficient tool
    that improves the quality of the final decision.
  • When to use it?
  • Evaluate relative cost of various activities, and
    potential effects of modifications
  • Analyze alternative process flows with
    comparative economic evaluation

Activity Based Costing
  • Procedure
  • Analyze Activities
  • Gather Costs
  • Trace Costs to Activities
  • Analyze Costs

Activity Based CostingExample
  • Description
  • It is the continuous and systematic process of
    measuring and assessing products, services,
    practices against those of high performing
    organizations to improve performance.
  • Two types of benchmarking
  • - Benchmarking prices
  • - Benchmarking processes
  • When to use it ?
  • Benchmarking is used when a company is suffering
    losses in a certain area and wants to improve its
    performance to overcome these losses.

  • Procedure
  • Identify the work process or area to be improved
  • Analyze the work process
  • Measure your own performance
  • Identify benchmarking partners
  • Determine data collection method
  • Collect data
  • Determine performance gap
  • Develop action plan
  • Implement action plan
  • Monitor results
  • Recalibrate benchmarks (Repeat process)

Target Costing
  • Description4
  • Is the cost that can be incurred while still
    gaining profit.
  • Target Cost Estimated Selling Price (Target
    Price) Desired Profit
  • When to use it1?
  • Dominantly with new products and services
  • Improve existing products

Target CostingExample (The Montclair Paper Mill)5
  • Setting the target price Per Ton
  • Competitors selling price to the merchant
  • Less freight paid by the mill
  • Normal sales returns allowances (60)
  • Montclair capital charge
  • Ship to the DC
  • DC operating cost
  • DC capital charge
  • Target Manufacturing Cost

Refining Estimates
  • Contingency Funds and Time Buffers
  • Are created independently to offset uncertainty.
  • Reduce the likelihood of cost and completion time
    overruns for a project.
  • Can be added to the overall project or to
    specific activities or work packages.
  • Can be determined from previous similar projects.
  • Changing Baseline Schedule and Budget
  • Unforeseen events may dictate a reformulation of
    the budget and schedule.

Project ManagementCost Management
Dr. Lotfi Gaafar
This Presentation is Based on information from
PMBOK Guide 2000
Project Cost Management Processes
  • Resource planning determining what resources and
    quantities of them should be used
  • Cost estimating developing an estimate of the
    costs and resources needed to complete a project
  • Cost budgeting allocating the overall cost
    estimate to individual work items to establish a
    baseline for measuring performance
  • Cost control controlling changes to the project

Resource Planning
Cost Estimating
Cost Budgeting
Cost Control
Resource Planning
  • The nature of the project and the organization
    will affect resource planning
  • Some questions to consider
  • How difficult will it be to do specific tasks on
    the project?
  • Is there anything unique in this projects scope
    statement that will affect resources?
  • What is the organizations history in doing
    similar tasks?
  • Does the organization have or can they acquire
    the people, equipment, and materials that are
    capable and available for performing the work?

Cost Control
  • Project cost control includes
  • monitoring cost performance
  • ensuring that only appropriate project changes
    are included in a revised cost baseline
  • informing project stakeholders of authorized
    changes to the project that will affect costs
  • Earned value management is an important tool for
    cost control

Using Software to Assist in Cost Management
  • Spreadsheets are a common tool for resource
    planning, cost estimating, cost budgeting, and
    cost control
  • Many companies use more sophisticated and
    centralized financial applications software for
    cost information
  • Project management software has many cost-related
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