COST ESTIMATION
1
“Good cooking takes time.
If you are made to wait, it is to serve you better, and to
please you.”
Menu of restaurant Antoine, New Orleans.
(Quoted in the mythical man-month by Brooks)
OBJECTIVES
Project Cost Management Process
 Cost Estimating
 Cost Budgeting
 Cost Control is not covered – See Earned Value
for that.

Reference for seminar: MBA Fundamentals by Kanabar
& Warburton, 2008 (Kaplan Publishing).
2
BIG DIG
Order
of Magnitude Estimate
$2.8 Billion.
Final Costs  $14 Billion +
3
PROCESS
Planning
Planning
Control
Estimate Costs
Determine
Budget
Control Cost
4
ESTIMATE COSTS: WHAT ARE THE
OUTPUTS?
Estimate
Costs
Activity Cost
Estimates
Basis of
Estimates
Project
Document
Updates
5
COST ESTIMATING VS. PRICING
 Cost



estimating and Pricing:
Cost estimating: how much will it cost the
performing organization to provide the product
or service involved?
Pricing: how much will the performing
organization charge for the product or service?
This is a business decision and will consider
profit
Our focus is on cost estimating.
6
WHY ARE SO MANY COST
ESTIMATES WRONG?
We need to define the work first and then
estimate the work.
 Generally we are asked to estimate and then
define the work. The cart is before the horse!

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MANY OTHER REASONS
Failure to assess and mitigate risks
 Risk Quantification is not done.
 Contingency Budget is not included.
 Poor change control: Not saying ‘No’ to requests
for changes. (or no Process exists)
 Poor quality—work has to be redone
 Poor communication channels
 New technology.

From your experience give us one reason.
8
TYPES OF ESTIMATES & ACCURACY
As project unfolds we gather more data about the
project and the accuracy improves
Estimate

+75
+25
+10
-10
-25
-5
Project
Completion
Time
Early/
Order of
Magnitude
Approximate/
Budget Estimate
Definitive
Estimate
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ACCURACY
Estimate
Accuracy
Order of
Magnitude
(Early)
-25%
+75%
Budget
Estimate
-10%
+25
Definitive
Estimate
-5%
10%
•
Most difficult to estimate as very
little project info is available
•
Used to finalize the Request for
Authorization (RFA), and
establish commitment
•
Development stage estimate.
Needed to predict revised project
10
completion date
APPROACHES TO ESTIMATING
Generic Approach
Top Down
• analogous method
• parametric method
• experience based.
Focus on overall development process.
Task Based Approach
Bottom-Up
• Add up WBS tasks.
• Detailed estimating.
• More definitive estimate.
Focus on individual project process.
11
POOR PROJECT MANAGEMENT (1 OF 2)
Inexperienced project managers can mess up
projects.
 To compress duration it is logical to add more
resources. But this might create a problem.
 The extra human communications required to
add another member to a programming team
takes away valuable time from other resources.

12
POOR PROJECT MANAGEMENT (2 OF 2)
Brook's law "Adding manpower to a late software project makes it later."
By Fred Brooks, author of "The Mythical Man-Month."
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Months
IMPACT OF COMMUNICATIONS
Impact of Communication, etc.
Resources
More resources should decrease duration. BUT if additional co-ordination
is required for each task then the Effort increases even more.
Communication Effort = n(n-1)/2
Number of people = 3.
3(3-1)/2 = 3 * 2/2 = 3
Number of people = 4
4(4-1)/2 = 4 * 3/ 2 = 6
ESTIMATING TECHNIQUES
Experience
(focus on
Delphi)
Projective
& Parametric
Detailed
WBS)
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DELPHI
Provides a formal structured approach for the
exchange of “opinions”.
 Can be used when no historical data exists.
Useful when





installing a new product methodology
making a significant change to an existing one.
implementing a unique product/project
Based on the theory that



Group opinions are fairly reliable.
Extreme views get annulled.
Informal one-on-one conversations are susceptible to
bias & intimidation.
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Experience: Delphi
DELPHI GROUP
Delphi
Monitor
Group should consist of experts on the
topic under discussion. Can include:
marketing people, vendors, customers
Should consist of ten people at least.
All communications is done in writing.
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PROCESS
1.
2.
3.
4.
5.
6.
7.
The Delphi group is given the program’s
specifications, and an estimation form.
They meet to discuss project goals, assumptions, and
estimation issues.
They then each anonymously list project tasks and
estimate size.
The estimates are given to the Delphi monitor who
tabulates the results and returns them to the
experts.
Only each expert’s personal estimate is identified on
the form. All others are anonymous.
The experts meet to discuss the results. They each
review the tasks they have defined/estimated.
The cycle continues until the estimates converge.
(Go back to step 3.)
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DELPHI TEMPLATE
Project: ______________
Estimator:_____________
Date:____________
Here is the range of estimates from Round: __
x
0
25
x
y
m
50
x
x
75
100
Please enter your estimate for round : _____
Your rationale for the estimate:
_____________________________________
_____________________________________
x = Estimates
Y = Your estimate
M = Median
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PERT METHOD

Find the Pessimistic (P), Optimistic (O) and Likely estimate
(L).
P+4L+O
Mean = ---------------------6
Standard Deviation=
Maximum - Minimum
----------------------------6
Estimate = Mean +/- 1 SD
For 95% confidence use 2 SD.
For 99% confidence use 3 SD.
68% confidence (1 SD)
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COMBINING DELPHI WITH PERT
While both the methods are independent
methods it is possible to combine the two
methods.
Procedure:
 Use Delphi.

Consider the lowest estimate as O
 Consider the highest estimate as P
 Consider the median as L

Calculate the Pert Mean
 Calculate the Standard Deviation.


Add 1, 2 or 3 SD to the Pert Mean
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PARAMETRIC MODELS
Good tool for early estimating.
Most, if not all, cost models use predictors.
A predictor has correlation with later results.
Effort = K * Predictor
House Cost per sq... foot = $100/sq... foot.
Purchase cost of a 2500 sq.. foot house:
= $2500 * 100
= $ 250,000.
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SOFTWARE PARAMETRIC MODEL
Cocomo
 Function Point
 4GT

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USING LIFE CYCLE EFFORT DISTRIBUTION TO
ESTIMATE IF YOU HAVE METRICS DATA
Initiation & Requirements
Functional Design
Detail Design
Coding (plus unit test)
System Testing
Acceptance Testing
Implementation
Wrap-Up
Historic Ratio
8%
80 PD
15%
150 PD
15%
150 PD
30%
300 PD
13%
130 PD
10%
100 PD
7%
70 PD
2%
20 PD
Total Effort Estimate: _
100%___1000 PD__
Estimated Project effort is 1000 Person-Days
One can estimate the project effort if the
effort associated with coding is known
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ESTIMATING RESOURCES – TOP DOWN




Calculating Team Size (FTE Person)
Square Root of Effort
Square Root of 40 person-months
= 6.5 people
* Barry Boehm – Cocomo Model
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YOU CAN CALCULATE DURATION

Calculating Duration (months)


=



=


=
Person-Months
----------------------Persons
40 person-months
--------------------------6.5 person(s)
6.4 months
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BOTTOM UP ESTIMATING
Requires construction of WBS.
 Should be more accurate
 But not necessarily always. If you miss out the
broader picture you will miss some detailed
estimates.
 Case Study: Site Analysis and Excavation costs
ignored.

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WBS OUTLINE ROLL UP
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PERT TOOL BAR
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PERT
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NEXT DETERMINE BUDGET: WHAT ARE
THE OUTPUTS?
Estimate
Costs
Cost
Performance
Baseline
Project
Funding
Documents
Project
Document
Updates
Allocate the overall cost estimates to individual activities
or work packages to establish a cost baseline for measuring
project performance.
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CORE CONCEPT
Effort, Duration, and Cost
 Effort: The number of labor units required to
 complete an activity
 Availability: Time a staff person is able to work
 Productivity: The relative measure of work in a
time unit
 Duration = ( Effort / Productivity ) / Availability
 Cost = ( Effort / Productivity ) x Unit Cost

Duration = Work_Hours / Work
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COST BUDGETING PROCESS
Inputs
1.
2.
3.
4.
Cost estimates
WBS
Project schedule
Cost
management
plan
Tools
1. Cost budgeting
tools and
techniques
Outputs
1. Cost baseline
2. Project Funding
Requirements
3. Document
Updates
33
CONSIDER DIRECT AND INDIRECT COSTS
Direct costs: Costs incurred for a specific project
 Salaries of project staff
 Equipment bought specifically for the project
 Indirect costs: Costs span over multiple projects
(“overhead”)
 Quality assurance department
 Rooms, electricity, heating

34
COST DISTRIBUTION MODEL
- WELLMAN’S DATA FOR IT PROJECTS
Assessment
Requirements
Definition
Software Tools
H/W Facilities Design
12%
$12,000
8%
$8000
10%
$10,000
2%
$2000
20%
$20,000
Development
Implementation
Training
Project
Management
Operationa
l SW
20%
$20,000
10%
$10,000
3%
$3000
5%
$5000
10%
$10,000
Total Cost of the Project = $100,000
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COSTS TO CONSIDER







Labor: Wages paid to all staff.
Overhead: Cost of payroll taxes and fringe benefits.

Usually % of Labor
Materials: Items used in the project.
 cement, lumber, paint
Supplies: Cost of tools, office supplies, equipment.

Should be prorated if expected life is beyond the project.
General & Administrative: Cost of management & support services
such as:
 purchasing, accounting, secretarial
 usually % of project cost.
Equipment Rental:
 computers, printers
 compressors, cranes, trucks
Profit
 Reward for successfully completing the project
 Calculated as % of project cost.
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COST BUDGETING  COST CONTROL

Cost baseline will be used to measure and
monitor cost performance of the project – see
Earned Value Slides
Expected
Cash Flow
Cumulative
Values
Cost
Baseline
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CONTROL COSTS PROCESS
Monitor Cost Performance
 Understand variances from plan
 Ensure all changes are recorded and agreed upon
 Prevent unauthorized changes from being
included in cost baseline
 Inform stakeholders of authorized changes

38
FINAL THOUGHTS
Accuracy can be
achieved if you have
historical data.
Introduce an
estimating
Framework such as
what is shown here.
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FINAL THOUGHTS
Project Costs: Are incurred while the project is
being fulfilled.
Life Cycle Costs: Includes the costs after project
completion.
There may be temptation to lower project costs at
the expense of long term costs. Life Cycle
Costing gives the PM a way to consider costs
outside of the scope of project fulfillment.
You need to know concepts such as: sunk costs,
present value, IRR, Net Present Value, Benefit
Cost Ratio.
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KEY POINTS TO REMEMBER
You must get the team members to provide
estimates where possible.
 When doing bottom-up estimating, use the rule of
“one to two people for one to two weeks.” You can
calculate the duration by dividing the total effort
by the number of resources.
 You can calculate the duration by dividing the
total effort by the number of resources.
 You can calculate the effort by multiplying the
duration with the number of resources.

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KEY POINTS TO REMEMBER
For many types of projects it is preferable to
estimate in days and not hours as people are not
productive 8 hours every day.
 You should always communicate the type of
estimate to the stakeholder—the type of estimate
is “order of magnitude”, “budget estimate” and
“definitive estimate”. During the initiation phase
you only have order of magnitude estimates.
 You must consider more than one estimating tool
or technique when developing estimates.

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KEY POINTS TO REMEMBER
Reliable budget estimates are arrived only after
creating a work-break-down structure.
 You must combine both the top-down and
bottom-up estimating techniques for good budget
estimates.
 Once you’ve completed cost estimation you do
cost budgeting.
 Cost Control follows Cost Budgeting. This
process involves reviewing project progress
reports and comparing the results against the
cost baseline and determining if management
action must be taken.

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