Time and Cost Estimation
Dr. Lotfi Gaafar
Project Management
Source: PMBOK Guide 2000
Gaafar 2007 / 1
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
Project Management
Gaafar 2007 / 2
Guidelines for Time and Cost Estimation







Have people familiar with the tasks make the estimate.
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 times.
Treat each task as independent, don’t aggregate.
Don’t make allowances for contingencies.
Account for risks separately.
Project Management
Gaafar 2007 / 3
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
Strategic decision making
Cost and time important
High uncertainty
Internal, small project
Fixed-price contract
Customer wants details
Unstable scope
Project Management
Macro Estimates
X
Micro Estimates
X
X
X
X
X
X
Gaafar 2007 / 4
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 projects
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
Project Management
Gaafar 2007 / 5
Activity Definition
Project Management
Gaafar 2007 / 6
Activity Sequencing
Project Management
Gaafar 2007 / 7
Activity Duration Estimation
Project Management
Gaafar 2007 / 8
Activity Duration Estimation
Project Management
Gaafar 2007 / 9
Activity Duration Estimation- Inputs
Project Management
Gaafar 2007 / 10
Activity Duration Estimation- Tools
Project Management
Gaafar 2007 / 11
Activity Duration Estimation- Tools
Project Management
Gaafar 2007 / 12
Schedule Development
Project Management
Gaafar 2007 / 13
Schedule Control
Project Management
Gaafar 2007 / 14
Activity Cost Estimation
Project Management
Gaafar 2007 / 15
Activity Cost Estimation- Inputs
Project Management
Gaafar 2007 / 16
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 project
Project Management
Gaafar 2007 / 17
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 Management
Gaafar 2007 / 18
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.
Determine the external resources - those not currently in
your organization - that you will need to get the job done.
Project Management
Gaafar 2007 / 19
Sample Cost Estimation Tools



Activity Based Costing
Benchmarking
Target Costing
Project Management
Gaafar 2007 / 20
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
Project Management
Gaafar 2007 / 21
Activity Based Costing

Procedure:
–
–
–
–
Analyze Activities
Gather Costs
Trace Costs to Activities
Analyze Costs
Project Management
Gaafar 2007 / 22
Activity Based Costing
Example
Total expenses
Activity
A1
A11
A12
A13
A2
A21
A22
A23
A3
A31
A32
A33
Project Management
$365.7
Division
$109.8
$54.9
$18.3
$36.6
$182.9
$128
$36.6
$18.3
$73.1
$14.6
$43.9
$14.6
Gaafar 2007 / 23
Benchmarking

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 ?
–
Project Management
Benchmarking is used when a company is suffering
losses in a certain area and wants to improve its
performance to overcome these losses.
Gaafar 2007 / 24
Benchmarking

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)
Project Management
Gaafar 2007 / 25
Target Costing

Description :
4
– Is the cost that can be incurred while still gaining
profit.
Target Cost = Estimated Selling Price (Target Price) – Desired Profit

When to use it ?
1
– Dominantly with new products and services
– Improve existing products
Project Management
Gaafar 2007 / 26
Target Costing
Example (The Montclair Paper Mill)
Setting the target price:
Competitor’s selling price to the merchant
Less: freight paid by the mill
Normal sales returns & allowances
Montclair capital charge
Ship to the DC
DC operating cost
DC capital charge
Target Manufacturing Cost
Project Management
5
Per Ton
$1466
(30)
(60)
(120)
(11)
(25)
(58)
$1162
Gaafar 2007 / 27
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 Management
Gaafar 2007 / 28
Project Management
Cost Management*
Dr. Lotfi Gaafar
* This Presentation is Based on information from PMBOK Guide 2000
Project Management
Gaafar 2007 / 29
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 budget
Project Management
Gaafar 2007 / 30
Resource Planning
Cost Estimating
Project Management
Gaafar 2007 / 31
Cost Budgeting
Cost Control
Project Management
Gaafar 2007 / 32
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 project’s scope
statement that will affect resources?
– What is the organization’s 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?
Project Management
Gaafar 2007 / 33
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
Project Management
Gaafar 2007 / 34
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 costrelated features
Project Management
Gaafar 2007 / 35