Chapter 5
ESTIMATING PROJECT TIMES AND COSTS
Chapter Outline
*Estimating is the process of forecasting or approximating the time and cost of
completing project deliverables. All project stakeholders prefer accurate cost and time
estimates, but they also understand the inherent uncertainty in all projects. Inaccurate
estimates lead to false expectations and customer dissatisfaction.
1. Factors influencing the quality of estimates
Factors related to the uniqueness of the project will have a strong influence on the
accuracy of estimates. Project, people, and external factors all need to be
considered to improve quality of estimates for project times and costs.
A. Planning horizon
The Planning Horizon: where estimates of current events are close to 100
percent accurate but are reduced for more distant events.
B. Project duration
Long duration projects increase the uncertainty in estimates.
C. People
*Accuracy of estimates depends on the skills of the people making the
estimates.
*Matching the right people to the appropriate task can influence
productivity and learning time.
*Have the team members work together in the past, on similar projects.
*High staff turn-over rates can influence estimates.
*Actual time spent on a project each day, not including meetings,
paperwork, answering e-mails/phone messages, can have an influence on
estimates.
D. Project structure and organization
Which project structure the organization chooses can influence time and
costs estimates. Whether the project is within the Functional
Organization, as a Dedicated Team, or with a Matrix arrangement (as
discussed in ch.3) can have an influence in estimates.
E. Padding estimates
In work situations where you are asked for time and cost estimates, most
are inclined to add a little padding to increase the probability and reduce
the risk of being late.
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F. Organization culture
In some Organization Cultures padding is tolerated and sometimes
encouraged, where in others it is not.
G. Other factors
Equipment down time, holidays, vacations, etc.
2. Estimating guidelines for times, costs, and resources
There is substantial evidence suggesting that poor estimates are a major
contributor to projects that have failed. Below are seven guidelines that can help
a project manager with estimating.
A. Responsibility
Estimates should be made by those responsible for the task. Draw on their
expertise!
B. Use several people to estimate
Cost and time estimates usually have a better chance of being realistic when
several people with relevant experience/knowledge of the task are used.
Different people bring different biases based on their experience.
C. Normal conditions
Estimates should be based on normal conditions, efficient methods, and a
normal level of resources.
D. Time units
Estimates of time must consider whether normal time is represented by
calendar days, workdays, workweeks, weekends, shifts, hours, minutes, etc.
E. Independence
Estimators should treat each task as independent of other tasks that might be
integrated by the WBS. Be careful about aggregating many tasks into one
time estimate, it could be too much of a “guestimate”.
F. Contingencies
Work package estimates should not include allowances for contingencies.
The estimate should assume normal or average conditions, and add an extra
fund for contingencies that can be used for unforeseen events.
G. Adding risk assessment to avoid surprises
Simply identifying the degree of risk lets stakeholders consider alternative
methods. Using new technology can be a risk.
3. Top-down versus bottom-up estimating
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Top-down: these estimates are sometimes made by top managers who have very
little knowledge of the processes used to complete the project.
Bottom-up: these estimates come from the people most knowledgeable about the
estimate needed.
4. Methods for estimating project times and costs
A. Top-down approaches for estimating project times and costs
At the strategic level top-down estimating methods are used to evaluate the
project proposal. Sometimes much of the information needed to derive
accurate estimates are not available at the proposal phase.
1. Consensus methods
This method uses the pooled experience of senior and/or middle
managers to estimate the total project duration and cost. This typically
involves a meeting where experts discuss, argue, and ultimately reach
a decision as to their best guess estimate.
2. Ratio methods (parametric method)
Top-down methods usually use ratios to estimate project times and
costs. Ex. Contractor may use cost per square foot for a project. If the
project is 2.700 s.f. and it typically cost $160.00 per square feet, then a
good ratio determination will be that the project will cost $432,000.
3. Apportion method
Apportionment is used when projects closely follow past projects in
features and cost. Given hood historical data, estimates can be made
quickly with little effort and reasonable accuracy.
4. Learning curves
Some projects require that the same task, group of tasks, or product be
repeated several times…the time to perform a task improves with
repetition.
B. Bottom-up approaches for estimating project times and costs
1. Template method
If the project is similar to past projects, the costs from past projects can
be used as a starting point for the new project. Differences in the new
project can be noted and past times & costs can be adjusted to reflect
the differences.
2. Parametric procedures
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As used in the Top-down approach, this technique can be applied to
the Bottom-up approach as well.
3. Detailed estimates for the WBS work packages
The most reliable method for estimating time and cost is to use the
WBS and to ask the people responsible for the work packages to make
the estimates. They know from experience or know where to find the
information to estimate work package durations.
C. A hybrid: Phase estimating
This approach begins with the Top-down estimate for the project and then
refines estimates of phases of the project as it is implemented. It is used when
an unusual amount of uncertainty surrounds a project and it is impractical to
estimate times and costs for the entire project. Phase estimating uses a twoestimate system over the life of a project. A detailed estimate is developed for
the immediate phase and a macro estimate is made for the remaining phases of
the project.
Unfortunately, your client will want an accurate estimate the moment decision
is made to implement the project. The customer who is paying for the project
perceives phase estimating as a blank check because cost and schedules are
not firm over the life cycle of the project.
5. Level of detail
Level of detail is different for different levels of management. The level of detail
in the WBS gives management the ability to aggregate network information so
each level of management has the information necessary to make decisions.
However, excessive detail can also become a barrier to the project’s success,
because the emphasis might lead to looking at department outcomes and not
deliverable outcomes.
6. Types of costs
A. Direct costs: these are real cost outflows that must be paid as the project
progresses, such as Labor, Materials, Equipment, etc.
B. Direct overhead costs: these are costs directly tied to the project deliverables
or work packages, such as the Project Manager’s salary and temporary rental
space for the team.
C. General and administrative overhead costs: these are costs not directly
linked to a specific project, such as advertising and accounting.
7. Refining estimates
A. Interaction costs are hidden in estimates.
Here, there is an understanding that work on one task is dependent on prior
tasks, therefore, the interactions between tasks will more than likely to take
place during the life cycle of a project.
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B. Normal conditions do not apply.
Estimates are supposed to be based on normal conditions. However, as an
example, resource shortages, whether in the form of people, equipment, or
materials, can easily extend original estimates.
C. Things go wrong on projects.
Here, the likelihood and impact of unforeseen events should be considered,
such as Design flaws revealed after the fact, extreme weather conditions
occur, accidents happening, etc.
D. Changes in project scope and plans.
Here, there is an understanding that changes in project scope and plans are
very likely to happen in any project. Ex. Learning what the competitor is
doing can cause a change in the scope or the client completely changing the
entire design of a kitchen can have an impact.
8. Creating a data base for estimating
The best way to improve estimates is collect and archive data.
9. Summary
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