Lesson 5: Estimating Project Times and Costs

Study questions

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Bottom-Up Approaches for Estimating Project Times and Costs, 4 pts

1. Template Methods: 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 and costs adjusted to reflect these differences. 2. Parametric Procedures Applied to Specific Tasks Just as parametric techniques such as cost per square foot can be the source of top-down estimates, the same technique can be applied to specific tasks. 3. Range Estimating: When do you use range estimating? Range estimating works best when work packages have significant uncertainty associated with the time or cost to complete. 4. A Hybrid: Phase Estimating, This approach begins with a top-down estimate for the project and then refines estimates for phases of the project as it is implemented. Some projects by their nature cannot be rigorously defined because of the uncertainty of design or the final product. Phase estimating 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 two-estimate system over the life of the project. A detailed estimate is developed for the immediate phase and a macro estimate is made for the remaining phases of the project.

Delphi method

A group method to predict future events—e.g., time, cost.

learning curves

A mathematical curve used to predict a pattern of time reduction as a task is performed over and over.

padding estimates

Adding a safety factor to a time or cost estimate to ensure the estimate is met when the project is executed.

Time and costs- 7 points

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 consumer dissatisfaction. Accuracy is improved with greater effort, but is it worth the time and cost—estimating costs money! Project estimating becomes a trade-off, balancing the benefits of better accuracy against the costs for securing increased accuracy. Estimating time and cost on a project is important because: 1. Estimates are needed to support good decisions. 2. Estimates are needed to schedule work. 3. Estimates are needed to determine how long the project should take and its cost. 4. Estimates are needed to determine whether the project is worth doing. 5. Estimates are needed to develop cash flow needs. 6. Estimates are needed to determine how well the project is progressing. 7. Estimates are needed to develop time-phased budgets and establish the project baseline

Lesson Note 5.7: Types of Costs Project teams use direct costs and overhead costs to estimate a project. 3points

Assuming work packages are defined, detailed cost estimates can be made. Here are typical kinds of costs found in a project: 1. Direct costs: These costs are clearly chargeable to a specific work package. a. Labor b. Materials c. Equipment d. Other 2. Direct project overhead costs: Direct overhead rates more closely pinpoint which resources of the organization are being used in the project. 3. General and administrative (G&A) overhead costs: These represent organization costs that are not directly linked to a specific project. These costs are carried for the duration of the project. The total project cost estimate is broken down in this fashion to sharpen the control process and improve decision making.

time and cost databases

Collection of actual, versus estimated, times and costs of work packages over many projects that are used for estimating new project tasks and their expected possible error.

apportionment methods

Costs allocated to a specific segment of a project by using a percentage of planned total cost; for example, framing a house might use 25 percent of the total cost and coding a teaching module, 40 percent of total cost.

direct costs

Costs that are clearly charged to a specific work package—usually labour, materials, or equipment.

Top-down estimates

Derived from someone who uses experience and/or information to determine the project duration and total cost. These estimates are sometimes made by top managers who have very little knowledge of the processes used to complete the project.

bottom-up estimates

Detailed estimates of work packages usually made by those who are most familiar with the task (also called micro estimates).

Lesson Note 5.2: Factors Influencing the Quality of Estimates- 7 points

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. 1. Planning Horizon:estimates of current events are close to 100 percent accurate but are reduced for more distant events. 2. Project Duration: Time to implement new technology has a habit of expanding in an increasing, nonlinear fashion. 3. People: The people factor can also introduce errors in estimating times and cost. 4.Project Structure and Organization: Which project structure is chosen to manage the project will influence time and cost estimates. 5. Padding Estimates: In some cases people are inclined to pad estimates 6. Organization Culture: Organization culture can significantly influence project estimates. In some organizations padding estimates is tolerated and even privately encouraged. Other organizations place a premium on accuracy and strongly discourage estimating gamesmanship. 7. Other Factors: Finally, nonproject factors can impact time and cost estimates. For example, equipment down time can alter time estimates. National holidays, vacations, and legal limits can influence project estimates. Project priority can influence resource assignment and impact time and cost.

Lesson Note 5.1: The Project Life Cycle

In this lesson, we continue our focus on the planning stage. Notice that time spent to develop a solid project plan is critical to a successful project.

Lesson Note 5.6: Level of Detail

Level of detail is different for different levels of management. At any level the detail should be no more than is necessary and sufficient.

How does the culture of an organization influence the quality of estimates?

Organization culture can influence project estimates depending on the importance the organization places on estimating. Use of top-down versus bottom-up estimating can influence estimates. How padding is handled strongly influences estimates. How organization politics is tolerated can severely influence estimates.

function points

Points derived from past software projects to estimate project time and cost, given specific features of the project.

trade-offs

Project management trade-offs involve assessing the advantages or benefits of the features in question to determine which feature is going to take priority. (in Lessons 1,3, 4, 5)

top-down estimates

Rough estimates that use surrogates to estimate project time and cost (also called macro estimates).

Lesson Note 5.4: Top-Down versus Bottom-Up Estimating

Table 5.1 depicts conditions that suggest when one approach is preferred over the other

Lesson Note 5.9: Creating a Database for Estimating

The best way to improve estimates is to collect and archive data on past project estimates and actuals. Saving historical data—estimates and actuals—provides a knowledge base for improving project time and cost estimating

Bottom-Up estimates

The bottom-up approach at the work package level can serve as a check on cost elements in the WBS by rolling up the work packages and associated cost accounts to major deliverables. Similarly, resource requirements can be checked. The bottom-up approach also provides the customer with an opportunity to compare the low-cost, efficient method approach with any imposed restrictions. The preferred approach in defining the project is to make rough top-down estimates, develop the WBS/OBS, make bottom-up estimates, develop schedules and budgets, and reconcile differences between top- down and bottom-up estimates. In conclusion, the ideal approach is for the project manager to allow enough time for both the top-down and bottom-up estimates to be worked out so a complete plan based on reliable estimates can be offered to the customer.

What are the major types of costs? Which costs are controllable by the project manager?

The three major types of costs are direct, direct overhead, and general and administrative costs. Direct costs are controllable by the project manager. Direct overhead and general and administrative costs are only controllable in the sense that if the resource or project is finished early or late, the costs will continue for the duration of the project.

Lesson Note 5.5: Methods for Estimating Project Times and Costs, 5 pts This section in the textbook introduces a number of techniques. Do not focus on the details of each technique. Learn the terms and focus on understanding that a number of techniques fit the top-down category of estimating.

Top-Down Approaches for Estimating Project Times and Costs. At the strategic level top-down estimating methods are used to evaluate the project proposal. In these situations top-down estimates are used until the tasks in the WBS are clearly defined. 1. CONSENSUS METHODS: This method simply 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. Firms seeking greater rigour will use the Delphi Method to make macro estimates. The Delphi Method makes use of a panel of experts familiar with the kind of project in question. The notion is that well-informed individuals, calling on their insights and experience, are better equipped to estimate project costs/times than theoretical approaches or statistical methods. Their responses to estimate questionnaires are anonymous, and they are provided with a summary of opinions. 2. RATIO METHODS: Uses the ratio of past actual costs for similar work to estimate the cost for a potential project. This macro method of forecasting cost does not provide a sound basis for project cost control since it does not recognize differences among projects Top-down methods (sometimes called parametric) usually use ratios, or surrogates, to estimate project times or costs. Top-down approaches are often used in the concept or "need" phase of a project to get an initial duration and cost estimate for the project. For example, contractors frequently use number of square feet to estimate cost and time to build a house. that is, a house of 2,700 square feet might cost $160 per square foot (2,700 feet 3 $160 per foot equals $432,000). 3. APPORTION METHODS: Costs allocated to a specific segment of a project by using a percentage of planned total cost. This method is an extension to the ratio method. Apportionment is used when projects closely follow past projects in features and costs. Given good historical data, estimates can be made quickly with little effort and reasonable accuracy. This method is very common in projects that are relatively standard but have some small variation or customization. 4. Function Point Methods for Software and System Projects Points derived from past software projects to estimate project time and cost, given specific features of the project. In the software industry, software development projects are frequently estimated using weighted macro variables called "function points" or major parameters such as number of inputs, number of outputs, number of inquiries, number of data files, and number of interfaces. These weighted variables are adjusted for a complexity factor and added. The total adjusted count provides the basis for estimating the labor effort and cost for a project (usually using a regression formula derived from data of past projects). 5. LEARNING CURVE: A mathematical curve used to predict a pattern of time reduction as a task is performed over and over Some projects require that the same task, group of tasks, or product be repeated several times. Managers know intuitively that the time to perform a task improves with repetition. This phenomenon is especially true of tasks that are labor intensive. In these circumstances the pattern of improvement phenomenon can be used to predict the reduction in time to perform the task. The main DISADVANTAGE of top-down approaches to estimating is simply that the time and cost for a specific task are not considered. Grouping many tasks into a common basket encourages errors of omission and the use of imposed time.

overhead costs

Typically, organization costs that are not directly linked to a specific project. These costs cover general expenses such as upper management, legal, market promotion, and accounting. Overhead costs are usually charged per unit of time or as a percentage of labour or material costs.

template method

Use of a prepared form to develop project networks, costs, and time estimates.

ratio methods

Uses the ratio of past actual costs for similar work to estimate the cost for a potential project. This macro method of forecasting cost does not provide a sound basis for project cost control since it does not recognize differences among projects.

Learning Objectives

1. explain how estimating project times and costs is the foundation for project planning and control. 2. describe the methods, uses, advantages, and disadvantages of top-down and bottom-up estimating methods. 3. suggest estimating guidelines for time, cost, and resources. 4. suggest a scheme for developing an estimating database for future projects. 5. explain the purpose of a project plan. Do not be intimidated or overwhelmed by the new terms and complexities of this chapter, because you are not expected to memorize the detailed formulas or tables. Continue to focus on the content as emphasized in the lesson notes. The examinations in this course test your grasp of the key terms and concepts in this lesson but not the specific application of estimating techniques.

top-down and bottom-up estimates serve different purposes:

1.Top-down estimates tend to focus on higher level (big picture) deliverables and bottom-up estimates focus more at the lower level (small picture) work packages. 2.Top-down estimates use wider ranges as compared to bottom-up estimates. 3.Top-down estimates are generally used in the defining and planning stages of the project, whereas bottom-up estimates are used closer to the executing stage.

Lesson Note 5.3: Estimating Guidelines for Times, Costs, and Resources Read this section of the textbook carefully to understand what the estimating guidelines involve 7 points

Managers recognize time, cost, and resource estimates must be accurate if project planning, scheduling, and controlling are to be effective. However, there is substantial evidence suggesting poor estimates are a major contributor to projects that have failed. Even though a project has never been done before, a manager can follow seven guidelines to develop useful work package estimates: 1. Responsibility. At the work package level, estimates should be made by the person(s) most familiar with the task. 2. Use several people to estimate. It is well known that a cost or time estimate usually has a better chance of being reasonable and realistic when several people with relevant experience and/or knowledge of the task are used. 3. Normal conditions. When task time, cost, and resource estimates are determined, they are based on certain assumptions. Estimates should be based on normal conditions, efficient methods, and a normal level of resources. 4. Time units. Specific time units to use should be selected early in the development phase of the project network. All task time estimates need consistent time units. Estimates of time must consider whether normal time is represented by calendar days, workdays, workweeks, person days, single shift, hours, minutes, etc. 5. Independence. Estimators should treat each task as independent of other tasks that might be integrated by the WBS. 6. Contingencies. Work package estimates should not include allowances for contingencies. 7. Adding risk assessment to the estimate helps to avoid surprises to stakeholders. It is obvious some tasks carry more time and cost risks than others.

Lesson Note 5.8: Refining Estimates 4 pts

The practice of adjusting original estimates by 20 or even 100 percent begs the question of why, after investing so much time and energy on detailed estimates, could the numbers be so far off ? There are a number of reasons for this, most of which can be traced to the estimating process and the inherent uncertainty of predicting the future. Some of these reasons are discussed below. 1. Interaction costs are hidden in estimates. According to the guidelines, each task estimate is supposed to be done independently. However, tasks are rarely completed in a vacuum. Work on one task is dependent upon prior tasks, and the hand-offs between tasks require time and attention. 2. Normal conditions do not apply. Estimates are supposed to be based on normal conditions. While this is a good starting point, it rarely holds true in real life. 3. Things go wrong on projects. Design flaws are revealed after the fact, extreme weather conditions occur, accidents happen, and so forth. 4. Changes in project scope and plans. As one gets further and further into the project, a manager obtains a better understanding of what needs to be done to accomplish the project.

phase estimating

This estimating method begins with a macro estimate for the project, and then estimates are refined for phases of the project as it is implemented.

What are the differences between bottom-up and top-down estimating approaches? Under what conditions would you prefer one over the other?

Top-down estimates are typically used in the project conceptual phase and depend on surrogate measures such as weight, square feet, ratios. Top-down methods do not consider individual activity issues and problems. Top-down estimates are good for rough estimates and can help select and prioritize projects. Bottom-up time and cost estimates are usually tied directly to the WBS and a work package. These estimates are made by people familiar with the task, which helps to gain buy-in on the validity of the estimate. Use of several people should improve the accuracy of the estimate. Bottom-up estimates should be preferred if time to estimate is available, estimating cost is reasonable, and accuracy is important.

Why are accurate estimates critical to effective project management?

Without accurate time and cost estimates, project control is ineffective. Inaccurate estimates can make the difference between profit and loss. Time and cost estimates are major inputs to project planning. Project control is completely dependent on accuracy of estimates. Estimates are needed to support good decisions. Estimates are used to determine project duration and cost. Estimates are used to develop cash flow needs. Estimates are used to develop time-phased budgets and establish the project baseline. Absence of estimates leads to inaccuracies, which result in time and cost under-/overruns. The activity of estimating reduces error.