PM Quiz 2 Chapter 5

Types of Costs

Direct Costs •Costs that are clearly chargeable to a specific work package. •Labor, materials, equipment, and otherDirect (Project) Overhead Costs •Costs incurred that are directly tied to project deliverables or work packages. •Salary, rents, supplies, specialized machinery General and Administrative Overhead Costs •Org costs indirectly linked to a specific package and apportioned to the project.

Define what a "white elephant" is in project management? Provide a real life example.

1. A white elephant is a burdensome possession that the owner cannot easily dispose of and whose cost (particularly upkeep) is out of proportion with its usefulness. 2. Examples include dormant Olympic and World Cup stadiums, the Concorde, or little used vacation homes.

Top-Down Approaches for Estimating Project Times and Costs

1. Consensus methods 2. Ratio methods (also called parametric, use surrgogates) 3. Apportion method 4. Function point methods for software and system projects 5. Learning curves (improvement or experience curves when quantity doubles, 60% is a large improvement, 100% is no improvement))

Conditions for Preferring Bottom-Up

1. Cost and time important; 2. Fixed-priced contract; 3. Customer wants details;

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

1. Direct, direct overhead, and general and administrative costs. 2. Direct costs are controllable by the project manager. 3. 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.

Estimating Guidelines for Times, Costs, and Resources (Work Package Estimates)

1. Have people familiar with the tasks make the estimate 2. Use several people to make estimates 3. Base estimates on normal conditions, efficient methods, and a normal level of resources 4. Use consistent time units in estimating task times 5. Treat each task as independent, don't aggregate 6. Do not make allowances for contingencies.

Factors Influencing the Quality of Estimates

1. Planning Horizon 2. Project Complexity 3. People (who are making estimates) 4. Project Structure and Organization 5. Padding Estimates (adding some extra time for safety) 6. Organizational Culture

Conditions for Preferring Top-Down

1. Strategic Decision Making; 2. High uncertainty; 3. Internal, small project; 4. Unstable Scope;

Bottom-Up Approaches for Estimating Project Times and Costs

1. Template methods 2. Parametric procedures (ratios as in top-down methods but applied to micro-level, specific tasks) 3. Range estimates for the WBS work packages when there is significant uncertainty; preferably use groups rather than individuals to make range estimates 4. Phase estimating: A hybrid approach that begins with a top-down estimate and then refines estimates for phases of the project as it is implemented.

Mega Projects: A Special Case

Are large-scale, complex ventures that typically cost $1 billion or more, take many years to complete, and involve multiple private and public stakeholders. •High-speed rail lines, airports, healthcare reform, the Olympics, development of new aircraft Often involve a "double whammy". •Cost much more than expected but underdelivered on benefits they were to provide. •Researchers found costs for bridges/tunnels, road and rail are underestimated 34%, 20% and 45% respectively!

Estimating Database Templates

Collecting and archiving data on past project estimates and actuals provides a knowledge base for improving project time and cost estimating.

Why is it difficult to estimate mega project (i.e., costs and benefits (i.e. airports, stadiums, etc.) costs and benefits?

First, the time horizon of 2-5 years to complete large, complex projects makes it difficult to accurately forecast costs and user needs. Second, the sheer complexity of these kinds of projects make it difficult to accurately estimate all of the costs. Third, the severity of the risks involved are significant. When things go wrong, they go wrong is a big way. While such conditions would suggest a very conservative estimate, the opposite occurs. Either blind enthusiasm or calculated deception is used to promote an exaggerated case for the project.

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. 1. Use of top-down versus bottom-up estimating can influence estimates. 2. How padding is handled strongly influences estimates. 3. How organization politics is tolerated can severely influence estimates.

White Elephants

Over budget, under value, high cost of maintaining (exceeds the benefits received)

Refining (or Adjusting) Estimates

Reasons for Adjusting Estimates •Interaction costs are hidden in estimates (for example time and cost for design to hand off a prototype to manufacturing) •Normal conditions (that were assumed) do not apply. •Things go wrong on projects. •Changes in project scope and plans •Overly optimistic - psychological data shows people overestimate how fast they can get things done) •Strategic misrepresentation > lies! Adjusting Estimates •Time and cost estimates of specific activities are adjusted as the risks, resources, and situation particulars become more clearly defined.

Reference Class Forecasting (RCF) Process

Three Steps of the RCF Process •Select a reference class of projects similar to your potential projects. •Collect and arrange outcome data as a distribution. Create a distribution of cost overruns as a percentage of the original project estimate. •Use the distribution data to arrive at a realistic forecast. Compare the original cost estimate for the project with the reference class projects.

Top-Down versus Bottom-Up Estimating

Top-Down Estimates •Are usually derived from someone who uses experience and/or information to determine the project duration and total cost .•Are sometimes made by top managers who have little knowledge of the processes used to complete the project. Bottom-Up Approach •Can serve as a check on cost elements in the WBS by rolling up the work packages and associated cost accounts to major deliverables at the work package level.

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

Top-down time and cost estimates 1. Typically used in the project conceptual phase 2. Depend on surrogate measures like weight, square feet, ratios. 3. Do not consider individual activity issues and problems. Top-down is good for rough estimates and can help select and prioritize projects. Bottom-up time and cost estimates 1. Usually tied directly to the WBS and a work package. 2. 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 is better 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. a. Time and cost estimates are major inputs to project planning. b. Project control is completely dependent on accuracy of estimates. c. Estimates are needed to support good decisions. d. Estimates are used to determine project duration and cost. e. Estimates are used to develop cash flow needs. f. Estimates are used to develop time-phased budgets and project baseline. g. Absence of estimates results in inaccuracies which result in time and cost under/overruns. The activity of estimating reduces error.

Level of Detail

•Level of detail in the WBS varies with the complexity of the project, the need for control, the project size, cost, duration, and other factors. •Excessive detail is costly. •When there is excessive detail, there is a tendency to break work into departmental assignments; therefore, this sometimes fosters a focus on departmental outcomes rather than on deliverable outcomes •Creates unproductive paperwork •Insufficient detail is costly. •Lack of focus on goals •Wasted effort on nonessential activities

Estimating Projects: Preferred Approach

•Make rough top-down estimates •Develop the WBS/OBS •Make bottom-up estimates •Develop schedules and budgets •Reconcile differences between top-down and bottom-up estimates

Estimating

•The process of forecasting or approximating the time and cost of completing project deliverables •The task of balancing expectations of stakeholders and need for control while the project is implemented

Why Estimating Time and Cost Is Important

•To support good decisions •To schedule work •To determine how long the project should take and its cost •To determine whether the project is worth doing •To develop cash flow needs •To determine how well the project is progressing

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