Project Management Module 9

4 Factors for estimating cost+

- Types of cost - Timing and accuracy of cost - Methods used to estimate - Cost estimating issues

Cost management plan should have

- costs (int/ext) - Activity resourcing - estimating - budget - control

Parametric Estimating

"an estimating technique in which an algorithm is used to calculate cost or duration based on historical data and project parameters." (Find more info)

Bottom-Up Estimating

"method of estimating project duration or cost by aggregating the estimates of the lower-level copponents of the WBS." Most acurate/time consuming

Methods of estimating cost

- Analogous - Parametric - Bottom-up - Linked to scope, schedule, resources, don't lie to self or others

Reserves

Contingency reserve (in the project budget inside baseline for known risks) Management reserve (Mgmt control: unforeseen work in scope, uncertain)

Time Value of Money

- Discount the value of future revenue and cost streams - Discount future dollars by the appropriate factor - The finance department may provide the appropriate rate - The rate depends on inflation rate plus the cost of capital

Analyzing Reserve Needs

- Known knowns (planning) can be estimated directly - Known unknowns (risk identification) may/may not occur - Unknown unknowns (uno unks) totally unexpected occurrences ◦ Management reserve - authorized by company executives

Cost Estimating Issues/techniques

- Supporting Detail (constraints, versions control, assumptions) - Special and Normal variation - Vendor Bid analysis - Value Engineering - Activites based costing - Life cycle cost - Time value of money - international currency

Analogous Estimating

"a technique for estimating the duration or cost of an activity or a project using historical data from a similar project."

Cost performance baseline -

Direct+ Indirect cost. Cost performance baseline - "the approved version of the time-phased project budget, excluding any management reserves, which can be changed only through formal change control procedures and is used as a basis for comparing actual results

Value Engineering

Double-checking all of the chosen methods - "an approach used to optimize project life cycle costs, save time, increase profits, improve quality, expand market share, solve problems, and/or use resources more

7 Types of cost

Fixed/Variable - Depend on volume Direct/Indirect - Depend on project or overhead Recurring/Nonrecurring Regular/Expedited- Overtime Estimated/Reserved- risk mitigation lease purchase labor material

Activities Based costing

Number of units, batch runs, variations, and amount of facility used

When do recurring and nonrecurring cost occur*

Recurring cost typically occur during the execution phase of the project. Whereas nonrecurring cost are associated with the planning phase.

Supporting Detail

Scope Method used Assumptions Constraints Range of possible outcomes Version control is critical Different assumptions by different people Untrue assumptions cause more work

Vendor Bid Analysis*

Vendor Bid Analysis can be used to determine if a vendor's bid is reasonable. There are different techniques for analysis based on number of bids and project. - is price reasonable - lowest offer is fair - marketplace prices - should cost... about

Accuracy/Timing Estimates

When, how accurate, and how used? -Order of magnitude (ballpark, conceptual, initial, level one) = go or no go Budget/Definitive Est (More accurate at each stage, rolling wave)

Control cost is used to*

compare actual project spending with planned expenditures to determine if corrective action is needed. A typical measuring point is a milestone, and the baseline for cost project control is the budget.

Life cycle cost

cost through life of project

The purpose of an order of magnitude cost estimate is to*

get an initial "ballpark" or "level-one" estimate (with little info) that can be used for things such as charter approval or moving forward on a project. These estimates can have a very large margin of error.

The "time value of money" is*

the value of of money in the future, and it is relevant to project management because it enables better project decision making (with respect to cost). One dollar today is likely worth more than one dollar next year, PM need to take this in to account, often with a rate from the finance department