Chapter 5

• Methods of estimating times and costs• Using Learning curves• Types of costs

• Direct Costs– Costs that are clearly

chargeable to a specific work package.

• Indirect Costs– Costs incurred that are

not directly tied to an identifiable project deliverable or work package.

• Special Case Costs– “estimated costs”

usually assigned to task that has been done over and over.

• Sunk Costs – Those costs that are

unrecoverable.• Capital Costs

– Assets that have a useful life, year or more.

5–4

• 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.

5–5EXHIBIT 5.1

• 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.

• To develop time-phased budgets and establish the project baseline.

5–6

Quality of Estimates

Quality of Estimates

ProjectDuration

ProjectDuration

PeoplePeople

Project Structure and Organization

Project Structure and Organization

PaddingEstimates

PaddingEstimates

OrganizationCulture

OrganizationCulture

Other (Nonproject)

Factors

Other (Nonproject)

Factors

Planning HorizonPlanning Horizon

5–7

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. Don’t make allowances for contingencies.

7. Adding a risk assessment helps avoid surprises to stakeholders.

• Order of Magnitude– “seat of your pants” estimate with very little thought or

preparation– Before it is stated, stress it is very rough and limited in

accuracy

• Budget Estimate– More accurate and requires some research– Can use historical data

• Definitive Estimate– Most accurate– Use the WBS completed and tested for accuracy– Include contingency allowances – lump sum amt.– Includes: training, testing, travel, monitoring, etc.

• Pro Forma Assessments– Initial profile of project costs– Can be order of magnitude, budget, or definitive

estimates– Are refined until there is a particular level of comfort

• Bottom- up

– Most time consuming and most expensive

– Uses WBS where each task is estimated and then added together as reverse upward.

– Tendency to “pad” as one goes

• Parametric Procedures Applied to Specific Tasks

– Using Industrial Engineering standards and analysis

– Involves cost per sq. ft., linear foot, etc.

• Macro (Top-down) Approaches

– Consensus methods

– Expert judgment

– Apportion method

– Learning curves

Project EstimateTimesCosts

• Fairly certain if done before in other projects– derive average duration from historical data

• Some projects books available containing mean tables for typical activities

• Ask around

• Four categories of resources– Money– Materials– Machines– People

• Questions to ask?– Who and what are

needed?– Who and what can do

the work?– Who and what are

available?– What level and

competence is required?

5–14

• 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.

• WBS• Resource Matrix• Gantt chart: a bar chart showing both the

amount of time involved and the sequence in which activities can be performed

LO 3LO 3

Activity 1Activity 2Activity 3Activity 4Activity 5Activity 6

Time

Vertical Axis: Always Activities or Jobs

Vertical Axis: Always Activities or Jobs

Horizontal Axis: Always TimeHorizontal Axis: Always Time

Horizontal bars used to denote length of time for each activity or job.

Horizontal bars used to denote length of time for each activity or job.

• A person engaged in a repetitive task will improve his/her performance over time.

• Airline industry was first industry to use Learning curves

• To determine Learning Curve rate:T2/T1 = T4/T2=T6/T3=T8/T4

• To determine time to produce nth or n units:

5–19TABLE A5.1

5–20TABLE A5.2