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Cost Estimation and Budgeting

Chapter 8

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Common Sources of Project Cost

Labor

Materials

Subcontractors

Equipment & facilities

Travel

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Types of Costs

Direct Vs. Indirect

Recurring Vs. Nonrecurring

Fixed Vs. Variable

Normal Vs. Expedited

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Name Hours Needed

Overhead Charge

Personal Time Rate

Hourly Rate

Total Direct Labor Cost 

John 40 1.80 1.12 $21/hr. $1,693.44

Bill 40 1.80 1.12 $40/hr. 3,225.60

J.P. 60 1.35 1.05 $10/hr. 850.50

Sonny 25 1.80 1.12 $32/hr. 1,612.80Total Direct Labor Cost =

 

$7,382.34

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Cost Classifications

Direct Labor X X X X

Building Lease X X X X

Expedite X X X X

Material X X X X

Non

-rec

urrin

g

Dire

ct

Indi

rect

Fix

ed

Rec

urrin

g

Var

iabl

e

Nor

mal

Exp

edite

d

Costs

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Cost Estimation

Ballpark (order of magnitude) ±30%

Comparative ±15%

Feasibility ±10%

Definitive ±5%

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Learning Curves

Each doubling of output results in a reduction in time to perform the last iteration.

x

:

Y = time required for the x unit of output

a = time required for the initial unit of output

X = the number of units to be produced

b = learning curve slope = log(learning %)/log(2)

bxY aX

Where

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Problems with Cost Estimation

Low initial estimates

Unexpected technical difficulties

Lack of definition

Specification changes

External factors

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Creating a Project Budget

• Top-down

• Bottom-up

• Activity-based costing (ABC)

Project Plan

WBS

Scheduling Budgeting

The budget is a plan that identifies the resources, goals and schedule that allows a firm to achieve those goals

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Activity-Based Costing

Projects use activities & activities use resources

1. Assign costs to activities that use resources

2. Identify cost drivers associated with this activity

3. Compute a cost rate per cost driver unit or transaction

4. Multiply the cost driver rate times the volume of cost driver units used by the project

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  Months

Activity January February March April May Total by Activity

Survey 4,000         4,000

Design   5,000 3,000     8,000

Clear Site   4,000       4,000

Foundation     7,500     7,500

Framing       8,000 2,000 10,000Plumb &Wire

      1,000 4,000 5,000

MonthlyPlanned

4,000 9,000 10,500 9,000 6,000  

Cumulative 4,000 13,000 23,500 32,500 38,500 38,500

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Budget Contingencies

The allocation of extra funds to cover uncertainties and improve the chance of finishing on time.

Contingencies are needed because• Project scope may change• Murphy’s Law is present• Cost estimation must anticipate interaction costs• Normal conditions are rarely encountered

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