Professional Documents
Culture Documents
Module X
COST ESTIMATION
Decision To Take up a Project Depends on
Real Need for the Outcome Time Required to Complete Project Estimated Cost Involved in Completing the Project
Project Cost Estimates/ Budgets/ WBS/ Project Schedules Interrelated & Any Change in One Will Affect Others & The Total Project
Project Cost Estimates Based Upon Elements of WBS & Prepared at Work Package Level & Even Lower at Activity/ Operational Levels If Necessary Estimating Events Further in Future More Difficult Due To Higher Degree of Uncertainties Estimates Initially Based On Opinion/ Judgement of Experts To Be Refined Later As More Information Becomes Available
For Medium/ High Complex Activities Planning is An Ongoing Process Throughout Project Life-Cycle As Changes Inevitable in Large Projects
Project Activities Get Greatly Affected By Changes in
Inputs: Project Brief Changes By Customer Can be Significant in Long Duration Projects Constraints: Degree of Uncertainty Increases in Long Duration Planning As Financial & Other Conditions Change - Different Interest Rates/ Cash Availability/ Investor Confidence Mechanisms Availability of People/ State of Technology Difficult To Predict Over Long Time
Feedback From Previous Projects Used as Guide for Time/ Cost Estimation
TYPES OF ESTIMATION
For Preparing Proposals Project Managers Role in the Estimating Process Varies Between
Collecting Estimations From Other People/ Functional Experts Developing Detailed Financial Cost-Benefit Analysis Themselves
Estimation Activity Continues Throughout Life-Cycle of Projects As Projects Near Completion the Estimates for Final Times/ Resources/ Costs Become More Accurate Five Types of Estimates Used in Project Management
Client: Indicative Cost Estimate Client: Preliminary Cost Estimate Client: Approximate Cost Estimate for Project Budgeting Client: Definitive Cost Estimate Client: Historical Actual Cost
Nature & Accuracy of Estimation Types Differ & Their Use/ Application Depends on the Stage in the Project Life-Cycle When Estimates Being Made Cost Estimates Used to Develop Budgets That Become Baseline Against Which Project Performance Get Evaluated Rate of Actual Cost Expenditure Compared To Budgeted Rate of Estimated Expenditure Measures Project Work Performance Throughout Project Life-Cycle
Initiation Phase
20%
Planning/ Design Phase Initial Stages of Execution Phase (70- 80)% Project Execution Phase
15%
Client: Approximate Cost Estimate for Project Budgeting Client: Definitive Cost Estimate
10% 5%
Preparing Detailed Estimation Time-Consuming & Accuracy Depends On Time & Resource Available While Preparing the Estimate Steps Involved in Preparing Detailed Estimation By Contractor Includes
Reviewing Tendered Scope of Work Identifying Planning Data for Estimation Developing Contract WBS Preparing Outline for Plan of Work Determining Quantities Estimating Unit Rates for Manpower/ Materials/ Equipment
Obtaining Specialist Sub-Contractor Quotation Collecting Resource Suppliers Quote Calculating Direct Project Costs Determining Indirect Costs Adding Contingency Amounts Adding Profit Mark-Up Deducting Discounts, When Required
15%
0.05 to 0.2
10%
0.1 to 0.5
5%
1.0 to 3.0
2% to 5%
0.1 to 1.0
Creates a Degree of Competition Between Supervisors of the Activities This Competition Often Beneficial for the Project
APPROACHES TO COSTING
Top Down Senior Management/ Project Sponsor Project Owner Project Manager Allocates Budgets To Sub-Projects Bottom Up
Project Manager
Sub-Projects Activities
Indirect Expenses Not Directly Related To Value-Adding Activity But Considered Necessary To Support Project (Project Overhead)
Transportation/ Training/ Project Administration
ELEMENTS OF COSTS
Profit General Overheads
Price
=
Direct Materials
Project Overheads
+
Total Cost
+
Prime Cost
Direct Labour
Project Overheads Include Indirect Expenses for the Project General Overheads Calculated as a Percentage of Total Cost
(Fixed)
Direct Material Cost = 15 800 = Rs. 12, 000 (Variable cost - Depends on No. of Participants) Prime Cost = 93000 + 12000 = Rs. 105, 000 Indirect Labour - administrative Time of 10 days = 1K 10 = Rs. 10, 000 Cost = 105000 + 10000 = Rs. 115, 000 Overhead Cost = 115000 0.60 = Rs. 69, 000
COST ESCALATION
Accurate Cost Estimation Difficult As It Starts at Conception Stage Long Before All Necessary/ Final Information About Project Becomes Available Estimated Costs Differ Substantially from Actual Final Figures By Way of Cost Overruns Actual Amount of Increase Creating Cost Overrun of Initial Estimated Costs Called Cost Escalation 20% Cost Escalation Common in Projects Larger & More Complex the Project Greater the Potential for Cost Escalation
Concord Supersonic Airliner Cost More Than 5 Times Original Estimates Nuclear Power Plants Frequently Cost 2 to 3 Times the Estimate Cutting-Edge/High Technology/R&D Projects - Frequently Above Several Hundred %
Project Team Including Functional Area Representatives & Contractors Discuss Work Phases/ Work Packages & To Receive Work Assignments Project Team Try To Classify Tasks in the Project as
Developmental: Requires Considerable Effort in Design/ Testing/ Fabrication Comparatively Difficult To Estimate Costs Due to Greater Uncertainty in Requirement of Labour Hours Off-the-Shelf: Adapting Existing Design/ Techniques/ Procedures Simpler To Estimate Costs as Material/ Labour Hours Required in Similar Projects Available
Analogy Estimate: Cost Estimate Developed By Reviewing Costs from a Previous Similar Project
Can be Used at Any Level of the Project: Overall/ Work Package/ Tasks Cost of a Similar Project/ Work Package Analyzed & Adjusted for Difference in Current and Earlier Projects Adjustments Made to Account for Dates/ Project Scale/ Location/ Complexity/ Exchange Rates Extensive Database of Past Projects Archived for Reference During New Projects
Parametric Estimation Most Suitable Technique When Cost Estimates Needed Quickly To Fix Preliminary Design Characteristics
The least square method also indicates that the standard error of the estimate is small, which suggests the model provides fairly close to actual costs for the eight projects.
Estimate the material cost required to construct a 300, 000 sq ft facility with two docks Using the model.
No. of Docks, x = 2
Estimated Material Cost, y = 201, 978 + (41, 490 30) + (17, 230 2) = $ 1, 481, 138
Engineering/ Fabrication Packages Further Divided Similarly Till Work Content of Each Element Can be Used to Estimate Time Required & Costs Each Element of Work Packages Absorbing the Cost Categories
Labour Cost: Estimated Labour Effort in Man-Hours Basic Labour Hourly Rate Materials Cost: Estimated Material Consumption Quantity Materials Unit Price Equipment Utilization Cost: Estimated Equipment Utilization Hour Basic Equipment Hiring Hourly Rate
At Task Level Detailed Estimates Derived from Standard Manuals that Contain Time & Cost Information about Labor and Materials to Perform Particular Tasks
Supervisors Submit Their Estimates to Work Package Managers Who Check/ Revise/ Aggregate & Pass Work Package Level Estimates to PM Project Manager & Independent Estimators Review the Time & Materials Estimate To Ensure
No Cost Overlooked/ Duplicated Estimators Understood What They Were Estimating Correct Estimating Procedures Used Allowances Made for Risks/ Uncertainties
Estimates Then Aggregated & Converted into Dollars By Multiplying By Standard Wage Rates & Material Costs - Current/ Projected Cost Estimate for Total Project Arrived at By Project Manager Adding In
Project-Wide Overhead Rates - Cover Project Management + Administrative Costs Company-Wide Overhead Rates - Cover General Company Expenses
CONTINGENCY AMOUNT
Throughout the Estimating Process Contingency Amount Added To Estimates For Taking Care of Uncertainties & Reducing Probability of Actual Cost Overruns Complex Projects/ Less Well-Defined Situations Demand Higher Contingency Amounts Activity Contingency: Contingency Amount Added By Estimator To Initial Estimate of Activity/ Work Package To Account for Known Unknowns- Highly Likely Sources of Cost Increase Scrap & Waste Design Changes Increases in Scope/ Size/ Function of End Item Delays Due to Weather Base Estimate: Total Project Cost + Activity Contingency
Project Contingency: Amount Added By Project Manager To Base Estimate To Account for Unknown Unknowns External Factors that Affect Project Costs Fluctuation of Exchange Rates Shortages in Resources Changes in Market/ Competitive Environment
Final/ Most Likely Cost Estimate: Base Estimate + Project Contingency Overrun Allowance: Amount Set Aside By Corporations For Developmental Projects Over & Above Most Likely Cost Estimate that PM Can Use Only With Prior Approval
RECONCILING ESTIMATES
Project Manager Submits To Top Management Final Cost Estimates/ Project Schedules & Forecasts Showing Time/ Cost Effects of Potential Escalation Factors Inflation/ Exchange Rates/ Project Risks Management Decide To Accept it/ Send it for Revision To Project Manager Based On Reconciliation of Two Cost Estimates
Final Cost Estimates Prepared By Project Team Using Upward Accumulation of Work Package Estimates Known as Bottom Up Approach Gross Estimates Prepared Based On Expert Opinion/ Analogy to Other Similar Projects Known as Top Down Approach
If Gross Estimate Substantially Larger Project Manager Reviews Each Work Package Estimate To Identify Oversight/ Over Optimism (Estimator Ego) If Gross Estimate Much Smaller Project Manager Reviews Work Package Estimates To Examine incorrect Assumptions/ Padding To Reconcile Differences Pushing Across-the-Board Cut Across All Estimates Not Recommended As It Will Affect Morale of the Project Team To Identify Mistakes in Estimation that Can Happen in Both Directions
Project Manager Approves Bottom-Up Estimates of Work Packages Functional Units Approve Top-Down Estimates for Work Expected From Them
BUDGETING
Written Statement of Money Showing Where it is Drawn From/ The Amount/ How it is to be Spent Defined as a Budget Most Operations Need Managers to Perform Budgetary Analysis Annually Managing Within Budget is Key Cost Control Tool of Project Managers Working in Perpetual Cycle of Seeking Approval & Allocation of Funds Budget Applications/ Grants Generally Contain Following Categories
Labour Materials Consumables Capital Expenditure (Cap-ex) Travel Subsistence
In Public Sectors Environments Budgets/ Grants Often Allocated Using Zero- Base Budgeting Approach
PROJECT BUDGET
Estimates Prepared First & Approved Estimates Become Basis for Budgets Organizations Committed To Perform Work According to the Budget Budgets Contain the Agreed-Upon Contracted Amount of What Work Should Cost Which Becomes Baseline for Tracking & Controlling the Work Project Budgets Similar to Fiscal Operating Budgets With Only Difference in Duration Covered By Each Project Budget Covers Full Life of the Project Fiscal Budget Covers One Year at a Time
Project Budget Essentially A Planning Document Outlining the Financial Plan of the Project
Project Budget Quantifies in Monetary Terms the Project Cost Objective Project Budget Allocates Responsibility for
Attaining The Objectives Reflects Resources Earmarked Pin-Points Results to be Achieved By the Responsible Person
ZERO-BASE BUDGETING
Drawing a Budget Without Reference to Last Budget Requiring Managers To Justify All Expenditures Afresh/ Not Just the Increases Over Last Year Where Project Activities Ongoing But Reviewed Periodically Zero-Base Approach Takes into Account Previous Performance As Well Further Funding Made Available to Projects Only When Progress is Demonstrated Where Progress Found Unsatisfactory Funding for Remaining Activities Denied/ Cut For This Reason Stipulation for Attracting Private Funding to Supplement Government Grants Often Added in Such a Project For Tracking Costs as Project Progresses Direct Labour & Material Costs Allocated & Costs Tracked Through Job Costing Systems For Accounting Purposes Separate Codes issued To Different Jobs & All Related Costs Recorded Against These Codes Project Manager/ Budget Holder Periodically Checks For Accuracy of the Cost Records
This Practice Does Not Encourage Good Use of Resources Project Management is Not Rewarded for Managing Cost More Efficiently Resulting in Any Unspent Funds Limitation of Conventional Budgeting System Avoided If Reward Granted for Cost Efficiency Through Greater Allocation of Funds in the Future Budgeting System Imposes Constraints in Movement of Funds Between Different Categories Often Creating Anomalies/ Waste Exhausted One Category of Expenditure Though Project Activities Remain Unfinished May Force a Manager to Pursue Even Cost Inefficient Activities If Budget Allows Funds from Another Category
PCAS - ELEMENTS
PCAS Inputs Estimating & Budgeting Work Package Cost Information PCAS Outputs Total Project Cost Estimates Time-Phased Budget For Cost Accounts
PCAS Supports Project Managers By Providing Information Related To How Project Progressing When Expenses Incurred Where Problems Developing PCAS Uses Time-Phased Budget To Create Output Reports That Help Project Managers To Control Project Costs
TIME-PHASED BUDGET
In Most Projects Simultaneous Control of Work Schedules & Cost Expenditures Extremely Difficult Time-Phased Budgets Created By Consolidating Two Primary Tools For Project Control
Project Schedules Project Budgets
Time-Phased Budget Shows How Budgeted Costs Distributed Over Time In Accordance With the Project Schedule Throughout Duration of the Project PCAS Generates Time Phased Reports (TPR) For Every Work Package TPR Allows Managers To Review & Compare Actual Expenditure With Planned Expenditure Every Month Time-Phased Reports Used
To Perform Cost Variance Analysis To Ensure Work Actually Completed & Charged Accurately To Revise Estimates & Budgets As Needed
TIME-PHASED BUDGET
Project: Department: Date: Work Package Description: Number/ Code: Rate 35/ Hr 20/ Hr 75% 50 100 1, 750 1,312 3,062 306 3,368 15% 2,000 1,500 100 3,600 360 3,960 100 2,000 1,500 3,500 350 3,850 100 2,000 1,500 3,500 350 3,850 Months 1 2 3 4 5 50 100 3,750 2,813 6,563 657 7,220 6 Hrs 100 400 Totals Cost 3, 500 8, 000 11,500 8,625 100 20,225 2,023 22,248
Charge Direct Labour (Professions) Direct Labour Cost Labour Overhead Other Direct Costs Total Direct Cost General /Admin Total Costs Profits Billing Total
10%
Cost Performance of a Package/ Group of Packages/ Whole Project Can be Monitored Using PCAS & the Cost Account Structure Cost Accounts Also Established for Non-Direct Project Cost Where Costs Can Not Be Readily Attributed To Any Work Package/ Specific Task