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COST ESTIMATION“Good cooking takes time.

If you are made to wait, it is to serve you better, and to please you.”

Menu of restaurant Antoine, New Orleans.

(Quoted in the mythical man-month by Brooks)

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OBJECTIVES

Project Cost Management Process Cost Estimating Cost Budgeting Cost Control is not covered – See Earned

Value for that.

Reference for seminar: MBA Fundamentals by Kanabar & Warburton, 2008 (Kaplan Publishing).

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BIG DIG

Order of Magnitude Estimate $2.8 Billion.

Final Costs $14 Billion +

WHY?

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PROCESS

Estimate Costs

Determine Budget

Control Cost

Planning

Planning

Control

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ESTIMATE COSTS: WHAT ARE THE OUTPUTS?

Activity Cost Estimates

Basis of Estimates

Project Document Updates

Estimate Costs

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COST ESTIMATING VS. PRICING

Cost estimating and Pricing:Cost estimating: how much will it cost the

performing organization to provide the product or service involved?

Pricing: how much will the performing organization charge for the product or service? This is a business decision and will consider profit

Our focus is on cost estimating.

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WHY ARE SO MANY COST ESTIMATES WRONG? We need to define the work first and then

estimate the work. Generally we are asked to estimate and then

define the work. The cart is before the horse!

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MANY OTHER REASONS Failure to assess and mitigate risks Risk Quantification is not done. Contingency Budget is not included. Poor change control: Not saying ‘No’ to

requests for changes. (or no Process exists) Poor quality—work has to be redone Poor communication channels New technology.

From your experience give us one reason.

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TYPES OF ESTIMATES & ACCURACY

As project unfolds we gather more data about the project and the accuracy improves

Time

ProjectCompletion

Est

ima

te

Early/Order of Magnitude

Approximate/Budget Estimate

DefinitiveEstimate

+75

-25 -10

+25

-5

+10

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ACCURACY

• Most difficult to estimate as very little project info is available

Estimate Accuracy

Order of Magnitude (Early)

-25%+75%

Budget Estimate

-10%+25

Definitive Estimate

-5%10%

• Used to finalize the Request for Authorization (RFA), and establish commitment

• Development stage estimate. Needed to predict revised project completion date

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Top Down • analogous method• parametric method• experience based.

Bottom-Up

• Add up WBS tasks.• Detailed estimating.• More definitive estimate.

Focus on individual project process.

Focus on overall development process.

Generic Approach

Task Based Approach

APPROACHES TO ESTIMATING

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POOR PROJECT MANAGEMENT (1 OF 2)

Inexperienced project managers can mess up projects.

To compress duration it is logical to add more resources. But this might create a problem.

The extra human communications required to add another member to a programming team takes away valuable time from other resources.

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POOR PROJECT MANAGEMENT (2 OF 2)

Brook's law "Adding manpower to a late software project makes it later." By Fred Brooks, author of "The Mythical Man-Month."

Resources

Mo

nth

s

More resources should decrease duration. BUT if additional co-ordination is required for each task then the Effort increases even more.

Communication Effort = n(n-1)/2Number of people = 3.

3(3-1)/2 = 3 * 2/2 = 3Number of people = 4

4(4-1)/2 = 4 * 3/ 2 = 6

Impact of Communication, etc.

IMPACT OF COMMUNICATIONS

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ESTIMATING TECHNIQUES

DetailedWBS)

Experience(focus on

Delphi)

Projective & Parametric

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DELPHI

Provides a formal structured approach for the exchange of “opinions”.

Can be used when no historical data exists. Useful when installing a new product methodology making a significant change to an existing one. implementing a unique product/project

Based on the theory that Group opinions are fairly reliable. Extreme views get annulled. Informal one-on-one conversations are

susceptible to bias & intimidation.

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DELPHI GROUP

Delphi Monitor

Group should consist of experts on thetopic under discussion. Can include: marketing people, vendors, customers

Should consist of ten people at least.

All communications is done in writing.

Experience: Delphi

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PROCESS

1. The Delphi group is given the program’s specifications, and an estimation form.

2. They meet to discuss project goals, assumptions, and estimation issues.

3. They then each anonymously list project tasks and estimate size.

4. The estimates are given to the Delphi monitor who tabulates the results and returns them to the experts.

5. Only each expert’s personal estimate is identified on the form. All others are anonymous.

6. The experts meet to discuss the results. They each review the tasks they have defined/estimated.

7. The cycle continues until the estimates converge. (Go back to step 3.)

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DELPHI TEMPLATE

Project: ______________Estimator:_____________Date:____________Here is the range of estimates from Round: __

0 10025 50 75

x x xy m x

x = EstimatesY = Your estimateM = Median

Please enter your estimate for round : _____Your rationale for the estimate:_____________________________________

_____________________________________

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PERT METHOD Find the Pessimistic (P), Optimistic (O) and Likely

estimate (L).

Mean = ----------------------6

P + 4 L + O

Maximum - MinimumStandard Deviation= -----------------------------

6

Estimate = Mean +/- 1 SD

For 95% confidence use 2 SD.

For 99% confidence use 3 SD.68% confidence (1 SD)

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COMBINING DELPHI WITH PERT

While both the methods are independent methods it is possible to combine the two methods.

Procedure: Use Delphi.

Consider the lowest estimate as O Consider the highest estimate as P Consider the median as L

Calculate the Pert Mean Calculate the Standard Deviation.

Add 1, 2 or 3 SD to the Pert Mean

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PARAMETRIC MODELS

Good tool for early estimating.

Most, if not all, cost models use predictors.A predictor has correlation with later results.

Effort = K * Predictor

House Cost per sq... foot = $100/sq... foot.

Purchase cost of a 2500 sq.. foot house:

= $2500 * 100

= $ 250,000.

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SOFTWARE PARAMETRIC MODEL

Cocomo Function Point 4GT

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USING LIFE CYCLE EFFORT DISTRIBUTION TO ESTIMATE IF YOU HAVE METRICS DATA

Initiation & Requirements 8% 80 PD

Functional Design 15% 150 PD

Detail Design 15% 150 PD

Coding (plus unit test) 30% 300 PD

System Testing 13% 130 PD

Acceptance Testing 10% 100 PD

Implementation 7% 70 PD

Wrap-Up 2% 20 PD

Total Effort Estimate: _ 100%___1000 PD__

Historic Ratio

Estimated Project effort is 1000 Person-DaysOne can estimate the project effort if the effort associated with coding is known

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ESTIMATING RESOURCES – TOP DOWN Calculating Team Size (FTE Person)

Square Root of Effort

Square Root of 40 person-months = 6.5 people

* Barry Boehm – Cocomo Model

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YOU CAN CALCULATE DURATION Calculating Duration (months)

Person-Months = ----------------------- Persons

40 person-months = --------------------------- 6.5 person(s)

= 6.4 months

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BOTTOM UP ESTIMATING

Requires construction of WBS. Should be more accurate But not necessarily always. If you miss out

the broader picture you will miss some detailed estimates.

Case Study: Site Analysis and Excavation costs ignored.

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WBS OUTLINE ROLL UP

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PERT TOOL BAR

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PERT

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NEXT DETERMINE BUDGET: WHAT ARE THE OUTPUTS?

Cost Performance Baseline

Project Funding Documents

Project Document Updates

Estimate Costs

Allocate the overall cost estimates to individual activities or work packages to establish a cost baseline for measuring project performance.

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CORE CONCEPT

Effort, Duration, and Cost Effort: The number of labor units required to complete an activity Availability: Time a staff person is able to

work Productivity: The relative measure of work in

a time unit Duration = ( Effort / Productivity ) /

Availability Cost = ( Effort / Productivity ) x Unit Cost

Duration = Work_Hours / Work

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COST BUDGETING PROCESS

1. Cost estimates2. WBS3. Project

schedule4. Cost

management plan

1. Cost budgeting tools and techniques

1. Cost baseline2. Project Funding

Requirements3. Document

Updates

Inputs Tools Outputs

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CONSIDER DIRECT AND INDIRECT COSTS

Direct costs: Costs incurred for a specific project

Salaries of project staff Equipment bought specifically for the project Indirect costs: Costs span over multiple

projects (“overhead”) Quality assurance department Rooms, electricity, heating

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COST DISTRIBUTION MODEL- WELLMAN’S DATA FOR IT PROJECTS

Assessment RequirementsDefinition

Software Tools H/W Facilities Design

12%$12,000

8%$8000

10%$10,000

2%$2000

20%$20,000

Development Implementation Training ProjectManagement

Operational SW

20%$20,000

10%$10,000

3%$3000

5%$5000

10%$10,000

Total Cost of the Project = $100,000

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COSTS TO CONSIDER Labor: Wages paid to all staff. Overhead: Cost of payroll taxes and fringe benefits.

Usually % of Labor Materials: Items used in the project.

cement, lumber, paint Supplies: Cost of tools, office supplies, equipment.

Should be prorated if expected life is beyond the project. General & Administrative: Cost of management & support services

such as: purchasing, accounting, secretarial usually % of project cost.

Equipment Rental: computers, printers compressors, cranes, trucks

Profit Reward for successfully completing the project Calculated as % of project cost.

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COST BUDGETING COST CONTROL

Cost baseline will be used to measure and monitor cost performance of the project – see Earned Value Slides

Expected Cash Flow

Cost Baseline

Cumulative Values

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CONTROL COSTS PROCESS Monitor Cost Performance Understand variances from plan Ensure all changes are recorded and agreed

upon Prevent unauthorized changes from being

included in cost baseline Inform stakeholders of authorized changes

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FINAL THOUGHTS

Accuracy can be achieved if you have historical data.

Introduce an estimating Framework such as what is shown here.

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FINAL THOUGHTS

Project Costs: Are incurred while the project is being fulfilled.

Life Cycle Costs: Includes the costs after project completion.

There may be temptation to lower project costs at the expense of long term costs. Life Cycle Costing gives the PM a way to consider costs outside of the scope of project fulfillment.

You need to know concepts such as: sunk costs, present value, IRR, Net Present Value, Benefit Cost Ratio.

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KEY POINTS TO REMEMBER You must get the team members to provide

estimates where possible. When doing bottom-up estimating, use the

rule of “one to two people for one to two weeks.” You can calculate the duration by dividing the total effort by the number of resources.

You can calculate the duration by dividing the total effort by the number of resources.

You can calculate the effort by multiplying the duration with the number of resources.

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KEY POINTS TO REMEMBER For many types of projects it is preferable to

estimate in days and not hours as people are not productive 8 hours every day.

You should always communicate the type of estimate to the stakeholder—the type of estimate is “order of magnitude”, “budget estimate” and “definitive estimate”. During the initiation phase you only have order of magnitude estimates.

You must consider more than one estimating tool or technique when developing estimates.

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KEY POINTS TO REMEMBER Reliable budget estimates are arrived only

after creating a work-break-down structure. You must combine both the top-down and

bottom-up estimating techniques for good budget estimates.

Once you’ve completed cost estimation you do cost budgeting.

Cost Control follows Cost Budgeting. This process involves reviewing project progress reports and comparing the results against the cost baseline and determining if management action must be taken.