Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-1 Cost Estimation and...
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Transcript of Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8-1 Cost Estimation and...
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 8-1
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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