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PCM 642 Topic 4Cost EstimatingPROJECT COST MANAGEMENT 642

COST ESTIMATING - INTRODUCTION

PCM 642 Topic 4Cost EstimatingLECTURE OVERVIEW

DefinitionPurposeCategorisingEstimates for project managementLevel of effortQuality of an estimateComponentsInputs and sourcesOutputs

PCM 642 Topic 4Cost EstimatingDEFINITION

Project cost management comprises:

Resource Planning,

Cost Estimating,

Cost Budgeting,

Cost Control .

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PCM 642 Topic 4Cost EstimatingDEFINITION

Definition (contd)PMI:

developing an approximation (estimate) of the costs of the resources needed to complete project activities ... it involves developing an

t f th lik l tit ti lt assessment of the likely quantitative result

AACE:compilation of all the costs of the elements of a project or effort included within an agreed-upon scope

PCM 642 Topic 4Cost EstimatingCOST ESTIMATING

now answer Class exercises: Question 1

PCM 642 Topic 4Cost EstimatingPURPOSES FOR COST ESTIMATES

Economic Evaluation Help determine whether project is economically viable

Budgeting & Cost ControlBudgeting and consequent cost control of the project

Time Estimating gEstimate related to resource availability & estimate

durationFunding Approval

Estimate will indicate funding needsComparing Alternatives

Cost evaluation between alternatives.eg.design solutions.

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PCM 642 Topic 4Cost EstimatingPURPOSES (CONTD)

Costing Scope Changes Determine costs of scope changes on projects.

Costing Legal Claims Estimates involved in claims & agreeing settlement

T d iTenderingClient procures service/product from external organsation: Contractor

Estimate prepared to formulate tender Client

Estimate as benchmark to measure competitiveness of contractor's bid .

PCM 642 Topic 4Cost EstimatingCATEGORISING ESTIMATES

BENEFITS Standardises basis of estimate:

l f f l l d Level of information available to produce estimate

The type of data that should be used

The level of expected accuracy

PCM 642 Topic 4Cost EstimatingCATEGORISING ESTIMATES

Projects can be classified according to the following: Degree of project definition

extent and type of input information available for estimating End usage of the estimate

eg. For feasibility studies, funding authorisation, budgets Estimating methodology

t h ti ( b d d l ti hi b t t & j t stochastic ( based around relationships between costs & project parameters generally other than direct measure of project elements)

deterministic - definitive measure of items Accuracy range

degree final cost will vary from estimate (traditionally expressed as + or - % around point estimate

Level of effort to prepare the estimate Indicates cost, time, resources required. (typically expressed as

% of total costs) .

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PCM 642 Topic 4Cost EstimatingTYPES OF ESTIMATES

Class Level ofProject

Definition

Typicalpurpose of

estimate

Typicalestimating

method

Accuracy relativeto Class 1

Effort relativeto Class

55 0 2% Screening or

FeasibilityStochastic or

Judgement10 to 20 1

4 1 5% Concept study Primarily 5 to 10 2 to 44 1 5% Concept studyor Feasibility

PrimarilyStochastic

5 to 10 2 to 4

3 10 40% Budget,Authorisation,

or Control

Mixed, butprimarily

stochastic

3 to 6 3 to 10

2 30 60% Control orTender

Primarilydeterministic

2 to 3 5 to 20

1 50 - 100% CheckEstimate or

Tender

Deterministic 1 10 to100

PCM 642 Topic 4Cost EstimatingPROJECT MANAGEMENT ESTIMATES

In construction projects;

AIQS Cost management Manual specifies types:Project stage AIQS Cost planning stage

AIQS Cost Common name of costing

Inception A Brief Brief stage cost

Indicative cost

Development B Outline proposals Outline proposals cost

Preliminary estimate

C Sketch design Sketch design cost plan

Limit of cost estimate

D - Documentation Tender document cost plan

Tender estimate

PCM 642 Topic 4Cost EstimatingPROJECT MANAGEMENT ESTIMATES

For project management;No specific type dictated

However, generally according to level , g y gof project definition

Suits PM as it mirrors PLC

Type of estimate changes with greater detail

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PCM 642 Topic 4Cost EstimatingORDER-OF-MAGNITUDE ESTIMATES

Characteristics 'ball park', conceptual', guesstimate earliest estimate. Decide which way (& whether) to go with

project quick, simple, inexpensive: 1 to 150 hours used when little information available false sense of accuracy. (+75% to -25%) typically parametric estimating .

Can be used for: evaluating general feasibility of a project evaluating cost consequences of proposed design modifications establishing preliminary budget for control purposes during

design screening alternative projects for further detailed analysis .

PCM 642 Topic 4Cost EstimatingBUDGET ESTIMATES

Characteristics prepared with some preliminary scope expected accuracy +25% to -10% typically parametric or semi-detailed deterministic .

Can be used for: setting preliminary budget &/or funding approval

screening project & confirming economic viability.

PCM 642 Topic 4Cost EstimatingDEFINITIVE ESTIMATES

Characteristics Based on extensive amount of detailed information Level of project definition between 30% and 100% Expected degree of accuracy +/- 5% level of effort 500 to 10,000 hours

ll d b typically deterministic, bottom-up estimating

Can be used for: bid, bid evaluation, contract changes, legal claims .

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PCM 642 Topic 4Cost EstimatingLEVEL OF EFFORT

must understand level of effort required Could be pressured into producing an estimate of;

Higher expected accuracy in insufficient time

Categorising avoids this problemP i i h k d l l f ff f Participants then know expected level of effort fortypes of estimate

Cost of preparing estimates (Humphreys and English)

Accuracy range (%)

$1,000,000 project

$10,000,000 project

$20,000,000 project

-5+ 15 20,000 50,000 90,000-15 + 30 6,000 15,000 30,000-30 + 50 1,500 4,000 8,000

PCM 642 Topic 4Cost EstimatingLEVEL OF EFFORT

Pm must also watch overspending on effort

For internal projects it is not worthwhileproducing an estimate more accurate than thecontrol estimate because it costs more tocontrol estimate, because it costs more toproduce than the value of the data

Turner (1993)

Read Turners (1993) example on the Tutorial sheet

PCM 642 Topic 4Cost EstimatingESTIMATING

now answer Class exercises: Question 2now answer Class exercises: Question 2

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PCM 642 Topic 4Cost EstimatingQUALITY OF AN ESTIMATE

Validity Estimate considered valid if basis for preparing it is also valid eg if previous similar project used to estimate proposed

project, all differences between the two must be properly taken into account

Reliability Reliable = methodical process followed by identifying, Reliable methodical process followed by identifying,

evaluating, using and recording all relevant information availableAccuracy

Accuracy = freedom from errorPrecision

= how many significant digits we use in calculations precise figure can still be inaccurate if error is made .

PCM 642 Topic 4Cost EstimatingCOST COMPONENTS

Labour - 2 parts: payment direct to person, PLUS on-costs.eg. payroll tax,

Materials - Usually obtained from manufacturers and suppliers. Equipment - Used but not consumed - useable on other projects. Subcontract - Elements performed by external firm.p y Fees - eg insurance and licence agreements Organisational Overheads-eg general office staff,office rent.

Internal project - included to give full cost; Contractor tendering - included as only means to recoup OH

Profit & Risk Internal project: not usually applicable Tender: yes

PCM 642 Topic 4Cost EstimatingESTIMATING - TYPES OF COSTS

2 costs - usually calculated separatelywithin an estimate.

Direct costs Costs readily traceable to the project .

I di t t Indirect costs All costs other than direct costs, PM usually has some control over direct but little or

no control over indirect costs" "a considerable amount of time is very often devoted

to defining and estimating the direct costs, with indirect costs taking a secondary importance (Patrascu, 1988) .

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PCM 642 Topic 4Cost EstimatingESTIMATING

now answer Class exercises: Questions 3 and 4

PCM 642 Topic 4Cost EstimatingESTIMATING INPUTS

Project Documents eg: scope statement, specification, drawings,

contract. Work Breakdown Structure (WBS)

WBS identifies project elements. Each can have a cost cost

Type, quantity & cost of resources determined & element costed.

WBS ensures that all identified work has been estimated (PMI)

Historical Information in-house cost records; similar projects; published

cost information; government figures; university research

PCM 642 Topic 4Cost EstimatingESTIMATING INPUTS

Organisational Policies eg., preferred estimating methods, resource costs, rent or buy

Project team skills and knowledge eg project team, consultants, g p j , ,subcontractors, suppliers .

Resource Breakdown Structure RBS advocated by Rad (2002) provides standard costs for organisational resources

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PCM 642 Topic 4Cost EstimatingSOURCES OF DATA

The availability of historical data is paramount in the development and use of estimating models (Rad, 2002).

Data may be derived from any of the following: Suppliers quotes Trade literature tech lit textbooks Trade literature, tech lit, textbooks Company historical data, standard costs Computer systems Government figures

PLUSPMs experience

(See NASA website for cost estimating)

PCM 642 Topic 4Cost EstimatingESTIMATING - OUTPUTS

Cost Estimate generally expressed in $ but may be in other units.

e.g. hoursSupporting Detail

estimate should describe scope basis (i.e., how was it developed) basis (i.e., how was it developed) assumptions indication of the range of the cost estimate

Cost Management Plan describe how cost variances will be managed. e.g.

different responses to major problems than to minor ones

plan may be formal or informal, highly detailed or broad framed, based on needs of the project stakeholders .

PCM 642 Topic 4Cost EstimatingESTIMATING

now answer Class exercises: Question 5

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PCM 642 Topic 4Cost EstimatingETHICS

Ethics: Fudge estimates !! (Bent & Humphreys

, 1996) manipulate to suit a particular purposeman pu a u a par u ar purp Living with consequences of manipulation

may be far worse than giving a realistic cost estimate

Estimates used as political tool!

PCM 642 Topic 4Cost EstimatingESTIMATING - SUMMARY

The estimate can only ever be as good as the estimators skill and experience will allow and the relevance and accuracy of the relevance and accuracy of the information on which it is based

(Lindsay Castell, 2010!!)

PCM 642 Topic 4Cost EstimatingESTIMATING - SUMMARY

End of topic End of topic