Business Project Management

MGT 172
Chapter 5:
Estimating Project Times and Cost

UCSD MGT 172 - Business Project Management

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Slide 1

Class Roadmap

UCSD MGT 172 - Business Project Management

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Slide 2

Estimating Projects
Estimating
The process of forecasting or approximating the time
and cost of completing project deliverables
The task of balancing the expectations of
stakeholders and the need for control while the
project is implemented

Estimating Methodologies
Top-down (macro or high level) estimates: group
consensus, or mathematical relationships
Bottom-up (micro or detailed) estimates: estimates of
elements of the work breakdown structure
UCSD MGT 172 - Business Project Management
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Slide 3

Why Are Good Estimates Important?

UCSD MGT 172 - Business Project Management

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Slide 4

Why Estimating Time and Cost Are

Important
Estimates are needed to support good decisions.
Estimates are needed to schedule work.
Estimates are needed to determine how long the
project should take and its cost.
Estimates are needed to determine whether the
project is worth doing.
Estimates are needed to develop cash flow needs.
Estimates are needed to determine how well the
project is progressing.
Estimates are needed to develop time-phased budgets
and establish the project baseline.
EXHIBIT 5.1
UCSD MGT 172 - Business Project Management
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Slide 5

Horror Stories
Confusion over Units of Measure in Aerospace
Industry
Excessive Use of Spreadsheets in Financial
Markets
Orders of Magnitude Error in Securities Sales
Authorization

UCSD MGT 172 - Business Project Management

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Six Keys to Estimating

1.
2.
3.
4.
5.
6.

Break it down
Simplify the math
Verify the digits
Sanity check
Tell the story
Deal with the challenges

UCSD MGT 172 - Business Project Management

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Factors Influencing the Quality of Estimates

Planning
Horizon
Other (Nonproject)
Factors

Project
Duration

Quality of
Estimates

Organization
Culture

Padding
Estimates

People

Project Structure
and Organization

UCSD MGT 172 - Business Project Management

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Slide 8

Estimating Guidelines for Times,

Costs, and Resources
1. Have people familiar with the tasks make the estimate.
2. Use several people to make estimates.
3. Base estimates on normal conditions, efficient methods,
and a normal level of resources.
4. Use consistent time units in estimating task times.
5. Treat each task as independent, dont aggregate.
6. Dont make allowances for contingencies.

7. Adding a risk assessment helps avoid surprises to

stakeholders.

UCSD MGT 172 - Business Project Management

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Slide 9

Macro versus Micro Estimating

Top-down
Encourages innovative, creative approaches
Establishes targets consistent with past experience and
pricing strategy

Bottoms Up
Time-consuming and costly process
May be required for justification of costs
Supports development of schedules and budgets
Supports trade-off analysis by contractor and customer

Utilizing both methods supports validation of estimates

TABLE 5.1
UCSD MGT 172 - Business Project Management
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Slide 10

Questions
When is the Macro approach appropriate?
When is the Micro approach appropriate?

Condition

Macro Estimates

Strategic decision making

High uncertainty

Internal, small project

Unstable scope

Micro Estimates

Fixed-price contract

Customer wants details

Cost and time important

UCSD MGT 172 - Business Project Management

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Slide 11

Estimating Projects: Preferred Approach

Make rough top-down estimates
Develop the WBS/OBS
Make bottom-up estimates
Develop schedules and budgets
Reconcile differences between top-down and bottom-up
estimates

UCSD MGT 172 - Business Project Management

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Slide 12

Methods for Estimating Project

Times and Costs
Macro (Top-Down) Approaches
Consensus methods - Utilizes pooled experience of senior
managers to estimate duration/cost
Ratio methods Use ratios to estimate costs (ex: $/foot)
Apportion method Allocates a portion of the budget to major
elements of work based on historical performance
Function point methods for software and system projects Uses
weighted variables (LOC, inputs, outputs etc) to estimate

Learning curves Utilizes performance improvement patterns to

estimate repetitive work

UCSD MGT 172 - Business Project Management

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Slide 13

Apportion Method of Allocating Project

Costs Using the Work Breakdown Structure
Budgets are allocated
from the top down

FIGURE 5.1
UCSD MGT 172 - Business Project Management
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Slide 14

Estimating the Work (Bottom-up)

Estimate the
resources required for
each low level
element of the WBS
Template
(Comparative)
Parametric
Detailed
Range Estimating

Document the
estimate in a Basis of
Estimate (BOE)

The scope:
What is being accomplished
The estimate:
Who/what is doing the work
How many hours
How long is the task
Cost of each resource and the
total task
The rationale:
Why a particular estimating
method or technique was
selected
How a specific estimate was
developed
Why specific history was
selected and used
How a given activity or job is
similar or dissimilar to past
efforts
Why the estimate is realistic
and credible

UCSD MGT 172 - Business Project Management

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Slide 15

Template (Comparative) Estimate

Estimate is developed based on similar elements from other
relevant experience
Document similarities and differences between the compared
elements

UCSD MGT 172 - Business Project Management

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Slide 16

How Credible Do You Think a

Template (Comparative) Estimate is?
Fairly credible as it is based on history. Somewhat
judgmental in which history is relevant and assessment of
how applicable experience is.

UCSD MGT 172 - Business Project Management

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Slide 17

Parametric Estimate
Models that mathematically analyze a large amount of
experience and reduce it to equations
Experience may be company or industry data

Complexity factors build on:

Amount of new design

Reuse of existing hardware or software
Experience of personnel
Maturity of technology

Measures of effort based on:

Lines of code, Function points, Hours

UCSD MGT 172 - Business Project Management

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Slide 18

How Credible Do You Think

a Parametric Estimate is?
Very credible as it is based on collective experience of either
a company or industry
Very little judgment applied

UCSD MGT 172 - Business Project Management

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Slide 19

Detailed Estimate
Estimates developed at the work package level by people
responsible for the effort
Represents the judgment of an expert individual or group
Based on their individual experience

UCSD MGT 172 - Business Project Management

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Slide 20

How Credible Do You Think a

Detailed Estimate is?
Least credible as it not based in history or standards
Credibility is based on the experience of the estimator
Subject to the most scrutiny
Should be validated through peer reviews or other estimating
methods

UCSD MGT 172 - Business Project Management

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Slide 21

Range Estimating
Range Estimating
Aggressive = 5 days
Most likely = 7 days
Conservative = 10 days

Typically, the most likely estimate is used in the

schedule development process

UCSD MGT 172 - Business Project Management

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Slide 22

Completed BOE Example

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Slide 23

Phase Estimating Over Product Life Cycle

FIGURE 5.3
UCSD MGT 172 - Business Project Management
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Slide 24

Top-Down and Bottom-Up Estimates

FIGURE 5.4
UCSD MGT 172 - Business Project Management
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Slide 25

WBS with Cost Estimates

The sum of the budget for all lowest level tasks must add up to
the total budget of the project
UCSD MGT 172 - Business Project Management
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Slide 26

Classroom Exercise: Develop an Estimate

Develop an estimate for one of the tasks shown on the
next page
Include the following information in your estimate
Project name
Duration estimate
Scope description
Estimate of resources, hours, and cost
Rationale for the estimate including identification of the
estimating methodology used
Assumptions

Ensure each name is on the estimate and turn it in to the

instructor(s)
UCSD MGT 172 - Business Project Management
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Slide 27

Classroom Exercise: Develop an Estimate

1. Prepare a soccer field for play
2. Paint the interior of a 2,000 sq foot house with 9 rooms
(existing structure)
3. Install drywall to the interior of a 2,000 sq foot house
(new construction)
4. Install landscaping on a 10,000 sq foot lot, to include
irrigation, topsoil, plants, and sod
5. Build a fence surrounding a 10,000 sq foot lot, including
installation of 2 gates

UCSD MGT 172 - Business Project Management

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Slide 28

Types of Costs
Direct Costs
Costs that are clearly chargeable to a specific work package.
Labor, materials, equipment, and other

Direct Project Overhead Costs

Costs incurred that are directly tied to an identifiable project
deliverable or work package.
Line management, rents, supplies, machinery, laboratories

General and Administrative Overhead Costs

Organization costs not directly linked to a specific project
Advertising, Corporate functional allocations (HR, Finance, Legal)

Which of these types of cost are controllable by the

Project Manager?
UCSD MGT 172 - Business Project Management
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Slide 29

Contract Bid Summary Costs

Direct costs
Direct overhead (25%)
Total Direct Costs
G&A overhead (20%)
Total Costs
Profit (20%)
Total bid

$80,000
$20,000
$100,000
$20,000
$120,000
$24,000
$144,000

FIGURE 5.5
UCSD MGT 172 - Business Project Management
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Slide 30

Refining Estimates
Reasons for Adjusting Estimates
Interaction costs are hidden in estimates
Normal conditions do not apply
Things go wrong on projects
Changes in project scope and plans better
understanding of scope

Adjusting Estimates
Time and cost estimates of specific activities are
adjusted as the risks, resources, and situation
particulars become more clearly defined
Experience to date indicates estimate no longer valid
UCSD MGT 172 - Business Project Management
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Slide 31

Refining Estimates (contd)

Contingency Funds and Time Buffers
Are created independently to offset uncertainty
Reduce the likelihood of cost and completion time
overruns for a project
Can be added to the overall project or to specific
activities or work packages
Can be determined from previous similar projects

Changing Baseline Schedule and Budget

Unforeseen events may dictate a reformulation of the
budget and schedule

UCSD MGT 172 - Business Project Management

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Slide 32

Creating a Database for Estimating

Estimating
Database
Templates
FIGURE 5.7
UCSD MGT 172 - Business Project Management
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Slide 33

Homework for Next Session

Read Chapter 6
Complete Exercise #4 (page 190)
Complete Exercise #8 (page 191)
Read p. 449-454

UCSD MGT 172 - Business Project Management

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Slide 34