Estimating Project Times

and Costs
Gray, Clifford F. and Larson, Erik W. Project Management: The Managerial Process,
5th ed., 2010, McGraw Hill, New York (Chapter 5)
Jack, Meredith and Samuel Mantel, Project Management, a Managerial Approach, 4th
d., John Wiley & Sons, 2000
Sullivan et al., Engineering Economy, 11th Ed., Prentice hall, 2000.

Estimating Projects
Estimating
The process of forecasting or approximating the time and cost of
completing project deliverables.

In order to develop a budget, we must:

WBS

Resource
Requirement

estimating
methods

Resource
rates
Activity Duration

Project schedule

Cost Estimate
estimating
methods
2

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 (one shift, 5 working
days,..), efficient methods, and a normal level of resources.
4. Treat each task as independent.
5. Dont make allowances for contingencies.

Types of Estimates
Top-down (macro) estimates: analogy,
group consensus, or mathematical
relationships
Bottom-up (micro) estimates: estimates
of elements of the work breakdown
structure
4

Top-Down Estimates
This strategy is based on collecting the opinions and
experiences of top and middle managers, and available past
data concerning similar activities
The managers estimate the overall project cost and the cost
of major deliverables.
These cost estimates are then given to lower level managers,
who are expected to continue the breakdown into budget
estimates for the specific sub-deliverables and work
packages
This process continues to the lowest level

Advantages: Aggregate estimates can often be developed

quite accurately for repeated projects
5

Bottom-Up Estimates
The people doing the work are consulted regarding times and budgets
to ensure the best level of accuracy
Initially, estimates are made in terms of resources, such as labor hours
and materials. They are later converted to dollar equivalent.
Bottom-up budgets should be and usually are, more accurate in the
detailed tasks.
The resulting task estimates are aggregated to give the total direct cost
of the project
Advantages:
Individuals closer to the work are apt to have a more accurate idea
of resource requirements
The direct involvement of low-level managers in estimate
preparation increases the likelihood that they will accept the result
with a minimum of aversion
6

Estimating Projects: Preferred

Approach
Develop the WBS/OBS.
Make rough top-down estimates.
Make bottom-up estimates.
Reconcile differences
bottom-up estimates

between

top-down

and

Methods for Estimating Project

Times and Costs

Project Estimate
Times
Costs

Macro (Top-down) Approaches

Consensus methods
Analogy method
Learning curves

Estimation Techniques
Consensus Methods (Expert Judgment / Delphi
method)
Expert Judgment: It uses the pooled experience of
senior and/or middle managers to estimate the
total project duration and cost. It involves several
meeting where the experts discuss, argue, and
ultimately reach a decision as to their best guess
estimate.
Delphi method: Several experts familiar with the
project are consulted. They each estimate the
project cost. These estimates are compared and
discussed. The estimation process iterates until an
agreed estimate is reached.
9

Estimation Techniques
Analogy Methods
These techniques are applicable when other projects in
the same application domain have been completed.
The cost of a new project is estimated by analogy with
these completed projects.
The cost of a similar project is analyzed and adjusted for
difference between it and the proposed project.
The adjustment takes into account factors such as dates,
project scale, location, exchange rates,..

10

Cost Indexes Method (ratio Method)

An index is a dimensionless number used to indicate how a
cost has changed over time relative to a base year.
Changes usually occur as a result of inflation, technological
advances, availability of labor and materials, changes in
consumer buying patterns
Many indexes are periodically published
Engineering News Record Construction Index
Marshall and Swift cost index (Equipment)
Statistical Abstract of the United States (government
indexes on yearly materials, labor, and construction costs)
U.S Department of Labor (output per man-hour by
industry)
Bureau of Labor and Statistics (Producer Price and
11
consumer Prices indexes).

Cost Indexes Method (ratio Method)

Using the indexes, if we know the cost of goods in one year, we can
estimate the cost of the same goods in another year by using a simple
ratio.
CN = Ck ( IN / Ik )
IN = Index for current year, N
Ik = Index for base year, k
Ck = cost of item during base year
CN = cost of the item during the current year

12

Example: A certain index for the cost of purchasing and installing utility
boilers is keyed to 1974, where the baseline value was set to 100.
Company XYZ installed a 50,000-lb/hr boiler in 1996 for $525,000
when the index had a value of 468. This same company must install
another boiler of the same size in 1999. The index in 1999 is 542. What
is the approximate cost of the new boiler?
C1999= $525,000 (542/468) = $608,013.

13

Parametric Cost Estimating Techniques

Relates the cost of an activity to one or more cost
drivers (independent variables)
Cost drivers are design variables that account for a
large portion of the total cost behavior.
Construction : floor space, roof surface area, wall surface area
Trucks / car : horsepower, gross weight
Turbine engine: fuel consumption
Electrical power plant: kilowatts
Computers: megabytes
Software : # of lines of codes

14

Power -Sizing Technique

Power sizing is a cost estimating technique that uses the relationship
between capacity or size and cost. It is frequently used for estimating the
cost of building industrial plants and equipment.

C New

S New
C
S

where CNew is the cost of the new plant, Both in $ as of the point in time
C is the cost of the existing plant, for which the estimate is desired
SNew is the capacity of the new plant,
S is the capacity of the existing plant.
X is the cost-capacity factor which varies depending on the type
of plant or equipment being built.
X = 0.68 for nuclear generating plants and 0.79 for fossil-fuel
generating plants

15

Example. Suppose that it is desired to estimate the cost of

building a 600-MW fossil-fuel plant. It is known that a 200MW plant cost $100 million 20 years ago when the
approximate cost index was 400, and the cost index is now
1,200. The cost capacity factor for a fossil-fuel plant is 0.79.
1. Update the known cost of the 200 MW plant 20 years ago to
a current cost. C = 100 (1200/400) = $300 million
2. Use the power-sizing model to estimate the cost of the 600
MW plant CNew= $300 million (600-MW/200-MW)0.79=
16
$714 million

Learning Curves
Studies have shown that human performance usually improves when a
task is repeated
The learning curve effect was first observed in the aircraft and
aerospace industries with respect to labor hours per unit (T.P. Wright,
Factors affecting the cost of airplanes, J. of Aeronautical Sciences, Vol 3., 1936.)

In general, performance improves by a fixed percent each time

production doubles (each time the output doubles, the worker hours
per unit decrease to a fixed percentage of their previous value)

17

Most learning curves are based on the assumption that the number of
input resources needed decreases by a constant percentage each time
the number of units produced doubles.
Y1 = labor hours required to produce the first output unit
Yn = labor hours needed to produce the nth output unit , n = 2, 4, 8, 16,
s = learning curve parameter (improvement rate, e.g., 90% )
Y2 = Y1 s
Y 4 = Y 2 s = Y 1 s2
Y 8 = Y 4 s = Y 1 s3
Yn = Y1 sp for p = 0, 1, 2, . and n = 2p
Yn
log(
) p log( s )
Y1
log( n ) p log( 2 )

Yn
log( ) / log( n ) log( s ) / log( 2 ) b

Y1
b = learning curve exponent

Yn Y1 n b for n = 2, 3, 4, . Unit Learning curve equation

18

Learning Curves Unit Values

Learning curve parameter (improvement rate)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
-0.736966 -0.621488 -0.514573 -0.415037 -0.321928 -0.234465 -0.152003 -0.074001

b
Unit
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

1
0.6000
0.4450
0.3600
0.3054
0.2670
0.2383
0.2160
0.1980
0.1832
0.1708
0.1602
0.1510
0.1430
0.1359
0.1296
0.1239
0.1188
0.1142
0.1099
0.1061
0.1025
0.0992
0.0961
0.0933
0.0906
0.0881
0.0858
0.0836
0.0815
0.0796
0.0778
0.0760
0.0744
0.0728
0.0713
0.0699
0.0685
0.0672
0.0660
0.0648
0.0636
0.0625
0.0615
0.0605
0.0595
0.0586
0.0577
0.0568
0.0560

1
0.6500
0.5052
0.4225
0.3678
0.3284
0.2984
0.2746
0.2552
0.2391
0.2253
0.2135
0.2031
0.1940
0.1858
0.1785
0.1719
0.1659
0.1604
0.1554
0.1507
0.1465
0.1425
0.1387
0.1353
0.1320
0.1290
0.1261
0.1233
0.1208
0.1183
0.1160
0.1138
0.1117
0.1097
0.1078
0.1060
0.1043
0.1026
0.1010
0.0995
0.0980
0.0966
0.0952
0.0939
0.0926
0.0914
0.0902
0.0890
0.0879

1
0.7000
0.5682
0.4900
0.4368
0.3977
0.3674
0.3430
0.3228
0.3058
0.2912
0.2784
0.2672
0.2572
0.2482
0.2401
0.2327
0.2260
0.2198
0.2141
0.2087
0.2038
0.1992
0.1949
0.1908
0.1870
0.1834
0.1800
0.1768
0.1737
0.1708
0.1681
0.1654
0.1629
0.1605
0.1582
0.1560
0.1538
0.1518
0.1498
0.1479
0.1461
0.1444
0.1427
0.1410
0.1394
0.1379
0.1364
0.1350
0.1336

1
0.7500
0.6338
0.5625
0.5127
0.4754
0.4459
0.4219
0.4017
0.3846
0.3696
0.3565
0.3449
0.3344
0.3250
0.3164
0.3085
0.3013
0.2946
0.2884
0.2826
0.2772
0.2722
0.2674
0.2629
0.2587
0.2546
0.2508
0.2472
0.2437
0.2405
0.2373
0.2343
0.2314
0.2286
0.2260
0.2234
0.2210
0.2186
0.2163
0.2141
0.2120
0.2099
0.2079
0.2060
0.2041
0.2023
0.2005
0.1988
0.1972

1
0.8000
0.7021
0.6400
0.5956
0.5617
0.5345
0.5120
0.4929
0.4765
0.4621
0.4493
0.4379
0.4276
0.4182
0.4096
0.4017
0.3944
0.3876
0.3812
0.3753
0.3697
0.3644
0.3595
0.3548
0.3503
0.3461
0.3421
0.3382
0.3346
0.3310
0.3277
0.3244
0.3213
0.3184
0.3155
0.3127
0.3100
0.3075
0.3050
0.3026
0.3002
0.2979
0.2958
0.2936
0.2915
0.2895
0.2876
0.2857
0.2838

1
0.8500
0.7729
0.7225
0.6857
0.6570
0.6337
0.6141
0.5974
0.5828
0.5699
0.5584
0.5480
0.5386
0.5300
0.5220
0.5146
0.5078
0.5014
0.4954
0.4898
0.4844
0.4794
0.4747
0.4701
0.4658
0.4617
0.4578
0.4541
0.4505
0.4470
0.4437
0.4405
0.4374
0.4345
0.4316
0.4289
0.4262
0.4236
0.4211
0.4187
0.4163
0.4140
0.4118
0.4096
0.4075
0.4055
0.4035
0.4015
0.3996

1
0.9000
0.8462
0.8100
0.7830
0.7616
0.7439
0.7290
0.7161
0.7047
0.6946
0.6854
0.6771
0.6696
0.6626
0.6561
0.6501
0.6445
0.6392
0.6342
0.6295
0.6251
0.6209
0.6169
0.6131
0.6094
0.6059
0.6026
0.5994
0.5963
0.5933
0.5905
0.5877
0.5851
0.5825
0.5800
0.5776
0.5753
0.5730
0.5708
0.5687
0.5666
0.5646
0.5626
0.5607
0.5588
0.5570
0.5552
0.5535
0.5518

1
0.9500
0.9219
0.9025
0.8877
0.8758
0.8659
0.8574
0.8499
0.8433
0.8374
0.8320
0.8271
0.8226
0.8184
0.8145
0.8109
0.8074
0.8042
0.8012
0.7983
0.7955
0.7929
0.7904
0.7880
0.7858
0.7836
0.7815
0.7794
0.7775
0.7756
0.7738
0.7720
0.7703
0.7687
0.7671
0.7655
0.7640
0.7625
0.7611
0.7597
0.7584
0.7570
0.7558
0.7545
0.7533
0.7521
0.7509
0.7498
0.7486

19

Learning curves Cumulative Values

Learning curve parameter (improvement rate)
b
Unit
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

0.6
-0.736966

0.65
-0.621488

0.7
-0.514573

0.75
-0.415037

0.8
-0.321928

0.85
-0.234465

0.9
-0.152003

0.95
-0.074001

1
1.6000
2.0450
2.4050
2.7104
2.9774
3.2158
3.4318
3.6298
3.8131
3.9839
4.1441
4.2951
4.4381
4.5740
4.7036
4.8276
4.9464
5.0606
5.1705
5.2766
5.3791
5.4783
5.5744
5.6677
5.7583
5.8464
5.9322
6.0158
6.0974
6.1770
6.2547
6.3308
6.4051
6.4779
6.5492
6.6191
6.6876
6.7548
6.8208
6.8855
6.9492
7.0117
7.0732
7.1337
7.1932
7.2518
7.3095
7.3663
7.4222

1
1.6500
2.1552
2.5777
2.9455
3.2739
3.5723
3.8469
4.1021
4.3412
4.5665
4.7800
4.9831
5.1770
5.3628
5.5413
5.7132
5.8791
6.0396
6.1950
6.3457
6.4922
6.6346
6.7734
6.9086
7.0407
7.1696
7.2957
7.4190
7.5398
7.6581
7.7742
7.8880
7.9997
8.1095
8.2173
8.3233
8.4276
8.5302
8.6312
8.7307
8.8287
8.9252
9.0204
9.1143
9.2069
9.2983
9.3885
9.4775
9.5654

1
1.7000
2.2682
2.7582
3.1950
3.5928
3.9601
4.3031
4.6260
4.9318
5.2229
5.5013
5.7685
6.0257
6.2739
6.5140
6.7467
6.9727
7.1925
7.4065
7.6153
7.8191
8.0183
8.2132
8.4040
8.5910
8.7745
8.9545
9.1313
9.3050
9.4759
9.6439
9.8094
9.9723
10.1328
10.2910
10.4469
10.6008
10.7526
10.9024
11.0504
11.1965
11.3409
11.4835
11.6245
11.7640
11.9019
12.0383
12.1733
12.3069

1
1.7500
2.3838
2.9463
3.4591
3.9345
4.3804
4.8022
5.2040
5.5886
5.9582
6.3147
6.6596
6.9941
7.3190
7.6355
7.9440
8.2453
8.5399
8.8284
9.1110
9.3882
9.6604
9.9278
10.1907
10.4494
10.7040
10.9548
11.2020
11.4458
11.6862
11.9235
12.1578
12.3892
12.6179
12.8439
13.0673
13.2883
13.5069
13.7232
13.9373
14.1493
14.3592
14.5671
14.7731
14.9772
15.1795
15.3801
15.5789
15.7761

1
1.8000
2.5021
3.1421
3.7377
4.2994
4.8339
5.3459
5.8389
6.3154
6.7775
7.2268
7.6647
8.0923
8.5105
8.9201
9.3218
9.7162
10.1037
10.4849
10.8602
11.2299
11.5943
11.9538
12.3086
12.6589
13.0050
13.3471
13.6853
14.0199
14.3509
14.6786
15.0031
15.3244
15.6428
15.9583
16.2710
16.5810
16.8885
17.1935
17.4960
17.7962
18.0942
18.3899
18.6835
18.9751
19.2646
19.5522
19.8379
20.1217

1
1.8500
2.6229
3.3454
4.0311
4.6881
5.3217
5.9358
6.5332
7.1161
7.6860
8.2444
8.7925
9.3311
9.8611
10.3831
10.8977
11.4055
11.9069
12.4023
12.8920
13.3765
13.8559
14.3306
14.8007
15.2666
15.7283
16.1861
16.6402
17.0907
17.5377
17.9814
18.4219
18.8593
19.2938
19.7254
20.1543
20.5805
21.0041
21.4252
21.8438
22.2601
22.6741
23.0859
23.4955
23.9030
24.3085
24.7120
25.1135
25.5131

1
1.9000
2.7462
3.5562
4.3392
5.1008
5.8447
6.5737
7.2898
7.9945
8.6890
9.3745
10.0516
10.7211
11.3837
12.0398
12.6899
13.3344
13.9735
14.6078
15.2373
15.8624
16.4833
17.1002
17.7132
18.3227
18.9286
19.5312
20.1306
20.7269
21.3202
21.9107
22.4985
23.0835
23.6660
24.2461
24.8237
25.3989
25.9719
26.5427
27.1114
27.6780
28.2425
28.8051
29.3658
29.9246
30.4815
31.0367
31.5902
32.1420

1
1.9500
2.8719
3.7744
4.6621
5.5380
6.4039
7.2612
8.1112
8.9545
9.7919
10.6239
11.4511
12.2736
13.0921
13.9066
14.7174
15.5249
16.3291
17.1302
17.9285
18.7241
19.5170
20.3074
21.0955
21.8812
22.6648
23.4462
24.2257
25.0032
25.7788
26.5526
27.3246
28.0949
28.8636
29.6306
30.3961
31.1601
31.9227
32.6838
33.4435
34.2019
34.9589
35.7147
36.4692
37.2225
37.9745
38.7254
39.4752
40.2239

20

Example 1: A manufacturer has a new contract for 16 prototype units

and a total of 800 labor hours were required for the first unit. Past
experience has indicated that on similar types of units the improvement
rate was 80%.
How many labor hours are required to produce the 16th unit?
How many labor hours are required to finish the whole project of 16
prototype units?
Y16 = Y1 16b , where b = log(0.8)/log(2) =-0.32193
Y16 = 800 16-0.32193 = 800 (0.4096) = 327.68 labor hours
16

= 800 (8.920) = 7,136 hours

t 1

The average unit labor hours = 7,136/16 = 446 labor hours per unit
21

Example 2: The assembly department is to start building a new

configuration of computer systems. The first system requires 3.5 hours
to assemble. Past experience indicates that an 85% learning curve
applies in this situation. How many units have to be assembled before a
a system can be built in less than 2 hours?
Yn = Y1 nb , where Y1 = 3.5 hours and b = log(0.85)/log(2) =-0.2345
n =? such that Yn < 2 hours,
3.5 n-0.2345 < 2 => n0.2345 > 1.75 => n > 10.87 or n = 11
The 11th unit will be assembled in less than 2 hours.

22

Linear Regression
Linear regression is a statistical technique used to estimate the
relationship between two variables.
Values of Dependent Variable

Actual observation

Deviation7

Deviation5

Deviation6

Deviation3
Deviation4
Deviation1

LeastTrend
squares
line,method
y^= a + bx
minimizes the sum of the
squared errors (deviations)

Deviation2

Value of Independent Variable

For small data sets, this technique can be used by hand. For large data
sets, spreadsheet and statistic packages can be used to estimate23 the
relationship.

Least Squares Method

The graph shows a data set involving a cost driver, X, and a dependent
cost, Y.
The dataset suggest a linear relationship.
24

Equations to calculate the regression variables a and b

Y a bX

The variables a and b are the ones that minimize the sum of squared
errors
n

2
2
Minimize (Yi Yi ) (a bXi Yi )
n

i 1
n

i 1

X Y nXY
i i

i 1
n

2
i

nX

i 1

a Y bX

25

Example 1. Find a linear equation to predict the packaging and

processing cost for an order (y) given its weight x = 250 lb.
yi (P ackaging cost)

xi weight Line Fit Plot

140
120
100
80
60
40
20
0
180

230

280

330

xi weight

xy

x2

264320 (10 )( 253)(102 .4)

b
0.279
2
658900 (10 )( 253 )
a 102 .4 (0.279 )( 253 ) 31 .813
y 31 .813 0.279 x

a Yn b X

XY
i

Y =31.813 +0.279 (250) = $101.563.

nXY

i 1
n

X
i 1

2
i

nX

26

Example 2. For a certain drilling operation within a flexible machining

cell, data regarding the time (in hours) to drill 1, 2, 3, and 4 holes in a
inch sheet of carbon steel have been obtained.
xi (No. of holes) Line Fit Plot
0.1400
0.1200
yi hours

0.1000
0.0800
0.0600
0.0400
0.0200
0.0000
0

xy

x2

xi (No. of holes)

2.5568 (12 )( 2.5)( 0.0732 )

0.0241
2
90 (12 )( 2.5)
a 0.0732 (0.0241)( 2.5) 0.01295

27

y 0.01295 0.0241 x

Model validation
Determine how well the model can estimate the cost/time.
Validation can be accomplished using statistical goodness of fit
measures such as standard error and the correlation coefficient
The standard error (SE) measures the average variation between the
actual and estimated cost/time values
n

2
(
y

y
i i)
i 1

SE

n
The correlation coefficient (R) measures the closeness of the actual
data points to the regression line.
n

(y
R

y )( xi x )

i 1

n
n

2
2
(
y

y
)
(
x

x
)
i
i

i 1
i 1

28

29

Excel Tutorial: Regression analysis

1.Make sure that the Analysis ToolPak Add-In is loaded into Excel.

Otherwise click on Office Button. Then click on Excel Option

1

5
3

30

Excel Tutorial
To perform simple linear regression:
While on the page where you entered your data, from the menu bar,
select DATA and Data Analysis. Scroll down and highlight
"Regression" and click OK.

31

Excel Tutorial
A data-entry window will pop up.
1. Under "Input Y Range," type:
$C$1:$C$7.
2. For "Input X Range," type:
$B$1:$B$7.
3. Click to add a checkmark in
the box for "Labels.
4. For "Output Options," select
Output Range and type $E$1
5. Click to add a checkmark in
the box for "Line Fit Plots.
6. Click OK.
7. Excel will perform the
regression and place the output
on the same worksheet.

32

Excel Tutorial
Reformatting the output
Before interpreting the output, you'll need to do some reformatting. The
columns do not automatically adjust to their optimal widths. To do this, within
the worksheet that you just created, double-click on the boundary to the right of
any column heading. Your table should look similar to the one in the next slide.

33

34

Parametric Estimate of Material Costs

J. Nicholas, Project Management for Business and Engineers, 2nd Ed., Elsevier Inc., 2004.

A warehousing contractor wants a quick way to estimate the material cost of a

facility. The companys engineers investigate the relationship between several
building parameters and the material costs for eight recent projects comparable
in terms of general architecture, layout and construction material. Using the
method of Least Square Method, they develop the following regression model
that relates material cost (y) to floor space (x1) in terms of 10,000 sq. ft. and the
number of shipping/receiving docks (x2) in a building.
y = 201,978 + 41,490 x1 + 17230 x2
Suppose a proposal is being prepared to construct a new 300,000 sq. ft. facility
with two docks. The estimated material cost is
y = 201,978 + (41,490) (30) + (17230) (2) = $1,481,138

35