You are on page 1of 40

Business Project Management

MGT 172
Chapter 5:
Estimating Project Times and Cost

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 1

Class Roadmap

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 2

Stakeholder Communications

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Project Communication Plan


Maps out the flow of information on the project
Addresses the following:

What information needs to be collected?


Who will receive information?
What information methods will be used?
What are the access restrictions?
When will information be communicated?
How will information be communicated?

Stakeholder
Analysis

Slide 4

Information
Needs

Sources of
Information

Dissemination
Modes

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Responsibility
and Timing

Information Needs
Project status reports
Deliverable issues
Changes in scope
Team status meetings
Gating decisions
Accepted request changes
Action items
Milestone reports

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Communication
Project
Communication PlanPlan:
Example

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 6

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
This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 7

Why Are Good Estimates Important?

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 8

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
This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 9

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


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

10

Six Keys to Estimating


1. Break it down
2. Simplify the math
3. Verify the digits
4. Sanity check
5. Tell the story
6. Deal with the challenges
UCSD MGT 172 - Business Project Management
This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

11

Digit Sum Check (or Casting Out Nines)


Example:
413
413
413 xx 547
547
547 =
=
=225,911
225,911
225,911
Sum the digits of the answer:
2+2+5+9+1+1=
Add digits of the sum to get to one number:
2+0=

20
2

Sum the digits of the original problem:


4+1+3=
5+4+7=
Add digits of the sum to get to one number:
1+6=
Multiply the reduced numbers:
8x7=
Reduce the product:
5+6=
Add digits of the sum to get to one number:
1+1=

8
16
7
56
11
2

Reduced numbers should match: 2 = 2


UCSD MGT 172 - Business Project Management
This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

12

Factors Influencing the Quality of Estimates


Planning
Planning
Horizon
Horizon
Other
Other(Nonproject)
(Nonproject)
Factors
Factors

Project
Project
Duration
Duration

Quality
Qualityof
of
Estimates
Estimates

Organization
Organization
Culture
Culture

Padding
Padding
Estimates
Estimates

People
People

Project
ProjectStructure
Structure
and
andOrganization
Organization

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 13

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


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 14

Top-Down vs. Bottoms Up 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


UCSD MGT 172 - Business Project Management
This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 15

Questions
When is the Top-Down approach appropriate?
When is the Bottoms Up approach appropriate?

Condition

Top-Down Estimates

Strategic decision making

High uncertainty

Internal, small project

Unstable scope

Bottoms Up Estimates

Fixed-price contract

Customer wants details

Cost and time important

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 16

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


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 17

Methods for Estimating Project


Times and Costs
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


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 18

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
This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 19

Estimating the Work (Bottoms 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


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 20

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


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 21

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


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 22

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


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 23

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


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 24

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


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 25

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


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 26

Range Estimating
Used when there is significant uncertainty
associated with the time or cost to complete
Range Estimating Durations Example
Aggressive = 5 days
Most likely = 7 days
Conservative = 10 days

Typically, the most likely estimate is used in the


schedule development process
Example: It will cost between $30,000 and $40,000 to
complete and take between 2 and 3 months
UCSD MGT 172 - Business Project Management
This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 27

Range Estimating Example

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Completed BOE Example

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 29

Phase Estimating over Product Life Cycle

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Top-Down and Bottom-Up Estimates

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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
This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 32

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
This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 33

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


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 34

Types of Costs
Direct Costs
Costs that are clearly chargeable to a specific work package
Labor, materials, equipment, and other direct costs (ODCs)

[Direct] Project Overhead Costs


Costs incurred that are directly tied to an identifiable project
Temporary rental space for a project team, laboratories, equipment

Ratio of dollar value of resources used (e.g. labor, materials, etc.)

General and Administrative Overhead Costs


Organization costs not directly linked to a specific project that are
apportioned to the project and shared by other projects
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
This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 35

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
This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 36

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
This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 37

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


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 38

Creating a Database for Estimating

Estimating
Database
Templates
FIGURE 5.7
UCSD MGT 172 - Business Project Management
This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 39

Homework for Next Session


Read Chapter 6
Use the Work Breakdown Structure defined in Exercise #1
Creating a Project Network on page 171 to create a project
network.

Draw the network using the Activity-on-Node (AON) method


Write the activity name in each box
Draw arrows to represent the relationships between the activities
Arrange the network so that it is legible
Apply the guidance provided in the Note and Hint on page 171

DO NOT USE THE YELLOW STICKY APPROACH DEFINED


IN THE BOOK.

April 22, 2010

UCSD MGT 172 - Business Project Management


This information may not be used or reproduced without prior written approval of the authors.
Some Content Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Slide 40