Transcript pptx - jimakers.com

Chapter 8
1
1.
2.
3.
4.
5.
6.
7.
8.
Understand the various types of common project costs.
Recognize the difference between various forms of project costs.
Apply common forms of cost estimation for project work,
including ballpark estimates and definitive estimates.
Understand the advantages of parametric cost estimation and the
application of learning curve models in cost estimation.
Discern the various reasons why project cost estimation is often
done poorly.
Apply both top-down and bottom-up budgeting procedures for
cost management.
Understand the uses of activity-based budgeting and time-phased
budgets for cost estimation and control.
Recognize the appropriateness of applying contingency funds for
cost estimation.
2
From PMBOK Guide
2004
3



Cost management has been defined to
encompass data collection, cost accounting,
and cost control.
Cost accounting and cost control serve as
the chief mechanisms for identifying and
maintaining control over project costs.
Cost estimation processes create a
reasonable budget baseline for the project.
4



Involves taking financial report information
and applying it to projects
Creates an accountability to maintain a clear
sense of money management
Encompasses data collection, cost accounting
and cost control
Cost a.k.a expenses
5

Labor
◦ Total cost associated with the hiring and paying of
various personnel

Materials
◦ Supplies needed during project execution

Subcontractors
◦ Cost for subcontracted labor and services


Equipment & facilities
Travel
6

Direct vs. Indirect

Recurring (RE) vs. Nonrecurring (NRE)

Fixed vs. Variable

Normal vs. Expedited
◦ Direct cost are clearly assigned to a specific aspect of the project
◦ Indirect cost are overhead cost of the project including general
administration
◦ Recurring are ongoing expenses (i.e. labor)
◦ Nonrecurring are typically a onetime expense (i.e. training)
◦ Fixed cost are cost that do not change based on volume
usage (i.e. rental rate on a copy machine)
◦ Variable cost do change based on usage (i.e. paper for the
copy machine)
◦ Normal are expected as part of the routine process
◦ Expedited are unplanned cost to speed up the project
execution
7
Name
Hours
Needed
Overhead
Charge
Personal
Time Rate
Hourly
Rate
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.
1,612.80
X
Total Direct Labor Cost =
X
X
Total Direct
Labor Cost
$7,382.34
8
Building Lease
X
Expedite
X
Material
X
X
X
X
X
X
X
X
X
X
X
Expedited
Normal
Variable
Fixed
Non-recurring
X
Recurring
Direct
Direct Labor
Indirect
Costs Examples
X
X
Other project cost?
9




The first step in determining if a project can
be done profitably
Creates a reasonable budget baseline
Identifies needed resources
Creates a time based budget for the needed
resources
10



The more clearly you can define the projects’
cost categories in the beginning, the less
need there is for estimation
It is best to cost out each work package
individually, rather than creating an overall
project cost
Methods of cost estimation
◦
◦
◦
◦
Ballpark - gueestimate ±30% accuracy
Comparative – based on history ±15% accuracy
Feasibility – based on standard tables ±10% accuracy
Definitive – once uncertainty is removed ±5% accuracy
When should each of these be used?
11

Cost estimating typically assumes a steady
rate at which work is done
◦ Time activity 1 = Time activity 2 = Time activity n



Experience teaches us that repetition of
activities often leads to a reduction of needed
time to complete a future task
Research shows that performance improves
by a constant fixed percentage each time
production doubles
Ultimately, project budgets must be adjusted
since learning curves are likely to occur
12
Each doubling of output results in a reduction
in time to perform the last iteration.
Yx  aX b
Where :
Yx = 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)
13

Your customers
expect
deflationary
pricing
14

Example 1
◦ Assume you are a project cost engineer calculating the cost of a repetitive
activity for your project.
◦ The initial output time for the first unit produced is 12 hours and the
second unit is 10 hours.
◦ There are a total of 20 iterations of this activity required for the project.
◦ Determine learning rate and the steady state rate.
10
learningrate 
 .83333
12
Yx  aX b  12  20

 10 
log 
 12 
log  2 
 12  20
.07918
.30103
 12  .45476 5.457
Example 2
◦ Problem 7 page 270
See learning curve example.xls
15
In spite of the best laid plans, various issues
can affect accurate project estimates





Low initial estimates
Unexpected technical difficulties
Lack of project scope definition
Specification changes
External factors
16
WBS
Project
Plan
Scheduling
Budgeting
The budget, is a plan
that identifies the
resources, goals,
and schedule that
allows a firm to
achieve those goals.
 Top-down
 Bottom-up
 Activity-based costing (ABC)
17




An approach that seeks to get top management
input first to create an overall project cost
Cost allowances are passed down level-by-level,
broken into allocated pieces for each task
Advantage: History shows that top management
typically estimates pretty well and causes good
budgetary discipline and cost control
Disadvantage: All successive levels need to fit
their expenses within the allowable spend
already chosen
Aggregate level of safety factor
18




Starts with the WBS to apply direct and
indirect cost to specific project activities
Cost allowances are aggregated level-bylevel, until a total project budget is
determined
Advantage: Emphasizes the need to create
detailed project plans to be able to acquire
necessary resources
Disadvantage: Reduces top management
control to an oversight function
Safety factor at each detailed step
19
A budgeting method that assigns cost first to
activities and then to the project based on each
project’s use of the resources.
1. Assign costs to activities that use resources
2. Identify cost drivers associated with this activity
(i.e. material, labor)
3. Compute a cost rate per cost driver unit or
transaction (i.e. labor rate/hour)
4. Multiply the cost driver rate times the volume of
cost driver units used by the project (the more a
resource is used, the more it drives cost)
20
Activity
Direct Cost
Budget Overhead
Total Cost
Survey
3,500
500
4,000
Design
7,000
1,000
8,000
Clear Site
3,500
500
4,000
Foundation
6,750
750
7,500
Framing
8,000
2,000
10,000
Plumb & Wire
3,750
1,250
5,000
Cumulative
38,500
21
Months
Activity
Survey
January
February
March
April
May
4,000
Total by
Activity
4,000
Design
5,000
Clear Site
4,000
Foundation
3,000
8,000
4,000
7,500
7,500
Framing
8,000
2,000
10,000
Plumb & Wire
1,000
4,000
5,000
Monthly Planned
4,000
9,000
10,500
9,000
6,000
Cumulative
4,000
13,000
23,500
32,500
38,500
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Jan
Feb
Mar
Apr
May
38,500
22
Activity
Planned Actual
Variance
Survey
4,000
4,250
250
Design
8,000
8,000
0
Clear Site
4,000
3,500
(500)
Foundation
7,500
8,500
1,000
10,000
11,250
1,250
5,000
5,150
150
38,500 40,650
2,150
Framing
Plumb & Wire
Total
23
The allocation of extra funds to cover uncertainties
and improve the chance of finishing on time.
(safety factor)




Contingencies are needed because
Project scope may change
Murphy’s Law is always present
Cost estimation must anticipate task interaction costs
Normal conditions are rarely encountered
Access to these funds should serve as your first
warning of project troubles. Cost control needs to be
employed.
24
1. Describe an environment in which it would be common to bid for
contracts with low profit margins. What does this environment
suggest about the competition levels?
2. How has the global economy affected the importance of cost
estimation and cost control for many project organizations?
3. Why is cost estimation such an important component of project
planning? Discuss how it links together with the Work Breakdown
Structure and project schedule?
4. Imagine you were developing a software package for your
company’s intranet. Give examples of the various types of costs
(labor, materials, equipment and facilities, subcontractors, etc.) and
how they would apply to your project.
25
5. Give reasons both in favor of and against the use of personal time
charge as a cost estimate for a project activity.
6. Think of an example of parametric estimating in your personal
experience, such as the use of a cost multiplier based on a similar,
past cost. Did parametric estimating work or not? Discuss the
reasons why.
7. Put yourself in the position of a project customer. Would you
accept the cost adjustments associated with learning curve effects
or not? Under what circumstances would learning curve costs be
appropriately budgeted into a project?
8. Consider the common problems with project cost estimation and
recall a project with which you have been involved. Which of these
common problems did you encounter most often? Why?
26
9. Would you prefer the use of bottom-up or top-down budgeting for
project cost control? What are the advantages and disadvantages
with each approach?
10.Why do project teams create time-phased budgets? What are their
principle strengths?
11.Project contingency can be applied to projects for a variety of
reasons. List three of the key reasons why a project organization
should consider the application of budget contingency.
27