PCM642 Topic 4

PROJECT COST MANAGEMENT 642

PCM 642 Topic 4

Cost Estimating

COST ESTIMATING - INTRODUCTION

LECTURE OVERVIEW

PCM 642 Topic 4

Cost Estimating

Definition
Purpose
Categorising
Estimates

for project management

of effort
Quality of an estimate
Components
Inputs and sources
Outputs
Level

PCM 642 Topic 4

Cost Estimating

DEFINITION

Project cost management comprises:

Resource

Planning,

Cost

Estimating,

Cost

Budgeting,

Cost

Control .

PCM642 Topic 4

PCM 642 Topic 4

Cost Estimating

DEFINITION
Definition (contd)

PMI:

developing an approximation (estimate) of the

costs of the resources needed to complete
project activities ... it involves developing an
assessmentt off the
th likely
lik l quantitative
tit ti result
lt

AACE:

compilation of all the costs of the

elements of a project or effort included
within an agreed-upon scope

COST ESTIMATING

PCM 642 Topic 4

Cost Estimating

now answer Class exercises: Question 1

PURPOSES FOR COST ESTIMATES

PCM 642 Topic 4

Cost Estimating

Economic Evaluation

Help determine whether project is economically viable

Budgeting & Cost Control

Budgeting and consequent cost control of the project

Time Estimating
g

Estimate related to resource availability & estimate

duration

Funding Approval

Estimate will indicate funding needs

Comparing Alternatives

Cost evaluation between alternatives.eg.design

solutions.

PCM642 Topic 4

PURPOSES (CONTD)

PCM 642 Topic 4

Cost Estimating

Costing Scope Changes

Determine costs of scope changes on projects.

Costing Legal Claims

Estimates involved in claims & agreeing settlement

T d i
Tendering

Client procures service/product from external

organsation:
Contractor

Estimate prepared to formulate tender

Client

Estimate as benchmark to measure competitiveness of

contractor's bid .

CATEGORISING ESTIMATES

PCM 642 Topic 4

Cost Estimating

BENEFITS
Standardises basis of estimate:

Levell off information

f
available
l l to produce
d
estimate

The type of data that should be used

The level of expected accuracy

CATEGORISING ESTIMATES

PCM 642 Topic 4

Cost Estimating

Projects can be classified according to the following:

Degree of project definition

extent and type of input information available for estimating

eg. For feasibility studies, funding authorisation, budgets

End usage of the estimate

Estimating methodology

Accuracy range

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

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) .

PCM642 Topic 4

PCM 642 Topic 4

Cost Estimating

TYPES OF ESTIMATES
Class

Level of
Project
Definition

0 2%

4
3
2
1

Typical
purpose of
estimate

Typical
estimating
method

Screening or Stochastic or
Feasibility
Judgement
1 5%
Concept study
Primarily
or Feasibility
Stochastic
10 40%
Budget,
Mixed, but
Authorisation,
primarily
or Control
stochastic
30 60%
Control or
Primarily
Tender
deterministic
50 - 100%
Check
Deterministic
Estimate or
Tender

Accuracy Effort
relative relative
to Class 1 to Class
5
10 to 20
1
5 to 10

2 to 4

3 to 6

3 to 10

2 to 3

5 to 20

10 to
100

PROJECT MANAGEMENT ESTIMATES

PCM 642 Topic 4

Cost Estimating

In construction projects;
Project
stageCost
AIQSmanagement
Cost planning
AIQS
Cost
AIQS
Manual
stage

Common name
of
specifies
types:

Brief stage
cost

costing

Inception

A Brief

Development

B Outline proposals Outline

proposals cost

Indicative cost
Preliminary estimate

C Sketch design

Sketch design
cost plan

Limit of cost
estimate

D - Documentation

Tender
Tender estimate
document cost
plan

PROJECT MANAGEMENT ESTIMATES

PCM 642 Topic 4

Cost Estimating

For project management;

No

specific type dictated

However,,

generally
g
y accordingg to level

of project definition

Suits PM as it mirrors PLC

Type of estimate changes with greater
detail

PCM642 Topic 4

ORDER-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 .

BUDGET ESTIMATES

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.

DEFINITIVE ESTIMATES

PCM 642 Topic 4

Cost Estimating

Characteristics

PCM 642 Topic 4

Cost Estimating

Characteristics

PCM 642 Topic 4

Cost Estimating

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
typically
ll deterministic,
d
b
bottom-up
estimating

Can be used for:

bid, bid evaluation, contract changes, legal claims .

PCM642 Topic 4

PCM 642 Topic 4

Cost Estimating

LEVEL 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 problem

Participants
P
i i
then
h
k
know
expected
d level
l
l of
f effort
ff
f
for
types of estimate
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

Cost of preparing estimates (Humphreys and English)

PCM 642 Topic 4

Cost Estimating

LEVEL OF EFFORT

Pm must also watch overspending on effort

For internal projects it is not worthwhile
producing an estimate more accurate than the
control estimate,
estimate because it costs more to
produce than the value of the data
Turner (1993)

Read Turners (1993) example on the Tutorial sheet

ESTIMATING

PCM 642 Topic 4

Cost Estimating

now
now answer Class exercises: Question 2

PCM642 Topic 4

QUALITY OF AN ESTIMATE

PCM 642 Topic 4

Cost Estimating

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,
evaluating, using and recording all relevant information available
Accuracy
Accuracy = freedom from error
Precision
= how many significant digits we use in calculations
precise figure can still be inaccurate if error is made
.

COST COMPONENTS

PCM 642 Topic 4

Cost Estimating

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 pperformed byy external firm.
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

ESTIMATING - TYPES OF COSTS

2 costs - usually calculated separately

within an estimate.

Direct costs

PCM 642 Topic 4

Cost Estimating

Costs readily traceable to the project .

I di t costs
Indirect
t

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) .

PCM642 Topic 4

PCM 642 Topic 4

Cost Estimating

ESTIMATING

now answer Class exercises:

Questions 3 and 4

ESTIMATING INPUTS

PCM 642 Topic 4

Cost Estimating

Project Documents

eg: scope statement, specification, drawings,

contract.

Work Breakdown Structure (WBS)

WBS identifies project elements. Each can have a

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

ESTIMATING INPUTS

PCM 642 Topic 4

Cost Estimating

Organisational Policies

eg., preferred estimating methods, resource

costs, rent or buy

Project team skills and knowledge

eg
g project
p j
team,, consultants,,
subcontractors, suppliers .

Resource Breakdown Structure

RBS advocated by Rad (2002) provides

standard costs for organisational resources

PCM642 Topic 4

SOURCES OF DATA

PCM 642 Topic 4

Cost Estimating

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,
literature tech lit,
lit textbooks
Company historical data, standard costs
Computer systems
Government figures

PLUSPMs experience

(See NASA website for cost estimating)

ESTIMATING - OUTPUTS

PCM 642 Topic 4

Cost Estimating

Cost Estimate

generally expressed in $ but may be in other units.

e.g. hours

Supporting Detail

estimate should describe scope

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 .

ESTIMATING

PCM 642 Topic 4

Cost Estimating

now answer Class exercises: Question 5

PCM642 Topic 4

PCM 642 Topic 4

Cost Estimating

ETHICS

Ethics:
Fudge estimates !! (Bent & Humphreys
, 1996)
manipulate
man pu a to suit
u a particular
par u ar purpose
purp

Living with consequences of manipulation

may be far worse than giving a realistic
cost estimate

Estimates used as political tool!

ESTIMATING - SUMMARY

PCM 642 Topic 4

Cost Estimating

The

estimate can only ever be as

good as the estimators skill and
experience will allow and the
relevance and accuracy of the
information on which it is based
(Lindsay Castell, 2010!!)

ESTIMATING - SUMMARY

PCM 642 Topic 4

Cost Estimating

End of topic

10