CHAPTER FIVE

Estimating Project
Times and Costs

Copyright © 2017 McGraw-Hill Education.

All Rights Reserved.
Where We Are Now

5–2
 Chapter Outline

5.1 Factors Influencing the Quality of Estimates

5.2 Estimating Guidelines for Times, Costs, and Resources
5.3 Top-Down versus Bottom-Up Estimating
5.4 Methods for Estimating Project Times and Costs
5.5 Level of Detail
5.6 Types of Costs
5.7 Refining Estimates
5.8 Creating a Database for Estimating
5.9 Mega Projects: A Special Case

5–3
 Learning Objectives

1. Understand estimating project times and costs are the

foundation for project planning and control
2. Describe guidelines for estimating time, cost, and resources
3. Describe the methods, uses, and advantages and disadvantages
of top-down and bottom-up estimating methods
4. Distinguish different kinds of costs associated with a project
5. Suggest a scheme for developing an estimating database for
future projects
6. Understand the challenge of estimating mega projects and
describe steps that lead to better informed decisions
7. Define a “white elephant” in project management and provide
examples

5–4
 Introduction

• We now have a Project Scope Baseline, it is time to start

Planning
• Initial focus is on estimating, the process of forecasting or
approximating the time and cost of completing project
deliverables
– Requires resources, quantities, when needed, & costs
– Must have a scope baseline to begin estimating (Project Scope
Statement, WBS, and WBS Dictionary)
• Given the urgency to start work, managers sometimes
minimize or avoid the effort to estimate project time and cost
– However, reliable cost, time, and budget estimates are the lifeline for
control
– They serve as the standard for comparison of actual and plan
performance throughout the life of the project

5–5
 Developing a Project Budget

• Three major elements of estimating

– Forecast what will be needed to complete each
work package
• Labor and material
– How much will it cost?
– When will it be needed?
• This gives us the estimate
• Estimates are approved by management,
then baselined to become budgets
• Thus, the budget reflects the project plan,
time-phased, in dollars

Estimating is the major activity during Interim Deliveries 2 and 3

Estimating is the major activity during Interim Deliveries 2 and 3
5–6
 Why Budgeting for Projects is Tougher

• By definition, projects are unique, non-recurring efforts

• So there’s often little history, little tradition to rely on
• Further, projects can last for years
– More uncertainty, more risk
• Why is estimating time and cost important?
– Time and cost estimates are major inputs to project planning
– Project control is completely dependent on accuracy of estimates
– Estimates are needed to support good decisions
– Estimates are used to determine project duration and cost
– Estimates are used to develop cash flow needs
– Estimates are used to develop time-phased budgets and establish the project baseline
– Absence of estimates results in inaccuracies which result in time and cost
under/overruns
– The activity of estimating reduces error
 Estimating Activity Durations: Inputs

• Project Documents
– Activity attributes
– Activity list
– Assumption log
– Lessons learned register
– Milestone list
– Project team assignments
– Resource breakdown structure, calendars, requirements
– Risk register
• Enterprise Environmental Factors
– Duration estimating databases, productivity metrics, published commercial
information, and team member location
• Organizational Process Assets
– Historical duration information, project calendars, estimating policies and procedures,
scheduling methodology, lessons learned repository

5–8
 Estimating Project Costs: Inputs

• Cost Management Plan

• Human Resource Management Plan
• Scope Baseline
– Project Scope Statement
– WBS
– WBS dictionary
• Project schedule
• Risk register
• Enterprise Environmental Factors
– Market conditions
– Published commercial information
• Organizational Process Assets
– Cost estimating policies
– Cost estimating templates
– Historical information, and
– Lessons learned
5–9
 Estimating Project Costs

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

5–10
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, don’t aggregate
6. Do not make allowances for contingencies
– But add a risk assessment to avoid surprises to stakeholders
– We add a risk assessment and Contingency Funds later

5–11
 Top-Down versus Bottom-Up Estimating
• Top-Down Estimates
– Usually derived from someone who uses experience and/or information to determine
project duration and total cost
– Sometimes made by top managers who have little knowledge of processes used to
complete the project
– Typically used in project conceptual phase, and depend on surrogate measures such as
weight, square feet, ratios
– Do not consider individual activity issues and problems
– Good for rough estimates and can help select and prioritize projects
• Bottom-Up Estimates
– Can serve as a check on cost elements in the WBS by rolling up work packages and
associated cost accounts to major deliverables at work package level
– Usually tied directly to the WBS and a work package
– Made by people familiar with task, which helps to gain buy-in on validity of estimate
– Use of several people should improve accuracy of estimate
– Preferred if time to estimate is available, estimating cost is reasonable, and accuracy is
important
– Overhead, contingency reserves, and profit have to be added in
5–12
 Top-Down versus Bottom-Up Estimating

Conditions for Preferring Top-Down or

Bottom-up Time and Cost Estimates

Top-down Bottom-up
Condition Estimates Estimates
Strategic decision making X
Cost and time important X
High uncertainty X
Internal, small project X
Fixed-price contract X
Customer wants details X
Unstable scope X

5–13
 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 (eliminate the padding and establish a management
reserve for contingencies—discussed in Chapter 7)

5–14
 Top-Down Approaches for Estimating Project Times and Costs

• Consensus methods*
– Delphi (nominal group technique)
– Expert opinion—very rough estimates
• Ratio (parametric estimating) methods*
• Apportion method
• Analogous estimating
• Function point methods for software and system projects
• Learning curves

5–15
Apportion Method of Allocating Project Costs Using the WBS

5–16
Simplified Basic Function Point Count Process
for a Prospective Project or Deliverable

5–17
Example: Function Point Count Method

5–18
 Pros and Cons of Top-Down Estimating

Advantages Disadvantages
– Quick, simple – Limited buy-in by junior
– Fair accuracy overall, managers
though individual – Senior managers views
elements may be in may be biased
error – Using data from
– Small tasks need not be dissimilar projects, or old
individually identified projects, can mislead

5–19
Bottom-Up Approaches for Estimating Project Times and Costs

• Template methods
• Parametric procedures applied to specific tasks
• Range estimates for
the WBS work packages
– Used when there is more uncertainty in the time required
– Beta and Triangular Distribution time estimates discussed later and in
more detail in Chapter 7
• Phase estimating: A hybrid
PMBOK calls this “Rolling Wave”

5–20
 Bottom-Up Work Package Costing

• Determine resource requirements & then costs for

each work package
– Fixed costs (e.g., materials—could be a variable cost, rent, utilities)
– Labor time by resource
– Labor rate
– Equipment time
– Equipment rate
– Overhead (easier to use loaded labor, material, and equipment rates)
– G&A

5–21
Range Estimating Template

5–22
 Entering Activity Times and Dependencies

We have hidden
We have hidden
the summary level
the summary level
tasks and entered
tasks and entered
activity durations
activity durations
and dependencies
and dependencies

5–23
Phase Estimating over Product Life Cycle

5–24
 Pros and Cons of Bottom-Up Estimating

Advantages Disadvantages
– More accurate, in – Overlooking a task can
detailed elements be a costly error
– The benefits of – Time-consuming to
participative prepare
management – Estimates can be (and
– Differences of opinion usually are) padded at
can be resolved every level
– Assumes each work
package is independent
when in fact, they may
be interdependent

5–25
 Behavioral Issues in Estimating

• Different perspectives, based on managerial

level
– Senior people tend to underestimate, junior
people tend to overestimate
– Lower levels tend to arbitrarily add reserves,
upper levels to arbitrarily delete them
• Bottom line: any system can be gamed
• So know what the games are . . .

5–26
Top-Down and Bottom-Up Estimates

5–27
 Level of Detail

• Level of detail is different for different levels of

management
• Level of detail in the WBS varies with the complexity
of the project
• Excessive detail is costly
– Fosters a focus on departmental outcomes
– Creates unproductive paperwork
• Insufficient detail is costly
– Lack of focus on goals
– Wasted effort on nonessential activities

5–28
 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
• Salary, rents, supplies, specialized machinery
• Again, better to use loaded rates in the Resource Sheet

• General and Administrative Overhead Costs

– Organization costs indirectly linked to a specific package
that are apportioned to the project
5–29
 Contract Bid Summary Costs

Direct costs $80,000

Direct overhead $20,000
Total direct costs $100,000
G&A overhead (20%) $20,000
Total costs $120,000
Profit (20%) $24,000
Total bid $144,000

5–30
 Three Views of Cost

• Committed Cost
—PM view of
costs
• Scheduled
Budget—
Comptroller
view of costs
• Actual Cost—
Treasurer or
Chief Financial
Officer

5–31
 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
– Overly optimistic
– Strategic misrepresentation
• Adjusting Estimates
– Time and cost estimates of specific activities are adjusted
as the risks, resources, and situation particulars become
more clearly defined
5–32
Estimating Database Templates

5–33
 Summary Guidelines for Work Package Estimating

• Time and resource estimates should be made by those most

familiar with the task
• Estimates should be based on “normal” conditions
• Time units employed should be consistent
• Work task estimates should be treated as independent
estimates and not influenced by other project tasks
• Contingencies should not be built into estimates. Top
management will have a contingency fund to use if necessary
• Remember, these are estimates. Errors and mistakes should
be allowed and not punished

5–34
 Why
Why Are
Are Time
Time and
and Cost
Cost Estimates
Estimates Important
Important to
to Project
Project Management?
Management?

• Estimates are key inputs to project planning & control

• Estimates support good decisions
• Estimates are used to determine project duration and cost
• Estimates are used to develop cash flow needs
• Estimates are used to develop time-phased budgets and
establish the project baseline
• Absence of estimates results in inaccuracies which result in
time and cost under/overruns

5–35
 Basis of Estimate Documentation

• Supporting documentation should provide a clear

and complete understanding of how the cost
estimate was derived
• Supporting detail may include:
– Documentation of the basis of the estimate (BOE)
– Documentation of all assumptions made
– Documentation of any known constraints
– Indication of the range of possible estimates
– Indication of the confidence level of the final estimate

5–36
 Mega Projects: A Special Case

• Mega Projects
– Are large-scale, complex ventures that typically cost $1
billion or more, take many years to complete, and involve
multiple private and public stakeholders
• High-speed rail lines, airports, healthcare reform, the Olympics,
development of new aircraft
– Often involve a double whammy
• Cost much more than expected but underdeliver on benefits they
were to provide
– Are sometimes called “White Elephants”
• Over budget, under value, high cost of maintaining (exceeds the
benefits received)

5–37
 Mega Projects Difficult to Estimate

• First, time horizon of 2-5 years to complete large, complex

projects makes it difficult to accurately forecast costs and
user needs
• Second, sheer complexity of these kinds of projects make it
difficult to accurately estimate all costs
• Third, severity of risks involved are significant
– When things go wrong, they go wrong is a big way
– While such conditions would suggest a very conservative estimate,
the opposite occurs
– Either blind enthusiasm or calculated deception is used to promote
an exaggerated case for project

5–38
 Three Steps of the Reference Class Forecasting (RCF) Process

• Select a reference class of projects similar to your

potential projects
• Collect and arrange outcome data as a distribution—
create a distribution of cost overruns as a percentage
of the original project estimate
• Use the distribution data to arrive at a realistic
forecast—compare original cost estimate for the
project with the reference class projects

5–39
 Benefits of RCF

• Outside empirical data mitigates human bias

• Political, strategic, and promoter forces have
difficulty ignoring outside RCF information
• Serves as a reality check for funding large projects
• Helps executives avoid unsound optimism
• Leads to improved accountability
• Provides basis for project contingency funds

5–40
 Key Terms

Apportionment Phase estimating

Bottom-up estimates Range estimating
Delphi method Ratio methods
Direct costs Reference class forecasting (RCF)
Function points Template method
Learning curves Time and cost databases
Overhead costs Top-down estimates
Padding estimates White elephant

5–41
 Review Questions

1. Why are accurate estimates critical to effective

project management?
2. How does the culture of the organization influence
the quality of the estimates?
3. What are the differences between bottom-up and
top-down estimating approaches? Under what
conditions would you prefer one over the other?
4. What are the major types of costs? Which costs
are controllable by the project manager?

5–42
 MS Project Tutorials

• Tutorial 5 discusses how to enter estimated duration

• Tutorial 6 discusses yellow sticky approach--network mapping
• Tutorial 7 discusses how to enter predecessor relationships
• Tutorial 8 discusses how to change the time scale on the
Gantt Chart view
• Tutorial 9 discusses how to format the Gantt Chart, to show
the Critical Path, and to display only the work packages
• Tutorial 10 discusses how to determine network sensitivity
using the number of critical paths, view the schedule table,
and review free and total slack
• Tutorial 11 discusses the differences between free and total
slack
• More on these later in your meeting with the VP Operations
5–43
Task Durations Entry

5–44
WBS with Predecessors

Use extreme caution in using

Use extreme caution in using
dependencies coupled with open
dependencies coupled with open
ended milestones—unexpected
ended milestones—unexpected
consequences and major problems
consequences and major problems
5–45
 The Task Information Dialogue Box

• Four types of dependencies

– Finish to start (default)
– Start to start
– Finish to finish
– Start to finish

• Normally not needed for your

project
– Might need it to set a to milestone
– Add a lag
– Generally where I find students
have created problems for
themselves
5–46
 The Task Information Dialogue Box

• Resources—two major approaches

– Assign number of teams
– May reduce duration
– Not necessarily more expensive
because time is shortened

• Resources—two major approaches

– Default is 100%--meaning one
resource * time * rate = estimated cost
– Used in your project
– More on this later

5–47
 The Task Information Dialogue Box

• Calendar Choices
– None defaults to Standard
– Standard
– Night Shift
– 24 hours
– Leave yours as none

• Constraint types
– As soon as possible (default)—leave this
alone for your project
– As late as possible (removes slack) Use extreme caution in using
– Start no earlier than Use extreme caution in using
dependencies coupled with the more
– Finish no earlier than dependencies coupled with the more
Start no later than “exotic” constraints—unexpected
–
“exotic” constraints—unexpected
– Finish no later than consequences and major problems
– Must start on
consequences and major problems
– Must finish on 5–48
WBS with Critical Path

5–49
 Gantt Schedule Table

You must add the ES and EF columns—they are not in default table
You must add the ES and EF columns—they are not in default table
5–50
Never, Never Extract the Network Diagram

5–51
 APPENDIX 5.1

Learning Curves
for Estimating

Copyright © 2017 McGraw-Hill Education.

All Rights Reserved.
 Learning Rate Considerations

• As output doubles, labor hours per unit decrease by a

fixed percentage
• For example, the first unit of output takes 1,000 hours,
and the learning rate is 80%
• Learning rates are Unit Labor hours required
for that unit
normally calculated
1 1000
by a Production
2 800
Engineer observing
4 640
actual learning
8 512
experience on
16 409.6
similar items
32 327.68
 Learning Curves

Tn = T1n r

where:
th
Tn = time required to complete the n unit
st
T1 = time required ot complete the 1 unit
r = log (learning rate/log(2)

5–54
 Learning Curves

Graphed on a
logarithmic scale, the
learning curve is a
straight line

With a linear scale, the learning curve starts with

steep declines and levels out as total production
increases

5–55
 Learning Curve Assumptions

The amount of time required to complete a task (or

unit of product) will be less each time the task is
attempted
• Assumes it is possible to improve the process

The unit time will decrease at a decreasing rate

• Over time it becomes more and more difficult to improve (diminishing

returns)

The reduction will follow a predictable pattern

• Learning is not a random process

5–56
 Learning Curves

• Learning curves can be developed from an arithmetic

tabulation, by logarithms, or some other curve-fitting
technique
• The improved performance can be thought of in two ways
– Time per unit – shows the decrease in time required for each
successive unit
– Output per time period – increase in number of units produced over a
fixed time period
• Calculating the learning curve is not part of this course—
however, we may need to calculate the learning rate

5–57
 Learning Curves

A 90% learning curve

Arithmetic Plot of Different Learning Curves
implies that each time
1.2000
cumulative production
70% doubles the labor cost
1.0000
80%
per unit is reduced by
Unit Time

90%

0.8000
10%

0.6000

0.4000

0.2000 Differences in learning

curves can have
0.0000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45
dramatic effects over
Unit Number time!

5–58
Data for an 80 Percent Learning Curve
 • Learning curves can be developed
from an arithmetic tabulation, by
logarithms, or some other curve-
fitting technique
• The improved performance can be
Learning Curves thought of in two ways
– Time per unit – shows the decrease in
time required for each successive unit
– Output per time period – increase in
number of units produced over a fixed
time period
• Calculating the learning curve is not
part of this course—however, we may
need to calculate the learning rate
 Learning Curves – Logarithmic Analysis

• The relationship between total number of units

produced and learning can be expressed
mathematically

Yx = Kxn
where:

x = unit number

Yx = Number of direct labor hours required to produce the xth unit

K = Number of direct labor hours required to produce the first unit

log b
n= where b = learning percentage
log 2
 Example 1: Learning Curves

180 From table 4A.5, with an 80%

Learning rate = = 0.80 improvement ratio unit 11 should take
225 between 0.4765 and 0.4493 times the
original time. Interpolate to obtain a
factor of 0.4629.

Y11 = Y1(0.4629) = 225(0.4629) = 104.15 Overick has been slightly overoptimistic

We only had times for Unit 1 and Unit 2
If we had actual times for 16 units we would calculate an average learning rate
(U2/U1 + U4/U2 + U8/U4 + U16/U8)/4 = Average Learning Rate 5–62
Example 1: Learning Curves

5–63
 Managerial Considerations

Individual learning and incentives

• Workers and organization must have adequate incentives to enhance

learning

Learning on new jobs versus old jobs

• The newer the job, the greater the improvements possible

Improvement comes from working smarter, not harder

• Better methods and support systems, not increased effort, are the
source of gains

Suggesting a learning rate leads to a built-in bias

• Learning rate becomes a goal instead of an independent phenomenon

5–64
 Managerial Considerations

Preproduction versus postproduction adjustments

• High levels of preproduction planning means early units will already incorporate
a significant amount of learning

Changes in indirect labor and supervision

• Changes to production conditions can influence the learning rate

Changes in purchasing practices, methods, and organizational

structure

• Significant adjustments to any of these factors can affect production rate

Contract phase-out

• As a contract nears completion learning curve may begin to turn upward

5–65
 Unit Learning Curve Tables

• When the learning percentage is known, tables can

be used to estimate labor hours for a specific unit
– Multiply the initial unit labor hours by the appropriate
value from the table

Example: With an 80%

learning rate, the eighth
unit should take 0.512
times the initial unit
time. If Y1 = 100,000, Y8
= 100,000(0.512) =
51,200

5–66
 Cumulative Learning Curve Tables

• When the learning percentage is known, tables can

be used to estimate labor hours for a series of units
– Multiply the cumulative labor hours by the appropriate
value from the table

Example: With an 80%

learning rate, the eight
units should take
5.3459 times the initial
unit time. If Y1 =
100,000, Y1 –Y8 =
100,000(5.3459) =
534,590

5–67
Learning Curves Unit Values

5–68
Learning Curves Cumulative Values

5–69
 Learning Curve Example 3

Boeing Aircraft collected the following cost data on the first eight units of
their new business jet.

a. Estimate the learning curve for the new business jet.

First, estimate the learning curve rate by calculating the average learning rate with each
doubling of production.
83
Units 1 to 2 = = 83%
100
62
Units 2 to 4 = = 74.7%
83
51
Units 4 to 8 = = 82.3%
62
Avg (83 + 74.7 + 82.3) = 80%

5–70
 Learning Curve Example 3

b. Estimate the average cost of the first 1,000 units of the jet.
The average cost of the first 1,000 units can be estimated using the cumulative
values table. The cumulative improvement factor for the 1,000th units at 80% is
158.7. The cost to produce the first 1,000 units is:
$100M * 158.7 = $15,870M for 1,000 jets
$15,870M
= $15.87M each
1,000

c. Estimate the cost to produce the 1,000th jet

To estimate the cost to produce the 1,000th jet we use the unit values table. The
unit improvement factor for the 1,000th unit at 80% is 0.1082. The cost to
product the 1,000th jet is:
$100M * .1082 = $10.82M

5–71
 Learning Curve Example 4

• Firm has a project to produce 21 units of left handed

widgets
• Firm’s typical learning rate is 85%
• First unit produced (prototype) required 43 hours
• Labor cost is $27 per hour average
• Overhead cost is 75% of direct labor cost ($20.25)
• Material cost is $187 per unit
• Pricing policy is 3 times total cost minus G&A
• What is price?

5–72
 Learning Curve Example 4

• Table 5.2 (interpolate between 20 and 22 units)

• T1-21 = 12.89 * 43
T =T n
n 1
r
• T1-21 = 554.27 hrs
• 554.27 * $27 = $14,965.29 labor
• 554.27 * $20.25 = $11,223.97 overhead
• 21 * $187 = $3,927 material
• 14,965.29 + 11,223.97 + 3,927 = $30,116.26
• 30,116.26 * 3 = $90,348.78
• 90,348.78 / 21 = $4,302.32
• Increasing the quantity will continue to reduce price
• Do learning curves help justify volume discounts?
5–73
 Learning Curve Example 4 Cost of 21st Unit

• Table 5.1 (interpolate between 20 and 22 units)

• T21 = .4899 * 43
T =T n
n 1
r
• T21 = 21.0657 hrs
• 21.0657 * $27 = $568.77 labor
• 21.0657 * $20.25 = $426.58 overhead
• 1 * $187 = $187 material
• $568.77 + 426.58 + 187 = $1,182.35

5–74
 Example 5

It takes 120 labor hours to produce the 1st unit of a

new product (the prototype). The company expects
an 85% learning rate. How long should it take to
produce the 8th unit?
a. Doubling the units method?
b. Learning curve table method?

Y1 = 120
LR = 0.85
n=8

5–75
Example 5: Doubling Units vs. Learning Curve Table

Y8 = 120(.6141) = 73.692 hours

Y1-8 = 120(5.9358) = 712.296 hours

5–76
 Example 5: Pricing

• Suppose the labor cost rate is $17.00 per hour and

company policy is to charge a customer 3 times the
labor cost for a job. What should the price be for
the first 8 units?

Y1-8 = 120(5.9358) = 712.296 hours

Price = 712.296($17)(3) = $36,327.10
$36,327.10
Unit Price = = $4,540.89
8

5–77
 Example 5: Pricing Second Lot

Suppose the company just finished the 1st 8 units and

the customer wants to know how much they would be
charged per unit for an additional 5 units?
Y1-8 = 120(5.9358) = 712.296 hours
Y1-13 = 120(8.7925) = 1,055.1 hours
Y9-13 = 1,055.1 - 712.296 = 342.804

Price = 342.804($17)(3) = $17,483.00

$17,483.00
Unit Price Y9-13 = = $3,496.60
5
vs. Unit Price Y1-8 = $4,540.89
5–78
 Solved Problem 1

A job applicant is being tested for an assembly-line position. Management

feels that steady-state times have been approximately reached after 1,000
performances. Regular assembly-line workers are expected to perform the
task within four minutes.
– If the job applicant performed the first test operation in 10 minutes and the second one
in 9 minutes, should this applicant be hired?
9 minutes
LR = = 90%
10 minutes
Yx = Kxn
Y1000 = 10 * 0.3499 = 3.499 minutes
Hire him!

Yx = Kxn
Y10 = is10the
– What * 0.7047 = 7.047 minutes
expected time that the job applicant would take to finish the 10th unit?
 Solved Problem 2

Boeing Aircraft collected the following cost data on the first eight units of
their new business jet.

a. Estimate the learning curve for the new business jet.

First, estimate the learning curve rate by calculating the average learning rate with each
doubling of production.
83
Units 1 to 2 = = 83%
100
62
Units 2 to 4 = = 74.7%
83
51
Units 4 to 8 = = 82.3%
62
Avg (83 + 74.7 + 82.3) = 80%
 Solved Problem 2

b. Estimate the average cost of the first 1,000 units of the jet.
The average cost of the first 1,000 units can be estimated using the cumulative values
table. The cumulative improvement factor for the 1,000th units at 80% is 158.7. The cost to
produce the first 1,000 units is:
$100M * 158.7 = $15,870M for 1,000 jets
$15,870M
= $15.87M each
1,000

c. Estimate the cost to produce the 1,000th jet

To estimate the cost to produce the 1,000th jet we use the unit values table. The unit
improvement factor for the 1,000th unit at 80% is 0.1082. The cost to product the 1,000th
jet is:

$100M * .1082 = $10.82M

 Summary

• A learning curve maps the relationship between unit production time

and the cumulative number of units produced
• These curves are useful for estimating the time required to produce a
product and to estimate cost
• The fundamental idea is that as output doubles, there is a fixed
percentage reduction in the time needed to produce each unit
• Learning curves can be analyzed using graphs or by mathematically
using the learning curve equations
• Most common calculations are made to estimate the time to make a
particular unit in the future
– Also the cumulative time to make a number of units in the future
• Expected organizational learning rates differ depending on the industry