Week 4

Estimating Project Times and Costs

5–1
 CHAPTER FIVE

Estimating Project
Times and Costs

Copyright © 2014 McGraw-Hill Education.

All Rights Reserved.

PowerPoint Presentation by Charlie Cook

Where We Are Now

5–3
 Estimating Projects
• Estimating
– The process of forecasting or approximating the time and
cost of completing project deliverables.
– Estimating process can be top down and bottom up.
– Top down estimate are done by senior management.
– Bottom up are typically performed by people who are
doing the work.
– The task of balancing expectations of stakeholders and
need for control while the project is implemented.
– Inaccurate estimates lead to false expectations and
consumer dissatisfaction.

5–4
 Why Estimating Time and Cost Are Important

• To support good decisions.

• To schedule work.
• To determine how long the project should take
and its cost.
• To determine whether the project is worth doing.
• To develop cash flow needs.
• To determine how well the project is progressing.
• To develop time-phased budgets and establish the
project baseline.

EXHIBIT 5.1

5–5
 Factors Influencing the Quality of Estimates
-Current vs distant event
-Conceptual phase vs defined work packages
-Project duration

-equipment down time

-national holidays, vacations, legal Planning Horizon -new technology usage
-project priority

Other
Project
(Nonproject)
Complexity
Factors
-skill of people

Quality of making the estimate

Organization Estimates People

Culture

-padding estimate vs
accurate estimate

Padding Project Structure -dedicated team with

higher speed
Estimates and Organization -matrix environment
team with lower cost
by personnel sharing
but longer time
-reduce risk but increase time and
cost
-pad the estimate to 10%-20% or
more 5–6
 Estimating Guidelines for Times,
Costs, and Resources
-experience and judgment

-to avoid surprises to stakeholders

Use people
-crowd sourcing
-new technology carries more time familiar with -consensus to eliminate
and cost risks than a proven process extreme estimate errors
the tasks
Include a risk Use several
assessment people to make
estimates
-such as 8 hours
Preparing workday and two shifts

Make no Initial
Assume normal
allowance for Estimates conditions
contingencies
-based on normal or
average conditions
-workdays, workweeks,
hours, minutes etc.
Assume tasks Use consistent
are independent time units

5–7
 Top-Down versus Bottom-Up Estimating
• Top-Down Estimates
– Are usually derived from someone who uses experience
and/or information to determine the project duration and
total cost.
– Are made by top managers who have little knowledge of
the processes used to complete the project.

• Bottom-Up Approach
– Can serve as a check on cost elements in the WBS
by rolling up the work packages and associated cost
accounts to major deliverables at the work package
level.

5–8
 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

TABLE 5.1

5–9
 Top-Down Approaches for Estimating
Project Times and Costs

(1) Consensus methods

• Pooled experience of senior and/or
middle managers to estimate the total
project duration and cost.
• Typically involves a meeting where experts
discuss, argue and get the best guess
estimate.
• Use Delphi Method to make macro
estimate. Delphi Method is a group
decision process about likelihood that
certain events will occur.

5–10
 Top-Down Approaches for Estimating
Project Times and Costs

(1) Consensus methods

• Delphi Method makes use of a panel of experts familiar with the
kind of project in question.
• Their responses to estimate questionnaires are anonymous and
they are provided with a summary of points.
• Experts are encouraged to reconsider and if appropriate to
change their previous estimate in light of the replies of other experts.
• After two or three rounds, the group will converge toward the best
response through this consensus process.
• The midpoint of responses is statistically categorized by the
median score. The range of responses by the panelists will
presumably decrease and the median will move toward the correct
estimate. 5–11
 Top-Down Approaches for Estimating
Project Times and Costs

(2) Ratio methods

• Used in the concept or “need” phase of a
project to get an initial duration and cost
estimate.
• For example, contractors use number of
square foot to estimate the cost and time
to build a house, that is a house of 2700 sf
might cost RM160 psf (2700sf x RM160 =
RM 432,000).
• Knowing the sf and RM psf, experience
suggests it should take about 100 days to
complete.

5–12
 Top-Down Approaches for Estimating
Project Times and Costs

(3) Apportion methods

• Is used when projects closely follow
past projects in features and costs.
• Given good historical data, estimate
can be made quickly with little effort and
reasonable accuracy.
• Very common in projects that are
relatively standard but have some
small variation.
• The costs are apportioned as a
percentage of the total cost.

5–13
Apportion Method of Allocating Project Costs
Using the Work Breakdown Structure

FIGURE 5.1

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 Top-Down Approaches for Estimating
Project Times and Costs

(4) Function point methods for software

and system projects
• Use weighted macro variables called “function
points” or major parameters such as
number of inputs, number of outputs, number
of inquiries, number of data files, and number
of interfaces.
• These weighted variables are adjusted for a
complexity factor and added.
• The total adjust count provides the basis for
estimating the labor effort and cost for a
project.

5–15
Simplified Basic Function Point Count Process
for a Prospective Project or Deliverable

TABLE 5.2

TABLE 5.3

5–16
 Example: Function Point Count Method

(4) Function point methods for software and system

projects
• One person-month represents on an average five function
points.
• The job will require 132 person-months (660/5 = 132).
• Assume you have 10 programmers who can work on this task,
the duration will be about 13 months.
• The cost is derived by multiplying the labour rate per month
times 132 person-months.
• For example, if the monthly programmer rate is RM4000, then
the estimated cost will be RM528,000 (RM4000 x 132).
• The accuracy depends on adequate historical data,
currency of data, and relevancy of the project/deliverables
to past averages. 5–17
 Top-Down Approaches for Estimating
Project Times and Costs

(5) Learning curves

• Some projects require that the same task, groups of
tasks or products be repeated several times.
• Time to perform a task improves with repetition.
• This phenomenon is especially true of tasks are labour
intensive.
• In these circumstances the pattern of improvement
phenomenon can be used to predict the reduction in
time to perform the task.
• The pattern of this improvement has been quantified in
the learning curve (also known as improvement curve,
experience curve and industrial progress curve).
5–18
 Top-Down Approaches for Estimating
Project Times and Costs

(5) Learning curves

• The relationship: Each time the output
quantity doubles, the unit labour hours are
reduced a constant rate.
• In practice, improvement ratio may vary from
60%, representing very large improvement, to
100%, representing no improvement at all.
• Lower percentage of improvement can occur only
in operations with high labour content.

5–19
 Learning Curves for Estimating

• Assume that a manufacturer has a new contract for 16 prototype

units and a total of 800 labour hours were required for the first unit.
• Past experience has indicated that on similar types of units the
improvement rate was 80%.
• The relationship of improvement:
Unit Labour
Hour
1 800
2 800 x 0.8= 640
4 640 x 0.8= 512
8 512 x 0.8= 410
16 410 x 0.8= 328

• Using Table A5.1 unit values, similar labour hours per unit can be
determined.
5–20
 Learning Curves Unit Values

TABLE A5.1

• Looking across 16 unit level and down the 80% column, find a ratio
of 0.4096.
• By multiplying this ratio times the labour hours for the first unit, we
obtain 328 hours (0.4096 x 800 = 327.68). 5–21
 Learning Curves for Estimating

• The cumulative values in Table A5.2 provide factors for computing

the cumulative total labour hours of all units.
• For the first 16 units, the total labour hours required would be 7136
hours (800 x 8.920 = 7136 hours)
• By dividing the total cumulative hours by the unit number, the
average unit labour hours is 446 hours (7136 labour hours/16 units
= 446 hours per unit)
• The labour hours for the 16th unit (328 hours) differs from the
average for all 16 units (446 hours).
• Knowing the average labour costs and processing costs, we could
estimate the total prototype costs.

5–22
Learning Curves Cumulative Values

TABLE A5.2

5–23
 Bottom-Up Approaches for Estimating
Project Times and Costs

(1)Template methods
• If the project is similar to past projects, the costs
from past projects can be used as a starting
point for the new project.
• Differences in the new project can be noted and
past times and costs adjusted to reflect these
differences.
• For example, a ship repair dry-dock firm has a set
of standard repair project (i.e. templates for
overhaul, electrical and mechanical) that are used
as starting points for estimating the cost and
duration of any new project.

5–24
 Bottom-Up Approaches for Estimating
Project Times and Costs

(1)Template methods
• Differences from the appropriate standardized
project are noted (for times, costs and resources)
and changes are made.
• Able to develop potential schedule, estimate costs
and develop budget in a very short time span.
• Development of such templates in a database can
quickly reduce estimate errors.

5–25
 Bottom-Up Approaches for Estimating
Project Times and Costs

• (2) Parametric procedures applied to

specific tasks
• Parametric technique such as cost psf can be the
source of top down estimates, the same technique can
be applied to specific tasks.
• For example, 36 different workstations are needed to
be converted under MS Office conversion project. On
average, a technician can convert three workstations
per day. Therefore, the project needs three technicians
four days to complete [(36/3)/3= 4 days].

5–26
 Bottom-Up Approaches for Estimating
Project Times and Costs

• (2) Parametric procedures applied to

specific tasks
• Similarly, to estimate the wallpapering allowance on a
house model, the contractor figured a cost of RM5 psf
of wallpaper and RM2 psf to install it, for a total of
RM7.
• By measuring the length and height of all the walls, he
is able calculate the total area in sf and multiply it by
RM7.

5–27
 Bottom-Up Approaches for Estimating
Project Times and Costs

• (3) Range estimates for the WBS work

packages
• Works best when work packages have significant
uncertainty associated with time and or cost to
complete.
• Prudent policy to require three time estimates: low,
average and high.
• The low to high give a range within which average
estimate will fall.
• Determining the low and high estimates for the
activity is influenced by factors such as complexity,
technology, newness and familiarity.
5–28
 Bottom-Up Approaches for Estimating
Project Times and Costs

• (3) Range estimates for the WBS work

packages
• Use group estimating to refine extremes by bringing
more evaluative judgements to the estimate and
potential risks.
• Figure 5.2 shows an estimating template using three
time (low, average and high) estimates for work
packages.
• Risk level indicates the degree of confidence that
the actual time will be very close to the estimate.

5–29
Range Estimating Template

FIGURE 5.2

5–30
 Bottom-Up Approaches for Estimating
Project Times and Costs

• (3) Range estimates for the WBS work

packages
• Group range estimating gives the project manager and
owner an opportunity to assess the confidence
associated with project time and cost.
• It helps to reduce surprises as the project
progresses.
• It also provides a basis for assessing risk,
managing resources, and determining the project
contingency fund.

5–31
 Bottom-Up Approaches for Estimating
Project Times and Costs

• (4) Phase estimating: A hybrid

• Begins with a top down estimate and then
refines estimates for phases of project as it is
implemented.
• Found in projects of aerospace, IT, new technology
and construction where design is incomplete.
• Used when an unusual amount of uncertainty
surrounds a project and it is impractical to estimate
times and costs for the entire project.
• Uses two-estimate systems: a detailed estimate is
developed for the immediate phase and a macro
estimate is made for the remaining phases of the
project. 5–32
 Phase Estimating over Product Life Cycle

FIGURE 5.3

• When the project need is determined, a macro estimate of the project cost
and duration is made.
• Simultaneously, a detailed estimate is made for deriving the project
specifications and a macro estimate for the remainder of the project.
• As the specifications are solidified, a detailed estimate for design is made
and a macro estimate for the remainder of the project is computed.
• As the project progresses through its life cycle and more info is available,
the reliability of the estimates is improving.

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Top-Down and Bottom-Up Estimates

FIGURE 5.4

5–34
 Estimating Projects: Preferred Approach

• Make rough top-down estimates.

• Develop the Work Breakdown Structures
(WBS)/Organisation Breakdown Structure
(OBS).
• Make bottom-up estimates.
• Develop schedules and budgets.
• Reconcile differences between top-down
and bottom-up estimates.

5–35
 Level of Detail

• Level of detail is different for different levels of management.

• At any level, the detail should be no more than is necessary and
sufficient.
• Top management interests usually center on the total project and
major milestone events that mark major accomplishments.
• First-line managers’ interests may be limited to one task or work
package.
• Level of detail in the WBS varies with the complexity of the
project, the need to control, project size, cost, duration and
other factors.

5–36
 Level of Detail

• Excessive detail is costly.

– Fosters a focus on departmental outcomes instead of
deliverable outcomes
– Creates unproductive paperwork
• Insufficient detail is costly.
– Lack of focus on goals
– Wasted effort on nonessential activities

5–37
 Types of Costs
• Direct Costs
– Costs that are clearly chargeable
to a specific work package.
• Labour, 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

• General and Administrative Overhead Costs

– Organization costs indirectly linked to a specific
package that are apportioned to the project
• Advertising, accounting, senior management above the
project level.
5–38
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 FIGURE 5.5

5–39
 Three perceptions of cost

• The project manager can

commit cost months before the
resource is used.
• This info is useful to the financial
officer in forecasting future
cash outflows.
• The project manager is
interested in when the budgeted
cost is expected to occur, and
when the budgeted cost actually
is charged, respective timings
of these two cost figures are
used to measure project
schedule and cost variances. FIGURE 5.6

5–40
 Refining Estimates
• Reasons for Adjusting Estimates
– Interaction costs are hidden in estimates such as
coordinating meeting between different
department/people.
– Normal conditions do not apply as resources not
available.
– Things go wrong on projects due to accident or extreme
weather.
– Changes in project scope and plans.
• Adjusting Estimates
– Time and cost estimates of specific activities are adjusted
as the risks, resources, and situation particulars become
more clearly defined.
5–41
 Estimating Database Templates
• The best way to improve estimates is to collect and archive
data on past project estimates and actuals.
• Creating a estimating database (cost and time) is a “best
practice” among leading project management organisations.
• The database approach allows the project estimator to select
a specific work package item from the database for
inclusion.
• The estimator can make any necessary adjustments
concerning the materials, labour and equipment.
• Any items not found in the database can be added to the
project.
• Quality of the database estimates depends on the
experience of the estimators, but over the time the data
quality should improve.
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 Estimating Database Templates
• Such structured databases serves as feedback for estimators
and as benchmarks for cost and time for each project.
• Comparison of estimate and actual for different projects can
suggest the degree of risk inherent in estimates.

5–43
 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.
• Examples include high speed rail lines, airports, healthcare
reform, the Olympics, development of new aircraft and so forth.
• They all tend to go way over budget and fall behind schedule.
• Denver airport (Colorado, USA) that opened in 1995 had cost
overrun of 200% and was completed two years later than
planned.
• The “Chunnel”, the 31-mile plus tunnel that connects France
with England, was 80% over budget.
• Mega projects, not only they cost much more than expected,
but they under deliver on benefits they are to provide.

5–44
 Mega Projects: A special Case
• The Denver Airport realized only 55% of forecasted traffic
during its first year of operation.
• The Chunnel traffic revenues have been one half of what
was predicted with internal rate of return of -14.5%.
• Why does there appear to be consistent pattern of
overestimating benefits and underestimating cost?
• Besides the factors of the complexity and long time horizon,
most promoters use deception to promote projects not
for public good but for personal gain, political or
economic.
• On some mega projects, not only they are over budget and
under value, but the cost of maintaining them exceeds the
benefits received.
• These kinds of projects are called white elephants.
5–45
 Mega Projects: A special Case

• South Africa built six new world class stadiums for the 2010
FIFA World Cup.
• None of the post-World Cup revenue generated from these
stadiums exceeds their maintenance cost.
• Beijing National Stadium, Bird’s Nest, built at a cost of $480M
for the 2008 Olympic games, requires over $10M each year
to maintain and has no regular tenant.
• How to minimize the “White Elephants”?
5–46
 Mega Projects: A special Case
• Proposal should require a thorough review by impartial
observers who do not have vested interest in the mega
project.
• Some if not all financial risk should be absorbed by
promoters and those who benefit financially from the project.
• Sustainable business practices should be used and
maintenance costs be integrated into the forecasted
cost/benefit analyses of the project.

5–47
 London 2012 Olympics: Avoiding White Elephant Curse

• The infrastructure and many arenas were already in place

and the Olympics provided a necessary upgrade.
• They built temporary arenas for less popular sports.
– After the games, the water polo arena was deconstructed and materials
recycled.
– The 12000-seat basketball arena was designed to be portable so it
could be used in future Olympics.
• Scalability was another key consideration.
– 17000-seat aquatic center was downsized to a 2500-person capacity
after the Olympics and is now open to public.
5–48
 Example 1

Mrs. Tolstoy and her husband, Serge, are planning their dream
house. The lot for the house sits high on a hill with a beautiful
view of the Appalachian Mountains. The plans for the house
show the size of the house to be 2,900 square feet. The
average price for a lot and house similar to this one has been
$120 per square foot. Fortunately, Serge is a retired plumber
and feels he can save money by installing the plumbing
himself. Mrs. Tolstoy feels she can take care of the interior
decorating. 5–49
 Example 1
The following average cost information is available from a local
bank that makes loans to local contractors and disperses
progress payments to contractors when specific tasks are
verified as complete.
24 % Excavation and framing complete
8% Roof and fireplace complete
3% Wiring roughed in
6% Plumbing roughed in
5% Siding on
17 % Windows, insulation, walks, plaster, and
garage complete
9% Furnace installed
4% Plumbing fixtures installed
10 % Exterior paint, light fixtures installed, finish
hardware installed
6% Carpet and trim installed
4% Interior decorating
4% Floors laid and finished 5–50
 Example 1
a. What is the estimated cost for the Tolstoy’s house if they
use contractors to complete all of the house?

b. Estimate what the cost of the house would be if the Tolstoys

use their talents to do some of the work themselves.

5–51
 Solution for Example 1
a. What is the estimated cost for the Tolstoy’s house if they
use contractors to complete all of the house?

Estimated total cost for the house is $348,000 (2,900 sq. ft. x
$120 per foot).

5–52
 Solution for Example 1
b. Estimate what the cost of the house would be if the Tolstoys
use their talents to do some of the work themselves.
Estimated savings of Serge’s plumbing work and Mrs. Tolstoy’s
interior decorating:
Plumbing roughed in 6% x $348,000 = $20,880
Plumbing fixtures installed 4% x $348,000 = $13,920
Interior decorating 4% x $348,000 = $13,920
Total saving = $48,720

Estimated total cost for the completed house using their talents is
$299,280 ($348,000 - $48,720).
5–53
 Example 2
Below is a project WBS with cost apportioned by percents. If the total
project cost is estimated to be $600,000, what are the estimated costs
for the following deliverables?
a. Design?
b. Programming?
b. In-house testing?

What weaknesses are inherent in this estimating approach?

5–54
 Solution for Example 2
Below is a project WBS with cost apportioned by percents. If the total
project cost is estimated to be $600,000, what are the estimated costs
for the following deliverables?
a. Design?
40% x $600,000 = $240,000
b. Programming?
20% x $600,000 = $120,000
c. In-house testing?
40% x $600,000 = $240,000

What weaknesses are inherent in this estimating approach?

a. Requires good, realistic historical data.
b. If total cost estimate is off, all other costs will be off.
c. Project must be very similar to past projects for sub-deliverables to
be useful.
5–55