Estimating Project Times

and Costs
CHAPTER FIVE

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

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 OUTLINE
• Introduction
• Factors Influencing the Quality of Estimates
• Estimating Guidelines for Times, Costs, and Resources
• Top-Down versus Bottom-Up Estimating
• Methods for Estimating Project Times and Costs
• Level of Detail
• Types of Costs
• Refining Estimates
• Creating a Database for Estimating
• Assignment

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Plans are of little importance, but planning is
essential.
— Winston Churchill, former British prime
minister

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Introduction

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 Introduction
• Estimating is the process of forecasting or approximating the time and cost
of completing project deliverables.
• Estimating processes are frequently classified as top-down and bottom-up.
• Top-down estimates are usually done by senior management.
• Management will often derive estimates from analogy, group consensus, or mathematical
relationships.
• Bottom-up estimates are typically performed by the people who are doing the work.
• Their estimates are based on estimates of elements found in the work breakdown structure.

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 Why Estimating Time and Cost Is 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.
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 Introduction
• All project stakeholders prefer accurate cost and time estimates, but they also
understand the inherent uncertainty in all projects.
• Inaccurate estimates lead to false expectations and consumer dissatisfaction.
• Accuracy is improved with greater effort, but is it worth the time and cost?
• Estimating costs money!
• Project estimating becomes a trade-off, balancing the benefits of better
accuracy against the costs for securing increased accuracy.
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Factors Influencing the Quality of
Estimates

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 Factors Influencing the Quality of Estimates
• A typical statement in the field is the desire to “have a 95 percent probability of meeting
time and cost estimates.”
• Past experience is a good starting point for developing time and cost estimates.
• But past experience estimates must almost always be refined by other considerations to
reach the 95 percent probability level:
1. Planning Horizon – The quality of the estimate depends on the planning horizon; estimates of
current events are close to 100 percent accurate but are reduced for more distant events.
2. Project Complexity – Time to implement new technology has a habit of expanding in an increasing,
nonlinear fashion. Sometimes poorly written scope specifications for new technology result in errors
in estimating times and costs.

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 Factors Influencing the Quality of Estimates

• But past experience estimates must almost always be refined by other

considerations to reach the 95 percent probability level:
3. People – The people factor can influence the quality of time and cost estimates.
3. For example, accuracy of estimates depends on the skills of the people making the
estimates.
4. How familiar are they with the task they are estimating?
4. Project Structure and Organization – Which project structure is chosen to manage
the project will influence time and cost estimates.

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 Factors Influencing the Quality of Estimates

• But past experience estimates must almost always be refined by other considerations
to reach the 95 percent probability level:
5. Padding Estimates – In some cases people are inclined to pad estimates.
• In work situations where you are asked for time and cost estimates, most of us are inclined to add
a little padding to increase the probability and reduce the risk of being late.
• If everyone at all levels of the project adds a little padding to reduce risk, the project duration and
cost are seriously overstated.
6. Organization Culture – Organization culture can significantly influence project estimates.
7. Other Factors – Finally, non-project factors can impact time and cost estimates.

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Estimating Guidelines for Times,
Costs, and Resources

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 Estimating Guidelines for Times, Costs, and
Resources
1. Responsibility – Have people familiar with the tasks make the estimate.
a. Draw on their expertise.
b. Get their buy-in.
c. Build communication channels early.
2. Use several people to make estimates – Different opinions eliminate extreme estimate
errors.
3. Normal conditions – Base estimates on normal conditions, efficient methods, and a
normal level of resources.
a. Possible conflicts in demand for resources on parallel or concurrent activities should not be
considered at this stage.

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 Estimating Guidelines for Times, Costs, and
Resources
4. Time units – Use consistent time units in estimating task times to allow
proper network analysis.
5. Independence – Treat each task as independent, don’t aggregate.
6. Contingencies – Don’t make allowances for contingencies.
7. Adding a risk assessment helps avoid surprises to stakeholders.
a. A simple breakdown by optimistic, most likely, and pessimistic for task time could
provide valuable information regarding time and cost.

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Top-Down versus Bottom-Up
Estimating

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 Top-Down versus Bottom-Up Estimating
• Since estimating efforts cost money, the time and detail devoted to estimating are important
decisions.
• Yet, when estimating is considered, you as a project manager may hear statements such as
these:
• Rough order of magnitude is good enough. Spending time on detailed estimating wastes money.
• Time is everything; our survival depends on getting there first! Time and cost accuracy is not an issue.
• The project is internal. We don’t need to worry about cost.
• The project is so small, we don’t need to bother with estimates. Just do it.
• However, there are sound reasons for using top-down or bottom-up estimates.
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 Top-Down versus Bottom-Up Estimating
• Top-Down Estimates
• Are usually are 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.
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 Conditions for Preferring Top-Down or
Bottom-Up Time and Cost Estimates
Condition Top-Down Estimates Bottom-Up 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 19
 Estimating Projects: Preferred Approach
1. Make rough top-down estimates.
2. Develop the WBS/OBS.
3. Make bottom-up estimates.
4. Develop schedules and budgets.
5. Reconcile differences between top-down and bottom-up estimates.

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Methods for Estimating Project
Times and Costs

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 Top-Down Approaches for Estimating Project
Times and Costs
• At strategic level, top-down estimating methods are used to evaluate the project
proposal.
• The information needed to derive accurate time and cost estimates is not available
in the initial phase of the project – for example, design is not finalized.
1. Consensus method
2. Ratio method
3. Apportion method
4. Function point methods for software and system projects
5. Learning curves

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 Consensus Methods
• Pooled experiences of senior and/or middle managers to estimate the total project
duration and cost.
• Experts discuss, argue, and ultimately reach a decision as to their best guess
estimate.
• The first top-down estimates are only a rough cut and typically occur in the
“conceptual” stage of the project.
• In some cases, the top-down estimates are not realistic because top management “wants the project”.
• Be careful that macro estimates made by top management are not dictated to lower level managers
who might feel compelled to accept the estimates even if they believe resources are not adequate.

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 Ratio Methods
• Use ratios to estimate time and cost of the project based on previous
experience.
• Examples:
• We built a house before of 250 m2 for $1000 per square meter in 180 days. Therefore,
this house of 500 m2 will cost approximately $500,000 in 360 days.
• Cost of new plants estimated by capacity size.
• Software product estimated by features and complexity.

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 Apportion Methods
• Extension of the ratio method.
• Used when projects closely follow past projects in the features and costs.
• Given good historical data, estimates can be made quickly with little effort
and reasonable accuracy.

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Apportion Method of Allocating Project Costs
Using the Work Breakdown Structure

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 Function Point Methods for Software and
System Projects
• In software industry, software development projects are frequently estimated
using 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 adjusted count provides the basis for estimating the labor effort
and cost for the project.

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

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Example: Function Point Count Method

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 Example: Function Point Count Method
• Given this count and the fact that one-person month has historically been
equal to 5 function points, the job will require 132 person month
(660/5=132).
• Assuming that you have 10 programmers who can work on this task, the
duration would be approximately 13 months.
• If the monthly programmer rate is $4000, then the estimated cost would be
$528,000 (132x4,000).

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 Learning Curves
• Some projects require that the same task, group of tasks, or product to be repeated several
times.
• Managers know intuitively that the time to perform a task improves with repetition.
• This phenomenon is especially true of tasks that are labor intensive.
• The pattern of improvement phenomenon can be used to predict the reduction in the time
to perform the task.
• From empirical evidence across all industries, the pattern of this improvement has been
quantified in the learning curve, which is described in the following relationship:
Each time the output quantity doubles, the unit labor hours are reduced at a constant rate.
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Bottom-Up Approaches for Estimating Project
Times and Costs
• Template methods
• Parametric procedures applied to specific tasks
• Range estimates for the WBS work packages
• Phase estimating: A hybrid

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 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 projects can be noted and past times and costs
adjusted to reflect these differences.
• This approach enables the firm to develop a potential schedule, estimate
costs, and develop a budget in a very short time span.

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 Parametric Procedures Applied to Specific
Tasks
• Parametric techniques, such as cost per square meter, can be applied to
specific tasks.

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 Range Estimating
• Range estimating works best when work packages have significant
uncertainty associated with the time and cost to complete.
• The approach helps to reduce surprises as the project progresses; provides a
basis for assessing risk, managing resources, and determining the project
contingency fund.

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 Support
Cost
Estimate
Worksheet

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 A Hybrid: Phase Estimating
• This approach begins with a top-down estimate for the project and then
refines estimates for the phases of the project as it is implemented.
• Phase estimating is used when an unusual amount of uncertainty surrounds
a project and it is impractical to estimate times and costs for the entire
project.
• Phase estimating uses a two-estimate system over the life of the project.
• A detailed estimate is developed for the immediate phase and a macro
estimate is made for the remaining phases of the project.
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Phase Estimating over Project Life Cycle

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Level of Detail

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 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.
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Types of Costs

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 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.
• General and Administrative (G&A) Overhead Costs – These represent
organization costs that are not directly linked to a specific project.
• These costs are carried for the duration of the project.

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Example – Contract Bid Summary Costs

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Three Views of
Cost

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Refining Estimates

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 Refining Estimates
• Adjusting Estimates – Time and cost estimates of specific activities are adjusted as
the risks, resources, and situation particulars become more clearly defined.
• 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.
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Creating a Database for Estimating

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 Creating a Database for Estimating
• The best way to improve estimates is to collect and archive data on past
project estimates and actuals.
• Saving historical data—estimates and actuals—provides a knowledge base
for improving project time and cost estimating.
• Creating an estimating database is a “best practice” among leading project
management organizations.

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Assignment

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 Assignment
• Execercises 4, 5, 6 & 7.
• Case 5.1 – Sharp Printing, AG
• Case 5.2 – Post-Graduation Adventure

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Thank You

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