PROJECT

MANAGEMENT
The Managerial Process

CHAPTER FIVE

Estimating Project Times and Costs

Copyright © 2014 McGraw-Hill Education.. All Rights Reserved.
PowerPoint Presentation by Charlie Cook
WHERE WE ARE NOW

5–2
ESTIMATING PROJECTS
• 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

5–3
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

5–4
FACTORS INFLUENCING THE QUALITY OF
ESTIMATES
Planning
Horizon
Other
Project
(Nonproject)
Duration
Factors

Quality of
Organization Estimates People
Culture

Padding Project Structure

Estimates and Organization

5–5
DEVELOPING WORK PACKAGE
ESTIMATES
Use people
familiar with
the tasks
Use several
Include a risk
people to make
assessment
estimates

Preparing
Make no Initial
Assume normal
allowance for Estimates conditions
contingencies

Assume tasks Use consistent

are independent time units

5–6
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.
7. Add a risk assessment to avoid surprises to stakeholders.

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
Cost and time important
High uncertainty
Internal, small project
Fixed-price contract
Customer wants details
Unstable scope

TABLE 5.1

5–9
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

5–10
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

5–11
TOP-DOWN APPROACHES FOR
ESTIMATING PROJECT TIMES AND COSTS

• Consensus methods
• Ratio methods
• Apportion method
Project Estimate
• Function point methods for Times
Costs
software and system projects
• Learning curves

5–12
APPORTION METHOD OF ALLOCATING PROJECT
COSTS USING THE WORK BREAKDOWN STRUCTURE

FIGURE 5.1

5–13
SIMPLIFIED BASIC FUNCTION POINT COUNT
PROCESS FOR A PROSPECTIVE PROJECT OR
DELIVERABLE

TABLE 5.2

5–14
EXAMPLE: FUNCTION POINT COUNT METHOD

TABLE 5.3

5–15
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

5–16
RANGE ESTIMATING TEMPLATE

FIGURE 5.2

5–17
PHASE ESTIMATING OVER
PRODUCT LIFE CYCLE

FIGURE 5.3

5–18
TOP-DOWN AND BOTTOM-UP ESTIMATES

FIGURE 5.4

5–19
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

5–20
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 Overhead Costs

– Organization costs indirectly linked to a specific package
that are apportioned to the project

5–21
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

5–22
THREE VIEWS OF COST

FIGURE 5.6

5–23
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.
• Adjusting Estimates
– Time and cost estimates of specific activities are adjusted
as the risks, resources, and situation particulars become
more clearly defined.

5–24
ESTIMATING DATABASE TEMPLATES

FIGURE 5.7

5–25
KEY TERMS
Apportionment methods Overhead costs
Bottom-up estimates Padding estimates
Contingency funds Phase estimating
Delphi method Range estimating
Direct costs Ratio methods
Function points Template method
Learning curves Time and cost databases

5–26
WBS FIGURE

Exercise 5.3

5–27
Developing Project Plan

~–28
WHERE WE ARE NOW

6–29
DEVELOPING THE PROJECT PLAN
• The Project Network
– A flow chart that graphically depicts the sequence,
interdependencies, and start and finish times of the
project job plan of activities that is the critical path
through the network.
• Provides the basis for scheduling labor and equipment.
• Enhances communication among project participants.
• Provides an estimate of the project’s duration.
• Provides a basis for budgeting cash flow.
• Identifies activities that are critical.
• Highlights activities that are “critical” and can not be delayed.
• Help managers get and stay on plan.

6–30
WBS/WORK PACKAGES TO NETWORK

FIGURE 6.1

6–31
WBS/WORK PACKAGE TO NETWORK (CONT’D)

FIGURE 6.1 (cont’d)

6–32
CONSTRUCTING A PROJECT NETWORK
• Terminology
– Activity: an element of the project
A
that requires time.
– Merge Activity: an activity that has
two or more preceding activities on B D
which it depends.
– Parallel (Concurrent) Activities:
Activities that can occur C
independently and, if desired, not
at the same time.

6–33
CONSTRUCTING A PROJECT NETWORK
(CONT’D)

• Terminology
– Path: a sequence of connected, dependent activities.
– Critical path: the longest path through the activity
network that allows for the completion of all project-
related activities; the shortest expected time in which the
entire project can be completed. Delays on the critical
path will delay completion of the entire project.

A B D

(Assumes that minimum of A + B > minimum of C in length of times to complete activities.)

6–34
CONSTRUCTING A PROJECT NETWORK
(CONT’D)

• Terminology
– Event: a point in time when an activity is started
or completed. It does not consume time.
– Burst Activity: an activity that has more than one activity
immediately following it (more than one dependency
arrow flowing from it).
B
• Two Approaches
– Activity-on-Node (AON)
• Uses a node to depict an activity. A C
– Activity-on-Arrow (AOA)
• Uses an arrow to depict an activity.
D

6–35
BASIC RULES TO FOLLOW IN DEVELOPING
PROJECT NETWORKS

1. Networks typically flow from left to right.

2. An activity cannot begin until all preceding connected
activities are complete.
3. Arrows indicate precedence and flow
and can cross over each other.
4. Each activity must have a unique identify number that is
greater than any of its predecessor activities.
5. Looping is not allowed.
6. Conditional statements are not allowed.
7. Use common start and stop nodes.

6–36
ACTIVITY-ON-NODE FUNDAMENTALS

FIGURE 6.2

6–37
ACTIVITY-ON-NODE FUNDAMENTALS
(CONT’D)

FIGURE 6.2 (cont’d)

6–38
NETWORK INFORMATION

TABLE 6.1

6–39
AUTOMATED WAREHOUSE—
PARTIAL NETWORK

FIGURE 6.3

6–40
AUTOMATED WAREHOUSE—
COMPLETE NETWORK

FIGURE 6.4

6–41
NETWORK COMPUTATION PROCESS
• Forward Pass—Earliest Times
– How soon can the activity start? (early start—ES)
– How soon can the activity finish? (early finish—EF)
– How soon can the project finish? (expected time—ET)
• Backward Pass—Latest Times
– How late can the activity start? (late start—LS)
– How late can the activity finish? (late finish—LF)
– Which activities represent the critical path?
– How long can activity be delayed? (slack or float—SL)

6–42
NETWORK INFORMATION

TABLE 6.2

6–43
ACTIVITY-ON-NODE NETWORK

FIGURE 6.5

6–44
ACTIVITY-ON-NODE NETWORK FORWARD PASS

FIGURE 6.6

6–45
FORWARD PASS COMPUTATION
• Add activity times along each path in the network (ES
+ Duration = EF).
• Carry the early finish (EF) to the next activity where it
becomes its early start (ES) unless…
• The next succeeding activity is a merge activity, in
which case the largest EF of all preceding activities is
selected.

6–46
ACTIVITY-ON-NODE NETWORK BACKWARD
PASS

FIGURE 6.7

6–47
BACKWARD PASS COMPUTATION
• Subtract activity times along each path in the
network (LF - Duration = LS).
• Carry the late start (LS) to the next activity where it
becomes its late finish (LF) unless
• The next succeeding activity is a burst activity, in
which case the smallest LF of all preceding activities
is selected.

6–48
DETERMINING FREE SLACK (OR FLOAT)
• Free Slack (or Float)
– Is the amount of time an activity can be delayed after the
start of a longer parallel activity or activities.
– Is how long an activity can exceed its early finish date
without affecting early start dates of any successor(s).
– Allows flexibility in scheduling scarce resources.
• Sensitivity
– The likelihood the original critical path(s) will change once
the project is initiated.
– The critical path is the network path(s) that has (have) the
least slack in common.

6–49
FORWARD AND BACKWARD PASSES
COMPLETED WITH SLACK TIMES

FIGURE 6.8

6–50
PRACTICAL CONSIDERATIONS
• Network Logic Errors
• Activity Numbering
• Use of Computers to
Develop Networks
• Calendar Dates
• Multiple Starts and Multiple
Projects

6–51
NETWORK LOGIC ERRORS
ILLOGICAL LOOP

FIGURE 6.9

6–52
AUTOMATED WAREHOUSE ORDER
PICKING SYSTEM NETWORK

FIGURE 6.10

6–53
AUTOMATED ORDER WAREHOUSE
PICKING SYSTEM BAR CHART

FIGURE 6.11

6–54
EXTENDED NETWORK TECHNIQUES
TO COME CLOSE TO REALITY

• Laddering
– Activities are broken into segments so the following
activity can begin sooner and not delay the work.
• Lags
– The minimum amount of time a dependent activity must
be delayed to begin or end.
• Lengthy activities are broken down to reduce the delay
in the start of successor activities.
• Lags can be used to constrain finish-to-start, start-to-start, finish-
to-finish, start-to-finish, or combination relationships.

6–55
EXAMPLE OF LADDERING USING
FINISH-TO-START RELATIONSHIP

FIGURE 6.12

6–56
USE OF LAGS
Finish-to-Start Relationship

FIGURE 6.13

Start-to-Start Relationship

FIGURE 6.14

6–57
USE OF LAGS
(CONT’D)

Use of Lags to Reduce

Project Duration

FIGURE 6.15

6–58
New Product Development
Process
FIGURE 6.16

6–59
USE OF LAGS
(CONT’D)

Finish-to-Finish
Relationship
FIGURE 6.17

Start-to-Finish
Relationship FIGURE 6.18

Combination
Relationship
FIGURE 6.19

6–60
NETWORK USING LAGS

FIGURE 6.20

6–61
HAMMOCK ACTIVITIES
• Hammock Activity
– Spans over a segment of a project.
– Has a duration that is determined after the network plan is
drawn.
– Is used to aggregate sections of the project to facilitate
getting the right amount of detail for specific sections of a
project.
– Is very useful in assigning and controlling indirect project
costs.

6–62
HAMMOCK ACTIVITY EXAMPLE

FIGURE 6.21

6–63
KEY TERMS
Activity Gantt chart
Activity-on-arrow (AOA) Hammock activity
Activity-on-node (AON) Lag relationship
Burst activity Merge activity
Concurrent engineering Parallel activity
Critical path Sensitivity
Early and late times Total slack
Free slack

6–64