Lecture 5

Estimating projects

• What is estimating projects

• Why estimating time, cost and resources are important
• Factors influencing the quality of estimates
• Estimating guidelines for times, costs and resources
• Methods of estimating project times and costs
• Top-down versus Bottom-up estimating
• Level of detail
• Types of costs
• Refining estimate
 What is Estimating projects

• Estimating
- The process of forecasting or approximating the time, cost and
resources of completing project deliverables
• 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
 Why estimating projects is important

• Estimates are needed to determine how long the project should take and its cost.

• Estimates are needed to support good decisions.

• Estimates are needed to determine whether the project is worth doing.

• Estimates are needed to develop cash flow needs.

• Estimates are needed to develop time-phased budgets and establish the project
baseline.

• Estimates are needed to determine how well the project is progressing.

 Factors influencing the quality of estimates
Accuracy of estimates depends on how far from the
point of estimate and the point that the event occurs

National holidays, legal Long-duration projects increase

Planning Horizon
regulations, vacations uncertainty in estimates

Other (Nonproject) Project

Factors Duration

Skills and experiences

Quality of in estimates
Organization Estimates People
Culture

Organization culture set the level of

tolerance to accuracy of estimates
Padding Project Structure and
Estimates Organization

People tend to add a padding to reduce risk Functional, dedicated or matrix structure would
and increase probability of estimates may increase or reduce time and cost estimates
 Estimating guidelines for times, costs and resources

• Have people familiar with the tasks make the estimate (To make use of their
skills and experiences)
• Use several people to make estimates (To avoid bias in estimates)
• Base estimates on normal conditions, efficient methods, and a normal level of
resources (necessary to have consensus e.g. Number of working hours, shifts
and workforces per day, etc.)
• Use consistent time units in estimating task times (Depends on specific project,
it could be day, week, month, shift, hour, minute, etc.)
• Treat each task as independent, don’t aggregate (To avoid neglecting
uncertainty of individual activities)
• Don’t make allowances for contingencies (Because extra fund for contingencies
will be made by top management)
• Adding a risk assessment helps avoid surprises to stakeholders.
 Methods of estimating project times and costs

• Macro (Top-Down) Approaches

- Consensus methods:
+ Use in the conceptual phase
+ Use experiences of senior and/or middle managers to estimate
+ Individual works are not identified
+ Delphi method to make estimate to avoid bias

- Ratio methods
+ Use in the conceptual phase
+ Use ratios (Amount of time and money per unit) to estimate
+ For example: $350/m2 of normal building
 Methods of estimating project times and costs

• Macro (Top-Down) Approaches (continued)

- Apportion method
+ This method is used when project to be estimated should closely follow
to past project in structure. The good historical data are needed.
 Methods of estimating project times and costs

• Macro (Top-Down) Approaches (continued)

- Function point methods for software and system projects
+ These projects are estimated using weighted variables or function points
which are adjusted for a complexity factor and added
+ The total adjusted count provides the basis for estimating cost and time
 Methods of estimating project times and costs

• Macro (Top-Down) Approaches (continued)

- Function point methods for software and system projects
 Methods of estimating project times and costs

• Macro (Top-Down) Approaches (continued)

- Learning curves:
+ The time to perform a task improves with repetition
+ Each time the output quantity doubles, the unit labor hours are reduced
at constant rate
 Methods of estimating project times and costs

• Micro (Bottom-Up) Approaches

- Template method
+ The project to be estimated is similar to past projects
+ The time and cost of past projects are used as starting point for new one
+ The differences in the new project can be noted for adjusting the past
project times and costs
+ Short time span for developing project budget and schedule with
reduced estimate errors

- Parametric procedures applied to specific tasks

+ if the unit cost known, such as cost per square meter or labor-day per lot
of product, the total cost and time to do specific tasks could be
estimated by dividing amount of work to unit cost
 Methods of estimating project times and costs
• Micro (Bottom-Up) Approaches (Continued)
- Detailed estimates for the WBS work packages
+ This method is used when the work packages have significant uncertainty
+ Having a group determine the low, average and high cost or duration
+ Calculating estimator average and range to see potential risks associated
with cost and time estimates
 Methods of estimating project times and costs
• Micro (Bottom-Up) Approaches (Continued)
- Phase estimating: A hybrid
+ This method is used when it is impractical to estimate time and cost for
entire project
+ The phase estimating use a two-estimate system over the project life: A
detailed estimate is developed for the immediate phase and a macro
estimate is made for the remaining phases of the project.

Detailed
estimate
 Top-down versus Bottom-up estimating

• Conditions for Preferring Top-Down or Bottom-Up Time and Cost Estimates

Condition Macro Estimates Micro

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
 Methods of estimating project times and costs

• 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
 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
 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
 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.
 Refining Estimates

• Contingency Funds and Time Buffers

- Are created independently to offset uncertainty
- Reduce the likelihood of cost and completion time overruns for a project
- Can be added to the overall project or to specific activities or work packages
- Can be determined from previous similar projects

• Changing Baseline Schedule and Budget

- Unforeseen events may dictate a reformulation of the budget and schedule.
 Exercise
• Mr. Frank wants to estimate total cost of building his house. He decides to take a similar completed house
for reference. At the time of reference, the market price of this type of house is 10 millions VND per
square meter. In order to make his estimate easy, he divides the construction work into 5 components,
namely Design, Basic Construction, Electrical work, Water supply work and Furniture work. Then, these
components are further divided into sub-components. Based on information about the reference house,
he calculates the share of each sub-component cost. The calculation results are shown in the table below:
Design Basic construction Electrical work Water supply work Furniture work
2% 65% 8% 5% 20%
Site Technical Underground House Doors & Paster Paint Wire Appliances Pipe Appliances Kitchen Living Bedroom Outdoor
Investigation design work frame Windows work work laying laying room work
0.5% 1.5% 5.0% 30.0% 15.0% 10.0% 5.0% 2.0% 6.0% 2.0% 3.0% 5.0% 5.0% 8.0% 2.0%

• You are required to help Mr. Frank to estimate total cost of his house if:
- The reinforce work for foundation will cost 100,000,000 millions VND more as compared to the
reference house
- Due to his change in using some better materials and famous brands, he has to pay more for house
frame, window & door, electrical wire, electrical appliances, water pipe, kitchen, living room and
bedroom by 5%, 8%, 2%, 4%, 1%, 6%, 8% and 10%, respectively.
- Total area of his house is 350 square meters.
 Exercise Solution
Design Basic construction Electrical work Water supply work Furniture work
2% 65% 8% 5% 20%
Investigation Technical Underground House Doors & Paster Wire Appliance Pippe Applicance Living Outdoor
site design work frame Windows work Paint work laying installation laying installation Kitchen room Bedroom work
0,5% 1,5% 5% 30% 15% 10% 5% 2% 6% 2% 3% 5% 5% 8% 2%
17,5 52,5 175,0 1.050,0 525,0 350,0 175,0 70,0 210,0 70,0 105,0 175,0 175,0 280,0 70,0
17,5 52,5 275,0 1.102,5 567,0 350,0 175,0 71,4 218,4 70,7 105,0 185,5 189,0 308,0 70,0

Total reference cost Total adjusted cost 

  10 Tr VND/m2 X 350m2 = 3.500 Tr. VND              3.757,5 Tr. VND
Underground work
  100                        
House frame
  5%                        
Door & window
  8%                        
electrical wire
  2%                        
electrical appliances
  4%                        
water pipe
  1%                        
Kitchen
  6%                        
Living room
  8%                        
Bedroom
  10%