SG5010 Project Management

Lecture 5: Estimating Project Times and

Costs
Learning Objectives

After completing this session, students will be able to:

 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.
 Understand the challenge of estimating mega projects and
describe steps that lead to better informed decisions.
Project Estimating

Estimating Defined

 Is the process of forecasting or approximating the time and cost of

completing project deliverables.

 Is a trade-off, balancing the benefits of better accuracy against the

costs of secured increased accuracy.

Types of Estimates

 Top-down (macro) estimates—analogy, group consensus, or

mathematical relationships

 Bottom-up (micro) estimates—based on estimates of elements found in

the work breakdown structure
Why Estimating Time and Cost Is Important
Factors Influencing the Quality of Estimates

 Planning Horizon

 Project Complexity

 People

 Project Structure and Organization

 Padding Estimates

 Organizational Culture

 Other Factors
Estimating Guidelines for Times, Costs, and
Resources
1. Responsibility

2. The use of several people to estimate

3. Normal conditions

4. Time units

5. Independence

6. Contingencies

7. Risk assessment added to the estimate to avoid surprises to

stakeholders
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 sometimes made by top managers who have very little

knowledge of the component activities used to complete the
project.
Top-Down versus Bottom-Up Estimating

Bottom-Up Estimates

 Can take place after the project has been defined in detail.

 Can serve as a check on cost elements in the WBS by rolling

up the work packages and associated cost accounts to major
deliverables.

 Provide the customer with an opportunity to compare the low-

cost, efficient method approach with any imposed
restrictions.
Conditions for Preferring Top-Down or
Bottom-Up Time and Cost Estimates
The Preferred Approach in Defining the
Project
 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
Estimating
 Many managers regard this as an art !
 Information available to one bidder is generally
available to others.
 This is an essential part of the planning process.
 Forms the basis for establishing standards for
budgets, man-hours, material costs, contingencies,
etc.
 Specific pricing strategies must be developed for each
situation.

 Cost Errors
Time Estimate: Unit Learning Curve
Each doubling of output results in a reduction in time to
perform the last iteration.
Time Estimate: Gantt Charts
 The Gantt chart or linked-bar chart
 Establish a time-phased network
 Can be used as a tracking tool
 Conventions: time goes from left to right, activities arranged
top to bottom in order of occurrence
 Viewing the forward schedule
Start at a given date and follow forward to determine the
end date
 Viewing the backward schedule
Look at required completion date and work back to find
start date
Gantt charts (Cont.)

Logical links indicated by arrows

Gantt Chart with Resources Specified
Project Cost Estimate
 Cost estimation processes create a reasonable budget
baseline for the project.
Price = cost + profit
Typically, a project estimate shows the client:
Tasks – What’s going to be done
Resources – By who
Rate – At what billing rate, in what currency, with how
much tax
Duration – For how many hours or days

 Cost management has been defined to encompass data

collection, cost accounting, and cost control.
Common Sources of Project Cost

 Labor

 Materials

 Subcontractors

 Equipment & facilities

 Travel
 Direct costs are expenses that a
Types of Costs company can easily connect to a
Recurring expenses
specific "cost object,"are on an
which may be
 Direct Vs. Indirect ongoing
a product, basis as an ordinary
department cost
or project.
of doing business.
Indirect costs go beyond the
 Recurring Vs. Nonrecurring
expenses associated with creating
a particular
Fixed expenses
Non-recurring product to include
or costs
expenses the
are those
are
 Fixed Vs. Variable
price
that of not
Variable
do maintaining
costs
extraordinary are
fluctuate
or the
withentire
those
one-time that
changes
expense
company.
respond
in directly
theproduction
company doesand
level or
notproportionately
sales volume
expect to
 Normal Vs. Expedited
to changes
recur, at leastin activity
not on anylevelregular
or
volume
basis.

Normal cost is cost incurred during

Expedited cost is the cost that is operations or during normal
normal
required for extra fast or even
working hours.
dedicated shipments or hiring extra
people to get a task done quicker.
Types of Costs in Projects
Direct Costs

 Are clearly chargeable to a specific work package

 Examples: Labor, materials, equipment, and other

Direct Project Overhead Costs

 Can be tied to project deliverables or work packages

 Examples: Salary of the project manager, temporary rental space
for the project team, supplies, specialized machinery

General and Administrative (G&A) Overhead Costs

 Are not directly linked to a specific project

 Examples: Advertising, accounting, salary of senior management
above the project level
Problems with Cost Estimation

 Low initial estimates

 Unexpected technical difficulties

 Lack of definition

 Specification changes

 External factors
Creating a Project Budget

WBS The budget is a

plan that identifies
Project the resources,
Plan goals and
Scheduling Budgeting schedule that
allows a firm to
 Top-down achieve those
 Bottom-up goals
Project Costs Using the WBS
Sample Project Budget

Activity Direct Costs Budget Overhead Total Cost

Survey 3,500 500 4,000

Design 7,000 1,000 8,000

Clear Site 3,500 500 4,000

Foundation 6,750 750 7,500

Framing 8,000 2,000 10,000

Plumb and Wire 3,750 1,250 5,000

Sample Budget Tracking Planned and
Actual Activity Costs
Activity Planned Budget Actual Variance

Survey 4,000 4,250 250

Design 8,000 8,000 -0-

Clear Site 4,000 3,500 (500)

Foundation 7,500 8,500 1,000

Framing 10,000 11,250 1,250

Plumb and Wire 5,000 5,150 150

Total 38,500 40,650 2,150

Three Views of Cost
Example of a Time-Phased Budget
Months

Total by

Activity January February March April May Activity

Survey 4,000 4,000

Design 5,000 3,000 8,000

Clear Site 4,000 4,000

Foundation 7,500 7,500

Framing 8,000 2,000 10,000

Plumb and Wire 1,000 4,000 5,000

Monthly Planned 4,000 9,000 10,500 9,000 6,000

Cumulative 4,000 13,000 23,500 32,500 38,500 38,500

 Budget Contingencies
The allocation of extra funds to cover uncertainties and improve the
chance of finishing on time.

Contingencies are needed because

 Project scope may change
 Cost estimation must anticipate interaction costs
 Normal conditions are rarely encountered
 Murphy’s Law is present

Nothing is as easy as it looks. Everything takes

longer than you think. Anything that can go wrong
will go wrong at the worst possible moment
Refining Estimates

Reasons for adjusting estimates

 Interaction costs are hidden in estimates.

 Normal conditions do not apply.

 Things go wrong on projects.

 Project scope and plans change.

 People are overly optimistic.

 People engage in strategic misrepresentation.

Mega Projects: A Special Case
Mega Projects Defined

 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: High-speed rail lines, airports, healthcare reform, the
Olympics, development of new aircraft

 Often involve a double whammy.

 Projects cost much more than expected and under-deliver on
benefits the projects were to provide.

 Are sometimes referred to as “white elephant.”

 Projects are over budget, under value and the costs of maintaining
the project exceed the benefits received.
Thank you & any Questions?
Next Week:
Developing a Project
Schedule

Lecture slides adapted from:

Larsen, E. & Gray, C. (2021), Project Management: The Managerial Process, 8th
Edition, McGraw Hill
Pinto, J.K. (2013), Project management: achieving
competitive advantage, 3rd Edn. Harlow: Pearson

Pictures are taken from Google image