CHAPTER FIVE

Estimating Project
Times and Costs

McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All
rights reserved.
 Where We Are Now

Explains the connection between #4 (Defining, WBS,) and #5 (Estimate):

https://www.youtube.com/watch?v=rN0FrDpQNUk

5–2
 Estimating Projects
• Project estimation is a yardstick for project cost control. If the
yardstick is faulty, you start on the “wrong foot”.
Do not underestimate the estimate!!
• 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
1. Top-down (macro) estimates: analogy, group
consensus, or mathematical relationships
2. 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 (Accuracy) of Estimates

Planning Horizon

Other
Project
(Nonproject)
Duration
Factors

Quality of
Organization Estimates People
Culture

Padding Project Structure

Estimates and Organization

5–5
 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. Don’t make allowances for contingencies.
7. Adding a risk assessment helps avoid surprises
to stakeholders.

5–6
 Top-Down versus Bottom-Up Estimating
Two main Approaches
• Top-Down Estimates https://www.youtube.com/watch?v=34nxX_VP1fo
–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 (detailed) processes used to complete the
project.
• Bottom-Up Approach https://www.youtube.com/watch?v=oQxgaVw0fWs
–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.
5–7
 Top-Down versus Bottom-Up Estimating

Conditions for Preferring Top-Down or Bottom-up

Time and Cost Estimates
Top-Down, Bottom-Up,
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

TABLE 5.1

5–8
 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

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

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

5–10
 Apportion Method of Allocating Project Costs
Using the Work Breakdown Structure

Used for +-standard projects, FIGURE 5.1

based on experience 5–11
 WBS Figure (Class Exercise 1)

5 Exercise 1-WBS-Solution.pdf 5–12

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

Function Point = Unit of Work

TABLE 5.2

5–13
 Example: Function Point Count Method

Assume: 10 function points can be done by one person per month

Conclusion: We need 66 (=660/10) people to complete the project in one month
Assume: There are 22 people on that project TABLE 5.3

Conclusion: The duration of the project is 3 (=66/22) months 5–14

 Learning Curves (See also Appendix 5.1)
• The time to perform a task improves with repetition
• It is especially true of tasks that are labour intensive
• Each time the output quantity doubles, the unit labour
hours are reduced at a constant rate (constant %)
• The constant reduced rate (90% when doubled, 80% when
doubled, etc.), changes as per industry, type of task, etc.

• A Learning Curve is also known as Improvement

Curve, Experience Curve
• Example: Unit Hours
1 800
Improvement rate is 80%
2 800 x 0.8 640
See Tables A5.1, A5.2 4 640 x 0.8 512
8 512 x 0.8 410 5–15
Table A5.1: Learning Curves Unit Values

TABLE A5.1

5–16
Table A5.2: Learning Curves Cumulative Values

TABLE A5.2

5–17
 Bottom-Up Approaches for Estimating
Project Times and Costs

• Template methods: When the project is similar to past projects, use

of previous tested standards. Template for electrical, Template for
mechanical, etc.

• Parametric procedures applied to specific tasks

Example: $5 per 𝑀2 of tiles, $3 per 𝑀2 of labour, $100/door, $50/window

• Range (O, P, M) estimates for the WBS work packages

Estimate dinner & dance (WBS): 4 ClassExercise-EL-Solution.docx
• Phase estimating: A hybrid (Fig 5.3)
When an amount of uncertainty exists. Start with a top-down (macro) estimate
for the whole project, and a detailed estimate (bottom-up) for Phase 1.
As the project progresses, update the detailed estimates of Phase 2, and so on.
5–18
Support Cost Estimate Worksheet

There is
a range in
No of days

FIGURE 5.2

5–19
 Phase Estimating over Product Life Cycle

Used for IT projects, or new technology.

Detailed estimate are made for the immediate phase,
and rough estimate for the remaining phases. FIGURE 5.3

5–20
Top-Down and Bottom-Up Estimates

FIGURE 5.4

5–21
 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

5–22
 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

5–23
 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

5–24
 Three Views (Perspectives) of Cost

(Known to PM,
but not to Finance)

These three views vary (known) according FIGURE 5.6

to the users (Finance, Project Mgt.,Operations,) 5–25

 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.

5–26
Creating a Database for Estimating

FIGURE 5.7

5–27
 Variability in Activity Times
• 3 time estimates (Will be practiced in Lab 3)
–Optimistic times (o)
–Most-likely time (m)
–Pessimistic time (p)
• Follow beta distribution
• Expected time: Et = (o + 4m + p)/6
• Variance of times: v = (p - o)2/62
• Project Variance = sum of variances of all activities on
the critical path
• Example: An activity has optimistic estimate (o) of 1, pessimistic estimate (p)
of 9, most likely estimate (m) of 2.
• Its Expected Time = 3 = (1+4*2+9)/6;
• Its Variance = 1.78 = (9 − 1)2 / 36 = 1.8 28