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3- Upload a 2 page APA formatted paper based on your current event presentation. Chapter Five

Estimating Project Times and Costs

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.

No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

Because learning changes everything.®

Where We Are Now

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Learning Objectives

05-01 Understand estimating project times and costs is the foundation for

project planning and control.

05-02 Describe guidelines for estimating time, costs, and resources.

05-03 Describe the methods, uses, and advantages and disadvantages of

top-down and bottom-up estimating methods.

05-04 Distinguish different kinds of costs associated with a project.

05-05 Suggest a scheme for developing an estimating database for future projects.

05-06 Understand the challenge of estimating mega projects and describe steps that lead to better informed decisions.

05-07 Define a “white elephant” in project management and provide

examples.

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Chapter Outline

5.1 Factors Influencing the Quality of Estimates

5.2 Estimating Guidelines for Times, Costs, and Resources

5.3 Top-Down versus Bottom-Up Estimating

5.4 Methods for Estimating Project Times and Costs

5.5 Level of Detail

5.6 Types of Costs

5.7 Refining Estimates

5.8 Creating a Database for Estimating

5.9 Mega Projects: A Special Case

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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

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Why Estimating Time and Cost Is Important

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EXHIBIT 5.1

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5.1 Factors Influencing the Quality of Estimates

Planning Horizon

Project Complexity

People

Project Structure and Organization

Padding Estimates

Organizational Culture

Other Factors

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5.2 Estimating Guidelines for Times, Costs, and Resources

Responsibility

The use of several people to estimate

Normal conditions

Time units

Independence

Contingencies

Risk assessment added to the estimate to avoid surprises to stakeholders

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5.3 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.

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.

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

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TABLE 5.1

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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

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5.4 Methods for Estimating Project Times and Costs

Top-Down Approaches

Consensus Method

Ratio Method

Apportion Method

Function Point Methods for Software and System Projects

Learning Curves

Bottom-Up Approaches

Template Method

Parametric Procedures Applied to Specific Tasks

Range Estimating

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Apportion Method of Allocating Project Costs Using the WBS

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FIGURE 5.1

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

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TABLE 5.2

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Example: Function Point Count Method

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TABLE 5.3

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Range Estimating Template

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FIGURE 5.2

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A Hybrid: Phase Estimating

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FIGURE 5.3

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Top-Down and Bottom-Up Estimates

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FIGURE 5.4

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5.5 Level of Detail

The level of detail in the WBS varies with:

The complexity of the project

The need for control

The project size, cost, and duration

Other factors

Excessive detail:

Emphasizes departmental outcomes rather than deliverable outcomes

Creates more unproductive paperwork

Inadequate detail:

Falls short of meeting the structure’s needs

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5.6 Types of Costs

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

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Contract Bid Summary Costs

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FIGURE 5.5

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Three Views of Cost

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FIGURE 5.6

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5.7 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.

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5.8 Creating a Database for Estimating

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FIGURE 5.7

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5.9 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.

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The Reference Class Forecasting (RCF)

Three Major Steps:

Select a reference class of projects similar to your potential project.

Collect and arrange outcome data as a distribution. Create a distribution of cost overruns as a percentage of the original project estimate (low to high).

Use the distribution data to arrive at a realistic forecast. Compare the original cost estimate for the project with the reference class projects.

Benefits:

Outside empirical data mitigates human bias.

Politics, strategic, and promoter forces have difficulty ignoring outside RCF information.

RCF serves as a reality check for funding large projects.

RCF helps executives avoid unsound optimism.

RCF leads to improved accountability.

RCF provides a basis for project contingency funds.

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Key Terms

Apportionment

Bottom-up estimates

Delphi Method

Direct costs

Function points

Learning curve

Overhead costs

Phase estimating

Range estimating

Ratio method

Reference class forecasting (RCF)

Template method

Time and cost databases

Top-down estimates

White elephant

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© McGraw-Hill Education

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.

No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

Because learning changes everything.®

www.mheducation.com

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