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    Pinto pm5 Inppt 08

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    The chapter discusses cost estimation and budgeting for projects. It covers different types of project costs, methods for estimating costs such as ballpark estimates and learning curves, and approaches for creating project budgets using techniques like top-down, bottom-up and activity-based costing. The chapter also addresses establishing contingency funds to cover uncertainties in project cost estimation.

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    Pinto pm5 Inppt 08

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    yoonsicvy2
    9 views26 pages
    The chapter discusses cost estimation and budgeting for projects. It covers different types of project costs, methods for estimating costs such as ballpark estimates and learning curves, and approaches for creating project budgets using techniques like top-down, bottom-up and activity-based costing. The chapter also addresses establishing contingency funds to cover uncertainties in project cost estimation.

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    The chapter discusses cost estimation and budgeting for projects. It covers different types of project costs, methods for estimating costs such as ballpark estimates and learning curves, and approaches for creating project budgets using techniques like top-down, bottom-up and activity-based costing. The chapter also addresses establishing contingency funds to cover uncertainties in project cost estimation.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    9 views26 pages

    Pinto pm5 Inppt 08

    Uploaded by

    yoonsicvy2
    The chapter discusses cost estimation and budgeting for projects. It covers different types of project costs, methods for estimating costs such as ballpark estimates and learning curves, and approaches for creating project budgets using techniques like top-down, bottom-up and activity-based costing. The chapter also addresses establishing contingency funds to cover uncertainties in project cost estimation.

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    of 26

    Project Management: Achieving

    Competitive Advantage
    Fifth Edition, Global Edition

    Chapter 8
    Cost Estimation and
    Budgeting

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Learning Objectives

    8.1 Understand the various types of common project costs


    and key differences between them.
    8.2 Apply common forms of cost estimation for project
    work, including ballpark estimates, definitive estimates,
    parametric estimates, and learning curve.
    8.3 Apply top-down, bottom-up, activity-based, and time-
    phased budgeting procedures for cost management.
    8.4 Recognize the appropriateness of applying contingency
    funds for cost estimation.

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    PMBoK Core Concepts

    Project Management Body of Knowledge (PMBoK) covered


    in this chapter includes:
    1. Plan Cost Management (PMBoK 7.1)
    2. Estimate Costs (PMBoK 7.2)
    3. Determine Budget (PMBoK 7.3)
    4. Control Costs (PMBoK 7.4)

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Cost Management

    • Cost management has been defined to encompass data


    collection, cost accounting, and cost control.
    • Cost accounting and cost control serve as the chief
    mechanisms for identifying and maintaining control over
    project costs.
    • Cost estimation processes create a reasonable budget
    baseline for the project.

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Common Sources of Project Cost

    • Labor
    • Materials
    • Subcontractors
    • Equipment and facilities
    • Travel

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Types of Costs

    • Direct Versus Indirect


    • Recurring Versus Nonrecurring
    • Fixed Versus Variable
    • Normal Versus Expedited

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Figure 8.2 Project Price Breakdown

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Table 8.2 Cost Classifications

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Cost Estimation

    • Ballpark (order of magnitude) 30%


    • Comparative 15%
    • Feasibility 10%
    • Definitive 5%

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Learning Curves

    Each doubling of output results in a reduction in time to


    perform the last iteration.

    Yx  aX b

    Where :
    Yx = the time required for the x unit of output
    a = the time required for the initial unit of output
    X = the number of units to be produced
    b = learning curve slope = log  learning % log(2)

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Figure 8.6 Unit Learning Curve Log-
    Linear Model

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Software Project Estimation—Function
    Points

    Function Point Analysis is a system for estimating the


    size of software projects based on what the software does.
    Function Points are a standard unit of measure that
    represents the functional size of a software application.

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Figure 8.7 Software Project Development
    Activities as a Function of Size

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Table 8.4 Complexity Weighting Table for
    Function Point Analysis

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Table 8.5 Function Point Calculations for
    Restaurant Reorder System

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Problems with Cost Estimation

    • Low initial estimates


    • Unexpected technical difficulties
    • Lack of definition
    • Specification changes
    • External factors

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Creating a Project Budget
    The budget is a plan that identifies the resources, goals, and schedule
    that allows a firm to achieve those goals.
    Figure 8.8 The Relationship Among WBS, Scheduling, and Budgeting

    • Top-down
    • Bottom-up
    • Activity-based costing (ABC)
    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved
    Activity-Based Costing

    Projects use activities and activities use resources.


    1. Assign costs to activities that use resources.
    2. Identify cost drivers associated with this activity.
    3. Compute a cost rate per cost driver unit or transaction.
    4. Multiply the cost driver rate times the volume of cost
    driver units used by the project.

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Table 8.6 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

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Table 8.7 Sample Budget Tracking Planned
    and Actual Activity Costs

    Activity Direct Costs Budget Overhead Total Cost


    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

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Table 8.8 Example of a Time-Phased
    Budget

    Months Total by
    Activity January February March April May Activity
    Survey 4,000 Blank Blank Blank Blank 4,000
    Design Blank 5,000 3,000 Blank Blank 8,000
    Clear Site Blank 4,000 Blank Blank Blank 4,000
    Foundation Blank Blank 7,500 Blank Blank 7,500
    Framing Blank Blank Blank 8,000 2,000 10,000
    Plumb and Wire Blank Blank Blank 1,000 4,000 5,000
    Monthly Planned 4,000 9,000 10,500 9,000 6,000 Blank
    Cumulative 4,000 13,000 23,500 32,500 38,500 38,500

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Figure 8.9 Cumulative Budgeted Cost of
    the Project

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Budget Contingencies

    The allocation of extra funds to cover uncertainties and


    improve the chance of finishing on time.

    Contingencies are needed because:


    1. Project scope may change
    2. Murphy’s Law is present
    3. Cost estimation must anticipate interaction costs
    4. Normal conditions are rarely encountered

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Benefits to Contingency Funding

    1. Recognizes future contains unknowns


    2. Adds provision for company plans for an increase in
    project cost
    3. Applies contingency fund as an early warning signal to a
    potential overdrawn budget

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Summary

    1. Understand the various types of common project costs


    and key differences between them.
    2. Apply common forms of cost estimation for project work,
    including ballpark estimates, definitive estimates,
    parametric estimates, and learning curve.
    3. Apply top-down, bottom-up, activity-based, and time-
    phased budgeting procedures for cost management.
    4. Recognize the appropriateness of applying contingency
    funds for cost estimation.

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved


    Copyright

    Copyright © 2020 Pearson Education, Ltd. All Rights Reserved

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