Ambo University

Woliso Campus
Department of Management
MA in project management Program
Individual Assignment 2 (25%)

1. What are the advantages and disadvantages of using top-down and bottom-up approaches
to cost estimating? How do you account for inflation and currency fluctuations in your
project cost management?

Advantages of Top-down approaches

 It is relatively simple and quick.

 It uses easily available data from secondary sources
 A more expedited process
 Provides clear expectations to departments
 Time-saver for upper and lower level management

Disadvantages of Top-down approaches

 It can be too broad and inaccurate

 It may overlook important details and nuances of the market.
 Can create unrealistic expectations
 May cause resentment in lower management
Advantages of Bottom-up approaches

 It provides a better understanding of project components.

 It allows team members to take responsibility for their job and ensure that all elements of
project have been considered.
 It allows a manager to gain a more comprehensive understanding of the work package
and identify potential barriers along the way.
 It is best suited to their expertise, allowing them to be flexible enough to modify
according to the needs of the project utilizing.
 Accuracy of estimating overall budget.
 Errors in funding small tasks need not be individually identified.
 A manager can make smarter decisions and avoid costly mistakes by estimating the job
package ahead of time.
 It also helps to avoid unpleasant shocks down the road. Even though the strategy requires
a significant time investment upfront, the assumption is that it will save time in the long
run.

Disadvantages of Bottom-Up approaches

 The additional labor that may be done beyond the tasks listed in the activities, such as
overhead and integration efforts, is frequently disregarded. These factors must be taken
into consideration for large-scale, complex projects and cannot be disregarded.
 Bottom up estimation method requires a significant investment of time. This is
particularly not feasible for projects with shorter deadlines.
 The potential for cost overruns is one of bottom-up budgeting's main drawbacks. This is
due to the fact that all costs are projected at the beginning of the process, and there is
always a chance that some of them will be understated. This also results in projects being
underfunded.
Inflation is the general increase in the prices of goods and services over time, which reduces the
purchasing power of money. For project managers, inflation can have a significant impact on the
project costs, especially for long-term or multi-year projects.

Methods to use for inflation and avoid budget overruns or underestimations in cost
management.

A) Use an inflation index

An inflation index is a measure of how the prices of a specific set of goods or services change
over time.You can use an inflation index to estimate the future costs of your project based on the
historical or projected inflation rates.

B) Apply an escalation factor

An escalation factor is a percentage that reflects the expected increase in the costs of a particular
item or category over time. You can apply an escalation factor to your project costs to account
for inflation and other factors that may affect the prices, such as supply and demand, market
conditions, or currency fluctuations. For example, if you expect the labor costs to increase by 5%
annually, you can multiply your current labor costs by 1.05 to get the estimated labor costs for
the next year.ly an escalation factor.

C) Use a contingency reserve

A contingency reserve is a portion of the project budget that is set aside for unforeseen or
uncertain events that may affect the project costs, such as inflation, risks, or changes. You can
use a contingency reserve to cover the potential cost overruns or variances caused by inflation or
other factors. For example, if you estimate your project costs to be $100,000 and you add a 10%
contingency reserve, you will have $110,000 as your total project budget.
 D) Update your cost baseline

A cost baseline is a snapshot of your approved project budget at a given point in time. It serves
as a reference for measuring and controlling your project performance and progress. You can
update your cost baseline periodically to reflect the changes in your project costs due to inflation
or other factors. For example, if you notice that your actual costs are higher than your planned
costs due to inflation, you can request a change in your cost baseline and adjust your project bu

E) Monitor and control your project costs

Monitoring and controlling your project costs is the process of tracking, reviewing, and
managing your project expenditures and ensuring that they are aligned with your project
objectives and scope. You can monitor and control your project costs regularly to identify and
address any issues or deviations from your cost baseline caused by inflation or other factors. For
example, you can use tools such as earned value analysis, variance analysis, or trend analysis to
measure and compare your actual costs with your planned costs and take corrective actions if
needed.

2. How do you use historical data and expert opinions to improve the accuracy and reliability
of your cost estimates? How do you handle changes and variations in your project scope
and requirements that affect your project costs?

To use historical data effectively, you need to have a systematic and consistent way of collecting,
storing, and analyzing it. To do this, you should first define the purpose and scope of your data
collection, identify the sources and methods of data collection, and establish criteria and
standards for data quality. Additionally, you should organize and store the data in a secure and
accessible way, ensuring that it is categorized, labeled, and documented properly. This will help
me protect the data from unauthorized access or modification.
After analyzing the historical data, you can use it to estimate the costs and benefits of your
project. To do this, select the most relevant and representative data that matches the scope,
complexity, and context of your project, and adjust it for any differences or changes. Then, use
the data to calculate the average or expected values of the costs and benefits of my project, as
well as the minimum and maximum values. Finally, use the data to evaluate the feasibility and
viability of your project, based on the historical return on investment and value for money of
similar projects or activities.

How do you handle changes and variations in your project scope and requirements that
affect your project costs?

1) Understand the baseline

 The first step to manage changes and variations is to establish and communicate a clear
and realistic baseline for the project scope and duration. This means defining the project
objectives, deliverables, requirements, assumptions, constraints, and risks, as well as
creating a detailed work breakdown structure (WBS) and a realistic schedule. The
baseline serves as a reference point to measure and monitor the project performance and
progress, and to evaluate the impact of any changes or variations.

2) Implement a change control process

 The second step to manage changes and variations is to implement a formal and
consistent change control process. This means setting up a system and a procedure to
identify, document, analyze, approve, and communicate any changes or variations that
affect the project scope and duration. The change control process should also define the
roles and responsibilities of the project team, the stakeholders, and the change control
board, as well as the criteria and tools for assessing and prioritizing the change requests.
 3) Use the critical path method

 The third step to manage changes and variations is to use the critical path method (CPM)
to optimize the project schedule and identify the dependencies and the slack time among
the project activities. The critical path is the longest sequence of activities that determines
the minimum project duration. Any changes or variations that affect the critical path
activities will have a direct impact on the project completion date. The CPM helps you to
analyze the schedule impact of any changes or variations, and to explore alternative
scenarios and options to compress or adjust the schedule.

4) Manage scope creep

 The fourth step to manage changes and variations is to manage scope creep, which is the
gradual and unauthorized expansion of the project scope due to adding new features,
requirements, or deliverables that were not originally planned or agreed upon. Scope
creep can cause delays, cost overruns, quality issues, and stakeholder dissatisfaction. To
prevent or minimize scope creep, you should follow the change control process, avoid
gold plating, clarify the project scope statement, and manage the expectations and the
communication with the stakeholders.

5) Update the project documents

 The fifth step to manage changes and variations is to update the project documents
accordingly. This means revising and re-baselining the project scope statement, the WBS,
the schedule, the budget, the risk register, and any other relevant documents that reflect
the approved changes or variations. Updating the project documents ensures that the
project team and the stakeholders are aligned and informed about the current status and
the future direction of the project.
 6) Monitor and control the project performance

 The sixth step to manage changes and variations is to monitor and control the project
performance regularly. This means collecting, analyzing, and reporting the project data
and metrics that indicate the progress, the variance, and the trends of the project scope
and duration. Monitoring and controlling the project performance helps you to identify
and address any issues, risks, or deviations that may arise due to changes or variations,
and to take corrective or preventive actions to keep the project on track and within the
agreed scope and schedule.

3. How do you use benchmarking and auditing to evaluate and improve your project cost
management processes and practices?

Benchmarking is the systematic process of measuring one’s performance against recognized

leaders for the purpose of determining best practices that lead to superior performance.

Benchmarking is a process used in management, including Higher Education, in which

organisations evaluate various aspects of their processes in relation to best practice, usually
within their own sector. It thus has an important comparative purpose. This then allows
organisations to develop plans on how to adopt best practice, usually with the aim of increasing
some aspect of performance.

Benchmarking best practices could mean making current or upcoming projects better in terms of
making them:

 More efficient (run on schedule or ahead of schedule)

 More cost effective (keeping on-
 Budget or under budget)
 More customer-centric or more customer service oriented
 And/or more profitable overall
Use benchmarking process steps

1. Identify what will be benchmarked. This can come from the top down, for example
from the company’s mission statement, or existing performance measures can be used.
2. Identify comparative companies. This is driven by the type of benchmarking you want
to do. For example, a company that wants to benchmark internally (e.g., across regions or
divisions) will need different information than a company that wants to see how it stacks
up against its competitors.
3. Determine the data collection method and collect the data.
4. Analyze the data to determine performance gaps between current performance and
desired performance,
5. Project future performance levels. Projecting future performance is important to know
if the company’s gap from industry practices will widen, narrow, or stay the same.
6. Communicate the benchmarking findings and gain acceptance. Communicating the
results to company leadership is a critical step as the identification of performance gaps
may lead to skepticism on the validity of the results. Gaining acceptance drives the
initiative for change.
7. Establish functional goals.
8. Develop action plans to meet those goals. Getting stakeholders to buy-in to the action
plan is critical to the success of the plan’s implementation and cannot be overlooked.
9. Implement specific action and monitor progress.
10. Recalibrate the benchmarks to drive continuous improvement.

Audit

 Audit is essentially a quality improvement process where performance is measured

against predetermined standards or criteria, which are chosen as important ‘indicators’ of
overall performance. in audit there will be pre-determined standards within defined
parameters, against which performance will be evaluated. Changes can then be
implemented to improve standards.
Plan cost audits and reviews: Before you start auditing and reviewing your project costs, you
need to have a clear plan that defines the scope, criteria, frequency, roles, and responsibilities of
the process.

Perform cost audits:Cost audits are formal and independent examinations of your project cost
accounts, records, and reports. They verify the accuracy, completeness, and compliance of your
project cost information. They also evaluate the effectiveness and efficiency of your project cost
management processes and practices.

Perform cost reviews:Cost reviews are informal and collaborative assessments of your project
cost performance, variance, and forecast. They measure the progress and status of your project
costs against the baseline, the budget, and the expected outcomes. They also identify and analyze
any issues, problems, or opportunities that may affect your project cost performance.

Implement cost audit and review actions:Based on the results of your cost audits and reviews,
you should implement any necessary actions to improve your project cost performance and
quality. You should prioritize and assign the actions according to their urgency, impact, and
feasibility. You should also monitor and track the status and outcomes of the actions. You should
update and adjust your project cost baseline, budget, and forecast as needed. You should also
document and share any lessons learned, best practices, or changes that resulted from your cost
audit and review actions.

Manage cost audit and review stakeholders:Throughout the cost audit and review process, you
should manage the expectations and involvement of your project stakeholders. You should
identify and engage the key stakeholders who have an interest or influence on your project cost
performance and quality.

Evaluate cost audit and review effectiveness:At the end of your project or after each cost audit
and review cycle, you should evaluate the effectiveness and value of your cost audit and review
process. You should measure and compare the actual versus planned results of your cost audit
and review activities.
4. What are the main challenges and best practices of cost estimation in building construction
projects in Ethiopia? How does price fluctuation of construction inputs affect the financial
capacity and performance of contractors in Ethiopia? What are the factors that cause
construction delays in Ethiopia and how to mitigate them?

The major challenges are:

1:Quantifying cost impacts:Estimators must also analyze cost impacts for new products or
approaches that are unknown or intangible. Quantifying the impacts of new regulations, human
lives, or even time as a dollar value can be subjective but necessary to compare alternatives and
make trades.

2: Resource constraints: Cost estimates must be timely! Time constrains many aspects of
estimating, including data collection and validation, data quality, and consistency.

3: Quality of available data:Resource constraints challenge the quality and quantity of data that
estimators can obtain. If there is not sufficient time available, estimators may use secondary data
sources, manipulated from the original source. Secondary data, especially that lack thorough
documentation, have limited usefulness.

4: Large number of organizations involved:Collecting data involves many different data

sources and organizations of which estimators must be aware. Estimators need to communicate
and coordinate with all of these sources. To be useful, the data must be accessible, so estimators
and analysts may need to obtain proper non-disclosure agreements (NDAs) or to meet other
security requirements for each organization.

5: Consistency:Once analysts collect all these data from the different sources through many time
periods, they must make it consistent and comparable.

The challenge here is that these organizations are inherently different and processes, procedures,
and structures have changed over time, even the value of the dollar has changed!
How does price fluctuation of construction inputs affect the financial capacity and
performance of contractors in Ethiopia?

The primary problems of the construction sector can be classified into two main categories.
The first is related to the consequences of integrated planning and implementability (Mishra and
Magar, 2017). The second problem is related to deficiencies and market price fluctuation of
the inputs required for the construction (Paulos, 2002). The deficiencies and market price
fluctuation of construction inputs is also greatly hindering the growth of the construction
industry. Sharp price increases lead contractors into failure to complete their projects within
the acceptable margin of time and quality for the client and fail to complete within the planned
cost margin for them. Contractors are the major actors in any construction project as they are
the ones who take up all the responsibility to undertake the whole construction activities and
related tasks. These major tasks include procurement of materials, deployment of all the
necessary machinery, equipment and human resource, managing the financial resources and
converting all resources into the intended project outputs. Therefore, among the various
stakeholders involved in the construction industry, contractors are the ones at the front line to
play the largest role in realizing projects. Hence, on due course of their operation they are the
ones to first face the problems and challenges encountered within the industry
Price fluctuation can generally be defined as the rise or fall of price of goods, materials and
services on the markets. Price fluctuation can occur at any market, i.e at international markets,
local market and/or at the labor market. A contractor who tenders at a fixed price runs the risk
that he may later have to pay more for materials and labor than the prices and wages current at
the time of his tender.(Conversely he may benefit if those prices and wages go down.).
What are the factors that cause construction delays in Ethiopia and how to mitigate them?

1. Budget Inaccuracies:Getting the estimate wrong for a construction job can be

massively detrimental.
2. Labor Challenges:One of the biggest reasons for construction delays today is
labor..
3. Subcontractor Schedules and Compliance:General contractors typically work
with a number of subcontractors for each project. Effectively managing them,
their timelines and schedules, compliance documentation, and collaborating with
other contractors is vital to a project’s success.
4. Lacking Good Communication:Communication and collaboration audit trails
also come in handy if a conflict does arise, giving the general contractor
confidence that teams have all the accurate information they need at all times to
resolve issues before they become a project problem.
5. Poor Weather:One thing that can’t be controlled is the weather (it would be great
if we could!). Understanding that extreme conditions can’t be controlled, allows
you to be prepared, which can make a difference.
6. Policy implementation and corruption
7. Lack of collaboration and professionalism.
8. Increasing Construction Material Costs.
5. You are managing a software development project with a budget of $100,000 and a duration
of 10 months. The project is divided into four phases: analysis, design, coding and testing.
Each phase has a planned value (PV) of $25,000 and a duration of 2.5 months. At the end of
the third month, you have completed the analysis phase and 50% of the design phase. Your
actual cost (AC) so far is $35,000.

Given:
Project Cost(BAC)=$100,000
Project Duration =10 Months
Work Packages=4 phase
PV=$25,000 for each phase
Time Elapsed=obove 3 Months
Percent complete: 50%(as per the schedule)
Actual Cost=$35,000

- What is the earned value (EV) of your project at the end of the third month?

EV= 50%XBAC(0.5X100,000)=50,000

- What is the schedule variance (SV) of your project at the end of the third month?

SV=EV-PV= 50,000-37,500 =12,500

- What is the cost variance (CV) of your project at the end of the third month?

CV=EV-AC= 50,000-35,000= $15,000

-What is the schedule performance index (SPI) of your project at the end of the third month?

SPI=EV/PV=$50000/37,500=1.333

- What is the cost performance index (CPI) of your project at the end of the third month?

CPI=EV/AC=50000/35,000=1.43
- What is the estimate at completion (EAC) of your project at the end of the third month?

EAC = BAC/CPI

100,000/1.43

69,930

-What is the estimate to complete (ETC) of your project at the end of the third month?

ETC=EAC-AC OR (BAC-EV)/CPI

ETC=69,690-35000=34,930

Planned Value = PV = Planned completion as per schedule * BAC = 38% * 800,000 = $304,000

Actual % of work completion = 40%

Earned Value = EV = Actual % of work completion * BAC = 40% * 800,000 = $320,000

Actual Cost of work completed = 50%

Actual Cost = AC = Actual Cost of work completed * BAC = 50% * 800,000 = $400,000

Cost Variance CV = EV - AC = 320,000 - 400,000 = $ (-80,000)

Step-by-step explanation

Schedule Variance = SV = EV - PV = 320,000 - 304,000 = $16,000

Cost performance Index = CPI = EV / AC = 320000 / 400000 = 0.80

Schedule Performance Index = SPI = EV / PV = 320,000 / 304,000 = 1.053

Since CV < 0, CPI < 1, the project is over-budget.

Since SV > 0, SPI > 1, the project is ahead of schedule.