Project Cost Analysis

Estimate Costs
Dr. Hisham Ali Sayed

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Estimate Costs
The process of developing an approximation of the monetary resources
needed to complete project work.

Determines the monetary A cost estimate is a quantitative assessment

resources required for the of the likely costs for resources required to
project complete the activity

The Project Manager has a professional responsibility to provide

accurate estimates (as possible ) , and also to maintain the integrity of
estimates.
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Project Cost Elements
• Different stakeholders measure project costs in different ways and at
different times.

Labor Materials Equipment Services Facilities

Special
Inflation allowance Contingency costs Cost of financing
Categories :

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Law of Diminishing Returns
• The more you put into something, the less you get out of it.
• For example, adding twice as many resources to an activity may not
get the activity done in half the time.

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The accuracy of a project estimate
• The accuracy of a project estimate will increase as the project progresses
through the project life cycle.

• In some organizations, there are guidelines for when such refinements can
be made and the degree of confidence or accuracy that is expected.

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 07.2 Estimate Costs

Inputs Tools & Techniques Outputs

.1 Project management plan .1 Expert judgment .1 Cost estimates
.2 Project documents .2 Analogous estimating .2 Basis of estimates
.3 Enterprise environmental .3 Project documents
factors .3 Parametric estimating updates
.4 Organizational process
assets .4 Bottom-up estimating
.5 Three-point estimating
.6 Data analysis
.7 Project management
information system
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.8 Decision making
Project Documents

Lessons learned Resource

Project schedule Risk register
register requirements

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 07.2 Estimate Costs

Inputs Tools & Techniques Outputs

.1 Project management plan .1 Expert judgment .1 Cost estimates
.2 Project documents .2 Analogous estimating .2 Basis of estimates
.3 Enterprise environmental .3 Project documents
factors .3 Parametric estimating updates
.4 Organizational process
assets .4 Bottom-up estimating
.5 Three-point estimating
.6 Data analysis
.7 Project management
information system
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.8 Decision making
Data analysis

Alternatives analysis Reserve analysis Cost of quality

Contingency reserves
(allowances)

ANALOGOUS PARAMETRIC BOTTOM-UP Decision THREE-POINT

PMIS
ESTIMATING ESTIMATING ESTIMATING Making ESTIMATING

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Analogous Estimating (Top Down)
Analogous estimating : A technique for estimating the duration or cost
of an activity or a project using historical data from a similar activity or
project.

Generally less costly Can be used in Reliable when

than other conjunction with projects are similar
techniques., less time other estimating and needed
consuming, and in the methods experience is available
same time Less
accurate

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Parametric Estimating
Parametric estimating: An estimating technique in which an algorithm
is used to calculate cost or duration based on historical data and
project parameters.
Use Parameters From Previous
Reliable if: Projects
Values: Measures of Scale:
• Historical information used - Scope - Size
was accurate. -Cost - Weight
• The parameters used in -Duration - Complexity
the model are readily
quantifiable.
Estimate Same Parameter for
• The model is scalable (i.e.
works for both a small and Current Project
larger project). 11
Bottom-Up Estimating
Bottom-Up Estimating: A method of estimating project duration or cost
by aggregating the estimates of the lower-level components of the
work breakdown structure (WBS).

• When we cannot estimate an activity with a good degree of

confidence, the work within the activity is decomposed into more
detail.
• Project management team must weigh the additional accuracy
against additional cost.

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Three-Point Estimating
Three-Point Estimating: A technique used to estimate cost or duration
by applying an average of optimistic, pessimistic, and most likely
estimates when there is uncertainty with the individual activity
estimates.

• Considers Estimation uncertainty and Risk which improves the

accuracy of a one point estimate.
• Most likely (cM)
• Optimistic (cO).
• Pessimistic (cP).

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Three-Point Estimating
Depending on the assumed distribution of values within the range of
the three estimates the expected cost, cE, can be calculated using a
formula:

Triangular Distribution:
cE = (cO + cM + cP) / 3

Beta Distribution (from a traditional PERT analysis):

cE = (cO + 4cM + cP) / 6
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Reserve Analysis
Reserve Analysis: An analytical technique to determine the essential
features and relationships of components in the project management
plan to establish a reserve for the schedule duration, budget, estimated
cost, or funds for a project.

• Contingency reserve
• Management reserve

(see Risk Management Tools and Techniques)

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Reserve Analysis
• At this stage Cost estimates may include contingency reserves or
buffers (a percentage of the estimated cost, a fixed number of work
periods, or may be developed by using quantitative analysis
methods).
• As More information is available , the contingency reserve may be
used, reduced, or eliminated.
• Contingency should be clearly identified in cost documentation.
• Estimates may also include Management reserve of cost for the
project.

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Vendor Bid Analysis
• Cost estimating methods may include analysis of what the project
should cost, based on the responsive bids from qualified vendors.

• Where projects are awarded to a vendor, additional cost estimating

work can be required of the project team to examine the price of
individual deliverables and to derive a cost that supports the final
total project cost.

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Group Decision-Making Techniques
Team-based approaches, such as brainstorming, the Delphi or nominal
group techniques, are useful for engaging team members to improve
estimate accuracy and commitment to the emerging estimates.

• Additional information is gained

• More accurate estimates are obtained.
• Commitment towards meeting the resulting estimates increases..

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Categories of Construction Costs

Variable
Cost
Fixed Cost

Indirect
Cost Direct Cost
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Variable Costs vs Fixed Costs
Variable Costs:
• Costs that change with the amount of production or the amount of
work.
• Examples: the cost of material, supplies and wages.

Fixed Costs:
• These are costs that do not change as production changes.
• Examples: set-up, rental, etc.

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Direct Costs vs Indirect Costs
Direct Costs:
• Costs that are directly attributable to the work on the project.
• Examples: team travel, team wages, recognition, and costs of material
used on the project.

Indirect Costs:
• Overhead items or costs incurred for the benefit of more than one
project.
• Examples: Include taxes, fringe benefits …
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Direct, Indirect, and Special Categories Costs
Cost estimates can be presented in summary form or in detail. Costs
are estimated for all resources that are applied to the activity cost
estimate

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Discussion about Activity Cost estimates
Classification
1. RC for Columns for the 2nd Floor.
2. Rental cost for company head office.
3. Permits Cost for the project.

Fixed Cost Variable Cost

Direct Cost A B
In Direct Cost C D

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Discussion about Activity Cost estimates
Classification
Fixed Cost Variable Cost
Direct Cost 3-Permits Cost 1-RC for
for the project Columns for the
2nd Floor
In Direct Cost 2-Rental cost for -
company head
office

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Depreciation
• Depreciation is the decrease in value of an asset over a period of time for
accounting and tax purposes.
• Depreciation Methods: Initial
Cost
• Straight Line Depreciation:
• Property depreciates the same
Salvage
• amount every year Value time
• Accelerated Depreciation:
• Property depreciates more rapidly in Initial years than Straight Line Depreciation.
Some examples are:
• Double Declining Balance Initial
Cost
• Sum of the Year Digits
Salvage
Value
time
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 07.2 Estimate Costs

Inputs Tools & Techniques Outputs

.1 Project management plan .1 Expert judgment .1 Cost estimates
.2 Project documents .2 Analogous estimating .2 Basis of estimates
.3 Enterprise environmental .3 Project documents
factors .3 Parametric estimating updates
.4 Organizational process
assets .4 Bottom-up estimating
.5 Three-point estimating
.6 Data analysis
.7 Project management
information system
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.8 Decision making
 Outputs
Cost estimates Costs required to Management
Contingency Reserve
complete project work, Reserve

Basis of estimates

Project documents updates Lessons learned

Assumption log Risk register
register

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