Project Management

Quản lý Dự án
Dr. TRAN QUYNH LE
Dr. NGUYEN DUC DUY
Industrial Systems Engineering Department
Mechanical Engineering Faculty
Ho Chi Minh City University of Technology (HCMUT)–
VNUHCM
 Chapter 5
Estimating Project Times and Costs

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 LEARNING OUTCOME

After learning this chapter you should be able to:

• Understand estimating project times and costs is the

foundation for project planning and control.

• Describe guidelines for estimating time, costs, and resources.

• Distinguish different kinds of costs associated with a project.

• Suggest a scheme for developing an estimating database for

future projects

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Estimating Projects
▪ Estimating
• The process of forecasting or approximating the time and cost of completing
project deliverables.
• The task of balancing the expectations of stakeholders and the need for
control while the project is implemented
▪ Types of Estimates
• Top-down (macro) estimates: analogy, group consensus, or mathematical
relationships
• Bottom-up (micro) estimates: estimates of elements of the work breakdown
structure

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Why Estimating Time and Cost Are Important

▪ Estimates are needed to support good decisions.

▪ Estimates are needed to schedule work.
▪ Estimates are needed to determine how long the project should take and its cost.
▪ Estimates are needed to determine whether the project is worth doing.
▪ Estimates are needed to develop cash flow needs.
▪ Estimates are needed to determine how well the project is progressing.
▪ Estimates are needed to develop time-phased budgets and establish the project
baseline.

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Factors Influencing the Quality of Estimates
Planning
Horizon

Other (Nonproject) Project

Factors Duration

Quality of
Organization Estimates People
Culture

Padding Project Structure

Estimates and Organization

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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 (dự phòng)
7. Adding a risk assessment helps avoid surprises to stakeholders.

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Macro versus Micro Estimating

Conditions for Preferring Top-Down or Bottom-up

Time and Cost Estimates

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

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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

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Methods for Estimating Project Times and Costs

▪ Macro (Top-down) Approaches

1. Consensus methods
➢ uses the pooled experience of senior and/or middle managers to estimate the total
project duration and cost
2. Ratio methods
➢ Top-down methods (sometimes called parametric) usually use ratios, or
surrogates/alternatives, to estimate project times or costs.
➢ E.g.: a house of 2,700 square feet might cost $160 per square foot (2,700 feet ×
$160 per square foot equals $432,000).
3. Apportion method
➢ Apportionment is used when projects closely follow past projects in features and
costs.

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Methods for Estimating Project Times and Costs (cont’d)

4. Function point methods for software and system projects

➢ Using weighted macro variables called function points or major parameters such as
number of inputs, number of outputs, number of inquiries, number of data files, and
number of interfaces.

5. Learning curves
➢ also known as improvement curve, experience curve, and industrial progress curve
➢ Each time the output quantity doubles, the unit labor hours are reduced at a
constant rate

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Learning curves

“A learning curve is a graphical representation of the relationship between how

proficient people are at a task and the amount of experience they have.”

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Some examples of
learning curves in
industry.

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Learning Curves for Estimating

For example, assume that a manufacturer has a new contract for 16 prototype
units and a total of 800 labor hours were required for the first unit.
Past experience has indicated that on similar types of units the improvement
rate has been 80 percent.
This relationship of improvement in labor hours is shown below:

Or: 800*0.4096=328

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Learning Curves for Estimating

▪ That is, the 16th unit should require close to 328 labor hours, assuming an 80
percent improvement ratio.
▪ Compute the cumulative total labor hours of all units.
▪ The first 16 units, the total labor hours required would be:
800x 8.920=7,136 hours

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Learning Curves Unit Values

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Learning Curves Cumulative Values

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Apportion Method of Allocating Project Costs Using the Work
Breakdown Structure

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

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Example: Function Point Count Method

TABLE 5.3

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Methods for Estimating Project Times and Costs (cont’d)

▪ Micro (Bottom-up) Approaches

• Template method
• Parametric Procedures Applied to Specific Tasks
• Detailed Estimates for the WBS Work Packages
• Phase Estimating: A Hybrid

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SB45 Support Cost Estimate Worksheet

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Phase Estimating over Product Life Cycle

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Top-Down and Bottom-Up Estimates

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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

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Developing Budgets

▪ Time-Phased Budgets
• A cost estimate is not a budget unless it is time-phased.
➢ Time phasing begins with the time estimate for a project.
➢ Time-phased budgets mirror how the project’s cash needs (costs) will occur or
when cash flows from the project can be expected.
➢ Budget variances occur when actual and forecast events do not coincide.

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Work Package Estimates

FIGURE 5.4

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Three Views of Cost

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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

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Contract Bid Summary Costs

Direct costs $80,000

Direct overhead $20,000
G&A overhead (20%) $20,000
Profit (20%) $24,000
Total bid $144,000

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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.

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Refining Estimates (cont’d)

▪ Contingency Funds and Time Buffers

• Are created independently to offset uncertainty.
• Reduce the likelihood of cost and completion time overruns for a project.
• Can be added to the overall project or to specific activities or work packages.
• Can be determined from previous similar projects.
▪ Changing Baseline Schedule and Budget
• Unforeseen events may dictate a reformulation of the budget and schedule.

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Creating a Database for Estimating

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Key Terms

▪ Apportionment methods ▪ Overhead costs

▪ Contingency funds ▪ Padding estimates
▪ Delphi method ▪ Phase estimating
▪ Direct costs ▪ Ratio methods
▪ Function points ▪ Template method
▪ Interaction costs ▪ Time and cost databases
▪ Learning curves ▪ Time-phased budgets
▪ Macro and micro estimating

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