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Project Cost / Finance Management
MSPM Bahria University
Week : 5 Project Cost Management
- Plan Cost Management
- Estimate Costs
- Determine Budget
- Control Costs
ESTIMATE COSTS
- Estimate Costs is the process of developing an approximation of the cost of resources needed to complete project work. The key benefit of this process is that it determines the monetary resources required for the project.
- This process is performed periodically throughout the project as needed.
Estimate Costs: Inputs, Tools & Techniques, and Outputs Estimate^ Costs: Inputs Cost management plan: The cost management plan describes estimating methods that can be used and the level of precision and accuracy required for the cost estimate. Quality management plan: The quality management plan describes the activities and resources necessary for the project management team to achieve the quality objectives set for the project. Estimate Costs: Inputs Scope baseline: The scope baseline includes the project scope statement, WBS, and WBS dictionary
- Project scope statement: The scope statement reflects funding constraints by period for the expenditure of project funds or other financial assumptions and constraints.
- Work breakdown structure: The WBS provides the relationships among all the project deliverables and their various components.
- WBS dictionary: The WBS dictionary and related detailed statements of work provide an identification of the deliverables and a description of the work in each WBS component required to produce each deliverable. Estimate Costs: Inputs Scope baseline: The scope baseline includes the project scope statement, WBS, and WBS dictionary
- Project scope statement: The scope statement reflects funding constraints by period for the expenditure of project funds or other financial assumptions and constraints.
- Work breakdown structure: The WBS provides the relationships among all the project deliverables and their various components.
- WBS dictionary: The WBS dictionary and related detailed statements of work provide an identification of the deliverables and a description of the work in each WBS component required to produce each deliverable.
Estimate Costs: Inputs ENTERPRISE ENVIRONMENTAL FACTORS: Market conditions: These conditions describe what products, services, and results are available in the market, from whom, and under what terms and conditions. Regional and/or global supply and demand conditions greatly influence resource costs. Estimate Costs: Inputs ENTERPRISE ENVIRONMENTAL FACTORS: Published commercial information: Resource cost rate information is often available from commercial databases that track skills and human resource costs, and provide standard costs for material and equipment. Published seller price lists are another source of information. Exchange rates and inflation. For large-scale projects that extend multiple years with multiple currencies, the fluctuations of currencies and inflation need to be understood and built into the Estimate Cost process. Estimate Costs: Inputs ORGANIZATIONAL PROCESS ASSETS:
- Cost estimating policies,
- Cost estimating templates,
- Historical information and lessons learned repository. Estimate Costs: Tools and Techniques Analogous estimating is a technique for estimating the duration or cost of an activity or a project using historical data from a similar activity or project.
- Analogous duration estimating is frequently used to estimate project duration/cost when there is a limited amount of detailed information about the project
- It is less costly and less time-consuming than other techniques, but it is also less accurate
Estimate Costs: Tools and Techniques Analogous estimating:
- Analogous cost estimating uses the values such as scope, cost, budget, and duration or measures of scale such as size, weight, and complexity from a previous, similar project as the basis for estimating the same parameter or measurement for a current project.
- this technique relies on the actual cost of previous, similar projects as the basis for estimating the cost of the current project. Estimate Costs: Tools and Techniques Parametric estimating is an estimating technique in which an algorithm is used to calculate cost or duration based on historical data and project parameters.
- It uses a statistical relationship between historical data and other variables (e.g., square footage in construction) to calculate an estimate for activity parameters, such as cost, budget, and duration. Estimate Costs: Tools and Techniques Example You are the project manager for the annual Earth Day 5k road race, with three primary components: marketing, registration, and race-day coordination.
- For marketing, there will be 500 flyers printed up at a cost $0. each.
- Last year the cost to host the registration website was $850.00 You estimate the same this year.
- There will be four people used to coordinate the race. Each resource will be paid $25 per hour and they will be working an estimated seven hours, based on the race last year.
- Estimate the total cost Marketing : Cost: $100 for brochures (parametric estimating 500 x $0.20) Registration Cost: $850 (analogous) Coordination Cost: $700 (parametric estimating 4 x $25 x 7) Total cost: ($100 +$850+$700= $1650) Estimate Costs: Tools and Techniques
Top Down estimating is a project estimating technique whereby the overall project is estimated first, and individual tasks are apportioned from it. You start from the top of the pyramid and work downwards.
- This type of project budgeting usually occurs when there is a fixed budget and/or the scope of the project must fit within a predetermined funding level, Estimate Costs: Tools and Techniques
Top-Down versus Bottom-Up Estimating
Top-Down Estimates Are usually are derived from someone who uses experience and/or information to determine the project duration and total cost. Are made by top managers who have little knowledge of the processes used to complete the project. Bottom-Up Approach Can serve as a check on cost elements in the WBS by rolling up the work packages and associated cost accounts to major deliverables at the work package level. Estimate Costs: Tools and Techniques
Top-Down versus Bottom-Up Estimating
Bottom-up estimating is a method of estimating a component of work. The cost of individual work packages or activities is estimated to the greatest level of specified detail. The detailed cost is then summarized or “rolled up” to higher levels for subsequent reporting and tracking purposes. The cost and accuracy of bottom-up cost estimating are typically influenced by the size and complexity of the individual activity or work package.
THREE-POINT ESTIMATING:
The accuracy of single-point cost estimates may be improved by considering estimation uncertainty and risk and using three estimates to define an approximate range for an activity’s cost:
Estimate Costs: Tools and Techniques Triangular Distribution The simplest three point estimate is the simple average of the three values (known as the triangular distribution): E = (a + m + b) / 3 Where: E = estimated cost a = optimistic value m = most likely value b = pessimistic value Estimate Costs: Tools and Techniques Beta Distribution The beta distribution places the final estimate closer to the most likely value: E = (a + 4m + b) / 6 Where: E = estimated cost a = optimistic value m = most likely value b = pessimistic value Comparison:
- The triangular distribution is the default and should be used if there is no reason to use anything else.
- The beta distribution should be chosen when there is more confidence in the most likely value, that is, where the final estimate should be tighter to the mean. Estimate Costs: Tools and Techniques Three Point Estimating and Risk Analysis The key benefit of three point estimating is the way it takes into account project risk.
- The project success factors are determined
- Risks which might affect the project success factors are identified.
- The risks are analyzed and prioritized to determine which are the most important.
- The project is divided into tasks (a work breakdown structure).
- Each task receives three estimates:
- Optimistic. Assuming the risks do not occur.
- Most likely. Assuming the risk occurrence level that is most likely to occur. Similar to other estimate types.
- Pessimistic. Assuming that the risks occur.
- The Three Point Estimating procedure is used to determine the final estimate for each task. Estimate Costs: Tools and Techniques
