Project Management Time and Cost Exercises

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CH APT ER F IV E

Estimating Project T imes and Costs

Estim atin g P ro je ct T im es a n d C osts

F acto rs I n flu en cin g t h e Q uality o f E stim ate s

E stim atin g G uid elin es f o r T im es, C osts , a n d

R eso urc es

T opD ow n v ers u s B otto m U p E stim atin g

M eth ods f o r E stim atin g P ro je ct T im es a n d C osts

L ev el o f D eta il

T ypes o f C osts

R efin in g E stim ate s

C re atin g a D ata b ase f o r E stim atin g

S um mary

A ppen dix 5 .1 : L earn in g C urv es f o r E stim atin g 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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Pro je ct e stim atio n i s i n deed a y a rd sti c k f o r p ro je ct c o st c o ntr o l. A nd i f t h e y a rd stic k i s f a ulty , y o u

sta rt o n t h e “ w ro ng f o ot.” … w e e xh ort y o u n ot t o u ndere stim ate t h e e stim ate . *

Given the urgency to start work on the project, managers sometimes minimize or avoid the effort to follow

through on estimating project time and cost. This attitude is a huge mistake and costly . There are important

reasons to make the ef fort and incur the cost of estimating for your project. Exhibit 5.1 s um marizes some key

reasons.

Estimating is the process of forecasting or approximating the time and cost of completing project deliverables.

Estimating processes are frequently classified as topdown and bottomup. Topdown estimates are usually done

by senior management. Management will often derive estimates from analogy , group consensus, or

mathematical relationships. Bottomup estimates are typically performed by the people who are doing the work.

Their estimates are based on estimates of elements found in the work breakdown structure.

All project stakeholders prefer accurate cost and time estimates, but they also understand the inherent

uncertainty in all projects. Inaccurate estimates lead to false expectations and consumer dissatisfaction.

Accuracy is improved with greater effort, but is it worth the time and cost—estimating costs money! Project

estimating becomes a tradeof f, balancin g the benefits of better accuracy against the costs for securing increased

accuracy.

Cost, time, and budget estimates are the lifeline for control; they serve as the standard for comparison of

actual and plan throughout the life of the project. Project status reports depend on reliable estimates as the major

input for measuring variances and taking corrective action. Ideally, the project manager , and in most cases the

customer , would prefer to have a databa se of detailed schedule and cost estimates for every work package in the

project. Regrettably , such detailed data gathering is not always possible or practical and other methods are used

to develop project estimates.

EX H IB IT 5 .1 W hy E stim atin g T im e a n d C ost A re I m porta n t

Estim ate s a re n eed ed t o s u pport g ood d ecis io ns.

E stim ate s a re n eed ed t o s c h ed ule w ork .

E stim ate s a re n eed ed t o d ete rm in e h ow l o ng t h e p ro je ct s h ould t a k e a n d i ts c o st.

E stim ate s a re n eed ed t o d ete rm in e w heth er t h e p ro je ct i s w orth d oin g.

E stim ate s a re n eed ed t o d ev elo p c ash f lo w n eed s.

E stim ate s a re n eed ed t o d ete rm in e h ow w ell t h e p ro je ct i s p ro gre ssin g.

E stim ate s a re n eed ed t o d ev elo p t im ep hase d b udgets a n d e sta b lis h t h e p ro je ct b ase lin e. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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Facto rs I n flu en cin g t h e Q uality o f E stim ate s

A typ ical statement in the field is the desire to “have a 95 percent probability of meeting time and cost

estimates.” Past experience is a good starting point for developing time and cost estimates. But past exper ience

estimates must almost always be refin ed by other considerations to reach the 95 percent probability level.

Factors related to the uniqueness of the project will have a strong influence on the accuracy of estimates.

Project, people, and external factors all need to be considered to improve quality of estimates for project times

and costs.

Pla n nin g H oriz o n

The quality of the estimate depends on the planning horizon; e stimates of current events are close to 100 percent

accurate but are reduced for more distant events. For example, cost estimates for a party you are organizing this

weekend should be much more accurate than the estimates for a wedding that will take place in three months.

The accuracy of time and cost estimates should improve as you move from the conceptual phase to the point

where individual work packages are defined. Longduration projects increase the uncertainty in estimates.

Pro je ct D ura tio n

T ime to implement new technology ha s a hab it of expanding in an increas ing, nonlinear fashion. Sometimes

poorly written scope specifications for new technology result in errors in estimating times and costs.

Peo ple

The people factor can influence the quality of tim e and cost estimates. For example, accuracy of estimates

depends on the skills of the people making the estimates. How familiar are they with the task they are

estimating?

Pro je ct S tr u ctu re a n d O rg an iz a tio n

Which pr oject structur e is chosen to manage the project will influence time and cost estimates. One of the major

advantages of a de dicated project team discussed earlier is the speed gained from concentrated focus and

localized project decisions. This speed comes at an additional cost of tying up personnel full time. Conversely ,

projects operating in a matrix environment may reduce costs by more effic iently sharing personnel across

projects but may take longer to complete since attention is divided and coordination demands are higher .

Paddin g E stim ate s

In some cases people are inclined to pad estimates. For exam ple, if you are asked how long it takes you to drive

to the airport, you might give an avera ge time of 30 minutes, assuming a 50/50 chance of getting there in 30

minutes. If you are asked the fastest you could possibly get there, you migh t reduce the driving time to 20

minutes. Finally , if you are asked how long the drive would take if you absolutely had to be there to meet with

the presid ent, it is likely you would increase the estimate to say 50 minutes to ensure not being late. In work

situations where you are asked for time and cost estimates, most of us are inclined to add a little padding to

increase the probability and reduce the risk of being late. If everyone at all levels of the project adds a little

padding to reduce risk, the project duration and cost 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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are seriously overstated. This phenomen on causes some managers or owners to call for a 10–15

percent cut in time and/or cost for the project. Of course the next time the game is played, the

person estimating cost and/or time will pad the estimate to 20 percent or more. Clearly such

games defeat chances for realistic estimates, which is what is needed to be competitive.

Org an iz a tio n C ultu re

Or ganization culture ca n significantly influence project estimates. In some organizations padding estimates is

tolerated and even privately encouraged. Other organizations place a prem ium on accuracy and strongly

discourage estimating gamesmanship. Organizations vary in the importance they attach to estimates. The

prevailing belief in some organizations is that detailed estimating takes too much time and is not worth the effort

or that it's impossible to predict the futu re. Other organizations subscribe to the belief that accurate estimates are

the bedrock of effective project management. Organization culture shapes every dimension of project

management; estimating is not immune to this influence.

Oth er F acto rs

Finally , nonproject factors ca n impact time and cost estimates. For example, equipment downtime can alter

time estim ates. National holidays, vacations, and legal limits can influence project estimates. Project priority can

influence resource assignment and impact time and cost.

Project estimating is a complex process. The quality of time and cost estimates can be improved when these

variables are considered in making the estimates. Estimates of time and cost together allow the manager to

develop a timephased budget, which is imperative for project control. Before discussing macro and micro

estimating methods for times and costs, a review of estimating guidelines will remind us of some of the

important “rules of the game” that can improve estimating.

Estim atin g G uid elin es f o r T im es, C osts , a n d R eso urc es

Managers recognize time, cost, and resource estimates must be accurate if project planning, scheduling, and

controlling are to be effective. However , there is substantial evidence suggesting poor estimates are a major

contributor to projects that have failed. Therefore, every effort should be made to see that initial estimates are as

accurate as possible since the choice of no estimates leaves a great deal to luck and is not palatable to serious

project managers. Even though a projec t has never been done before, a manager can follow seven guidelines to

develop useful work package estimates.

1. Responsibility . A t the work package level, estimates should be made by the person(s) most familiar with

the task. Draw on their expertise! Except for supertechnical tasks, those responsible for getting the job done on

schedule and within budget are usually firstline supervisors or technicians who are experienced and familiar

with the type of work involved. These people will not have some preconceived, imposed duration for a

deliverable in mind. They will give an estimate based on experience and best judgment. A secondary benefit of

using those responsible is the hope they will “buy in” to seeing that the estimate materializes when they

implement the work package. If those involved are not consulted, it will be difficult to hold them responsible for

failure to achieve the estimated time. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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Finally, drawing on the expertise of team members who will be responsible helps to build

communication channels early .

2. Use several people to estimate. It is well known that a cost or time estimate usually has a better chance of

being reasonable and realistic when several people with relevant experience and/or knowledge of the task are

used (sometimes called “crowdsourcing ”). True, people bring different biases based on their experience. But

discussion of the individual differences in their estimate leads to consensus and tends to eliminate extreme

estimate errors.

3. Normal conditions. When task time, cost, and resource estimates are determined, they are based on certain

assumptions. Estimates should be based on normal conditions, efficient methods, and a normal level of

resour ces . Nor mal conditions are sometimes difficult to discern, but it is necessary to have a consensus in the

organization as to what normal conditions mean in this project. If the normal workday is eight hours, the time

estimate should be based on an eighthour day. Similarly , if the normal workday is two shifts, the time estimate

should be based on a twoshift workday. Any time estimate should reflect efficient methods for the resources

normally available. The time estimate should represent the normal level of resources—people or equipment. For

example, if three programmers are available for coding or two road graders are available for road construction,

time and cost estima tes should be based on these normal levels of resources unless it is anticipated the project

will change what is currently viewed as “normal.” In addition, possible conflicts in demand for resources on

parallel or concurrent activities should not be considered at this stage. The need for adding resources will be

examined when resource scheduling is discussed in a later chapter .

4. Time units. Specific time units to use should be selected early in the development phase of the project

network. All task time estimates need consistent time units. Estimates of time must consider whether normal

time is represented by calendar days, workdays, workweeks, person days, single shift, hours, minutes, etc. In

practice the use of workdays is the dom inant choice for expressing task duration . However , in projects such as a

heart transplant operation, minutes probably would be more appropriate as a time unit. One such project that

used minutes as the time unit was the movement of patients from an old hospital to an elegant new one across

town. Since there were several lifeendangering moves, minutes were used to ensure patient safety so proper

emer gency lifesupp ort systems would be available if needed. The point is, netw ork analysis requires a standard

unit of time. When computer programs allow more than one option, some notation should be made of any

variance from the standard unit of time . If the standard unit of time is a fived ay workweek and the estimated

activity duration is in calendar days, it must be converted to the normal workweek.

5. Independence. Estim ators should treat each task as independent of other tasks that might be integrated by

the WBS. Use of firstline managers usually results in considering tasks independently; this is good. Top

managers are prone to aggregate many tasks into one time estimate and then deductively make the individual

task time estimates add to the total. If tasks are in a chain and performed by the same group or department, it is

best not to ask for all the time estimates in the sequence at once to avoid the tendency for a planner or a

supervisor to look at the whole path and try to adjust individual task times in the sequence to meet an arbitrary

imposed schedule or some rough “guesstimate” of the total time for the whole path or segment of the project.

This tendency does not reflect the unce rtainties of individual activities and generally results in optimistic task

time estimates. In summary , each task time estimate should be considered independently of other activities. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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SN APSH OT F R O M P R A CTIC E R ed ucin g E stim atin g E rro rs *

C om ple x ity is th e m ajo r so urc e o f estim ati n g erro r, sa y s K erry W ills , P ro je ct M an ag em en t S r. D ir e cto r at th e

health care s e rv ic es o rg an iz atio n C ig na, in H artf o rd , C onnectic u t. “ P ro je ct m an ag ers c an not p ossib ly b e e x perts in a ll

a re as a n d th ere fo re n eed to r e ly o n th e s ta k eh old ers f o r th eir e x pertis e w hen e stim atin g,” W illis n ote s. T o m in im iz e

erro rs h e r e co m men ds t r e atin g e stim atin g a s a l iv in g p ro cess a n d n ot a o netim e e v en t.

H e f o llo w s t h e s a m e a p pro ach o n a ll o f h is p ro je cts :

1. I d en tif y a ll o f t h e s ta k eh old ers b ase d o n t h e s c o pe o f t h e p ro je ct a n d o rg an iz atio nal h is to ry .

2. I n volv e t h e s ta k eh old ers w hen c re a tin g t h e e stim ate s. “ Y ou c an 't h old p eo ple a cco unta b le f o r e stim ate s t h ey

d id n't h elp c re ate ,” W illis s a y s.

3. A ggre g ate t h e e stim ate s b y c o m parin g s e v era l m od els ( re so urc e b ase d , p ara m etr ic , e tc .) .

4. M an age t h e p ro je ct a gain st t h e e stim ate s. T his i n clu des m ak in g a d ju stm en ts b ase d o n c h an ges i n p ro je ct

sc o pe.

5. T ra ck p ro je cts c lo se ly u sin g t o ols s u ch a s e arn ed v alu e t o g au ge p ro gre ss t o w ard e stim ate s.

6. T ra ck a ctu al c o sts a n d t im e a t a g ra n ula r l e v el t o r e calib ra te t h e m odel f o r f u tu re p ro je cts .

“ T he i n itia l e stim ate c o uld b e p erfe ct, b ut i f i t i s n o t m an ag ed , t h en t h e e n d r e su lt w ill b e b ad a n d p eo ple w ill p oin t t o

th e e stim atin g p ro cess,” W ills a rg ues.

* S . S w an so n, “ E stim atin g E rro rs ,” P M Netw ork , O cto ber 2 011 , p p. 6 2–66.

6. Contingencies. W ork package estimates should not include allowances for contingencies. The estimate

should assume normal or average conditions even though every work package will not materialize as planned.

For this reason top management needs to create an extra fund for contingencies that can be used to cover

unforeseen events.

7. Adding risk assessment to the estimate helps to avoid surprises to stakeh olders. It is obvious some

tasks carry more time and cost risks than others. For example, a new technolog y usually carries more time and

cost risks than a proven process. Simply identifying the degree of risk lets stakeholders consider alternative

methods and alter process decisions. A simple breakdown by optimistic, most likely, and pessimistic for task

time could provide valuable information regarding time and cost. See Chapter 7 f or furthe r discussio n of project

risk.

Where applicable, these guidelines will greatly help to avoid many of the pitfalls found so often in practice. See

Snapshot from Practice: Reducing Estimating Errors for a similar set of guidelines.

TopD ow n v ers u s B otto m U p E stim atin g

Since estimating efforts cost money , the time and detail devoted to estimating is an important decision. Yet,

when estimating is considered, you as a project manager may hear statements such as these: 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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Rough order of magnitude is good enough. Spending time on detailed estimating wastes money .

Time is everything; our survival depends on getting ther e first! Time and cost accuracy is not an issue.

The project is internal. W e don't need to worry about cost.

The project is so small, we don't need to bother with estimates. Just do it. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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TA BLE 5 .1 C on dit io n s f o r P re fe rrin g T op D ow n o r B otto m U p T im e a n d C ost E stim ate s

However , there are sound reasons for using topdown or bottomup estimates. Table 5.1 depicts conditions that

suggest when one approach is preferred over another .

Topdown estimates usua lly are derived from someone who uses experience and/or information to determine

the project duration and total cost. However , these estimates are sometimes made by top managers who have

very little knowledg e of the component activities used to complete the project. For example, a mayor of a major

city making a speec h noted that a new law building would be constructed at a cost of $23 million and would be

ready for occupancy in two and onehalf years. Although the mayor probably asked for an estimate from

someone, the estimate could have come from a luncheon meeting with a local contractor who wrote an estimate

(guesstimate) on a napkin. This is an extreme example, but in a relative sense this scenario is frequently played

out in practice. See Snapshot from Practice: Council Fumes, for another example of this. The question actually

is, do these estimates repr esent lowcost, efficient methods ? Sel dom. The fact that the estimate came from the

top can influence people responsible to “do what it takes to make the estimate.”

If possible and pract ical, you want to push the estimating process down to the work package level for bottom

up estimates that establish lowcost, efficient methods. This process can take place after the project has been

defined in detail. Good sense suggests project estimates should come from the people most knowledgeable about

the estima te needed. The use of several people with relevant experience with the task can improve the time and

cost estimate. The bottomup approach at the work package level can serve as a check on cost elements in the

WBS by rolling up the work packages and associated cost accounts to major deliverables. Similarly, resource

requirements can be checked. Later, the time, resource, and cost estimates from the work packages can be

consolidated into timephased networks, resource schedules, and budgets that are used for control.

The bottomup approach also provides the customer with an opportunity to compare the lowcost, efficient

method approach with any imposed restrictions. For example, if the project completion duration is imposed at

two years and your bottomup analysis tells you the project will take two and onehalf years, the client can now

consider the tradeof f of the lowcost method versus compressing the project to two years—or in rare cases

canceling the project. Similar tradeoffs can be compared for different levels of resources or increases in

technical performan ce. The assumption is any movement away from the lowco st, efficient method will increase

costs—e.g., overtime. The preferred approach in defining the project is to make rough topdown estimates,

develop the WBS/O BS, make bottomup estimates, develop schedules and budgets, and reconcile differences

between topdown and bottomup estimates. Hopefully , these steps will be done befor e final negotiation with

either an internal or external customer . In conclusion, the ideal approach is for the project manager to allow

enough time for both the topdown and bottomup estimates to be worked out so a complete plan based on

reliable estimates can be offered to the customer . In this way false expectations are minimized for all

stakeholders and negotiation is reduced. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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SN APSH OT F R O M P R A CTIC E C ouncil F um es a s T ra m T ale U nfo ld s *

Portla n d, O re g on's , W illa m ette riv erfro nt d ev elo pm en t h as e x plo ded w ith se v en c o ndom in iu m to w ers a n d a n ew

h ealth s c ie n ces c en te r u nder c o nstr u ctio n. T he h ealth s c ie n ce c o m ple x is to b e lin ked w ith O re g on H ealth S cie n ces

U niv ers ity ( O HSU ), w hic h i s h ig h o n a n earb y h ill, w ith a n a eria l c ab le t r a m .

The aeria l tr a m lin kin g th e w ate rfro nt dis tr ic t to O HSU is to su pport th e univ ers ity ex pan sio n, to in cre ase

b io te ch nolo gy re se arc h , a n d to b eco m e P ortl a n d's ic o n e q uiv ale n t to S eattle 's S pace N eed le . A ll o f th e h ype tu rn ed

so uth w hen n ew s f ro m a h earin g s u ggeste d th at th e r e al b udget f o r th e tr a m c o nstr u ctio n, o rig in ally e stim ate d a t $ 15

m illio n, is g oin g to b e a b out $ 55–$60 m illio n, n early tr ip le th e o rig in al e stim ate . T he e stim ate c o uld e v en g o h ig her.

C om mis sio ners w an t t o f in d o ut w hy c ity s ta ff k now in gly r e lie d o n f la w ed e stim ate s. M ik e L in dberg , p re sid en t o f t h e

nonpro fit A eria l T ra n sp orta tio n I n c., a ck now le d ged “ th e $ 1 5 m illio n n u m ber w as n o t a g o od n um ber. I t w as s im ply a

g uesstim ate .” C om mis sio ner E rik S te n s a id , “ T hose n um bers w ere p re se n te d a s m uch m ore f ir m th an th ey a p pear to

h av e b een … . I t a p pears t h e a ctu al d esig n w asn 't c o ste d o ut. T hat's p re tty s h oddy.”

* T he O re g onia n, J a n uary 1 3, 2 006, b y F ra n k R yan , p ag es A 1 a n d A 14, a n d A pril 2 , 2 006, p ag e A 1.

M eth ods f o r E stim atin g P ro je ct T im es a n d C osts

T op D ow n A ppro ach es f o r E stim atin g P ro je ct T im es a n d C osts

At the strategic level topdown estimating methods are used to evaluate the project proposal. Sometimes much

of the information needed to derive accurate time and cost estimates is not available in the initial phase of the 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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project—for example, design is not finalized. In these situations topdown estimates are used until the tasks in

the WBS are clearly defined.

Con se n su s M eth ods

This method simply uses the pooled experience of senior and/or middle managers to estimate the total project

duration and cost. This typically involves a meeting where experts discuss, ar gue, and ultimately reach a

decision as to their best guess estimate. Firms seeking greater rigor will use the Delphi Method to make these

macro estimates. See Snapshot from Practice: The Delphi Method.

It is impor tant to recognize that these first topdown estimates are only a rough cut and typically occur in the

“conceptual” stage of the project. The topdown estimates are helpful in initial development of a complete plan.

However, such estimates are sometimes significantly off the mark because little detailed information is gathered.

At this level individ ual work items are not identified. Or, in a few cases, the topdown estimates are not realistic

because top management “wants the project.” Nevertheless, the initial topdown estimates are helpful in

determining whether the project warrants more formal planning, which would include more detailed estimates.

Be careful that macro estimates made by senior managers are not dictated to lower level managers who might

feel compelled to accept the estimates even if they believe resources are inadequate. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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SN APSH OT F R O M P R A CTIC E T he D elp hi M eth od

O rig in ally d ev elo ped b y th e R A ND C orp ora tio n in 1 969 f o r te ch nolo gic al f o re castin g, th e D elp hi M eth od is a g ro up

decis io n p ro cess a b out th e lik elih ood th at c erta in e v en ts w ill o ccu r. T he D elp hi M eth od m ak es u se o f a p an el o f

ex perts fa m ilia r w ith th e k in d o f p ro je ct in q uestio n. T he n otio n is th at w ell in fo rm ed in div id uals , c allin g o n th eir

in sig hts a n d e x perie n ce, a re b ette r e q uip ped to e stim ate p ro je ct c o sts /tim es th an th eo re tic al a p pro ach es o r s ta tis tic al

m eth ods. T heir re sp onse s to estim ate q uestio nnair e s are an onym ou s, an d th ey are p ro vid ed w ith a su m m ary o f

opin io ns.

E xperts a re th en e n co ura g ed to re co nsid er, a n d if a p pro pria te , to c h an ge th eir p re v io us e stim ate in lig ht o f th e

re p lie s o f o th er e x perts . A fte r tw o o r th re e ro unds it is b elie v ed th at th e g ro up w ill c o nverg e to w ard th e “ b est”

r e sp onse t h ro ugh t h is c o nse n su s p ro cess. T he m id poin t o f r e sp onse s i s s ta tis tic ally c ate g oriz ed b y t h e m ed ia n s c o re . I n

e ach s u cceed in g ro und o f q uestio nnair e s, th e ra n ge o f re sp onse s b y th e p an elis ts w ill p re su m ab ly d ecre ase a n d th e

m ed ia n w ill m ove t o w ard w hat i s d eem ed t o b e t h e “ co rre ct” e stim ate .

O ne d is tin ct a d van ta g e o f th e D elp hi M eth od is th at th e e x perts n ev er n eed to b e b ro ught to geth er p hysic ally . T he

pro cess a ls o d oes n ot re q uir e c o m ple te a g re em en t b y a ll p an elis ts , s in ce th e m ajo rity o pin io n is re p re se n te d b y th e

m ed ia n . S in ce th e re sp o nse s a re a n onym ous, th e p itf a lls o f e g o, d o m in eerin g p ers o nalitie s, a n d th e “ b an dw ag on o r

halo e ff e ct” i n r e sp onse s a re a ll a v oid ed . O n t h e o th er h an d, f u tu re d ev elo pm en ts a re n ot a lw ay s p re d ic te d c o rre ctly b y

ite ra tiv e c o nse n su s n or b y e x perts , b ut a t t im es b y c re ativ e, “ o ff t h e w all” t h in kin g.

Although your authors prefer to avoid the topdown approach if possible, we have witnessed surprising

accuracy in estimati ng project duration and cost in isolated cases. Some examp les are building a manufacturing

plant, building a distribution warehouse, developing air control for skyscraper buildings, and road construction.

However , we have also witnessed some horrendous miscalculations, usually in areas where the technology is

new and unproven. T opdown methods can be useful if experience and judgment have been accurate in the past.

Ratio M eth ods

T opdown methods (sometimes called parametric) usually use ratios, or surroga tes, to estimate project times or

costs. Topdown approaches are often used in the concept or “need” phase of a project to get an initial duration

and cost estimate for the project. For example, contractors frequently use number of square feet to estimate the

cost and time to buil d a house; that is, a house of 2,700 square feet might cost $160 per square foot (2,700 feet ×

$160 per foot equals $432,000). Likewise, knowing the square feet and dollars per square foot, experience

suggests it should take approximately 100 days to complete. Two other common examples of topdown cost

estimates are the cost for a new plant estimated by capacity size, or a software product estimated by features and

complexity . 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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FIG URE 5 .1 A pportio n M eth od o f A llo ca tin g P ro je ct C osts U sin g t h e W ork B re a k dow n S tr u ctu re

A pportio n M eth ods

This method is an extension to the ratio method. Apportionment is used when projects closely follow past

projects in features and costs. Given good historical data, estimates can be made quickly with little effort and

reasonable accuracy. This method is very common in projects that are relatively standard but have some small

variation or customization.

Anyone who has borrowed money from a bank to build a house has been exposed to this process. Given an

estimated total cost for the house, banks and the FHA (Federal Housing Authority) authorize pay to the

contractor by completion of specific segments of the house. For example, foundation might represent 3 percent

of the total loan, framing 25 percent, electric, plumbing and heating 15 percent, etc. Payments are made as these

items are completed. An analogous process is used by some companies that apportion costs to deliverables in the

WBS—given average cost percentages from past projects. Figure 5.1 presents an example similar to one found

in pra ctice. Assuming the total project cost is estimated, using a topdown estimate, to be $500,000, the costs are

apportioned as a percentage of the total cost. For example, the costs apportioned to the “Document” deliverable

are 5 percent of the total, or $25,000. The subdeliverables “Doc1 and Doc2” are allocated 2 and 3 percent of

the total—$10,000 and $15,000, respectively .

Functio n P oin t M eth ods f o r S oftw are a n d S yste m P ro je c ts

In the software industry, software development projects are frequently estimated using weighted macro variables

called “function points” o r major parameters such as number of inputs, number of outputs, number of inquiries,

number of data files, and number of interfaces. These weighted variables are adjusted for a complexity factor

and added. The total adjusted count provides the basis for estimating the labor effort and cost for a project

(usually using a regression formula derived from data of past projects). This latter method assumes adequate

historical data by type of software project for the industry—for example, MIS systems. In the U.S. software

industry , oneperson month represents on average five function points. A person working one month can

generate on average (across all types of software projects) about five function points. Of course each

organization needs to develop its own average for its specific type of work. Such historical data provide a basis

for estimating the project duration. Variations of this topdown approach are used by companies such as IBM, 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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Bank of America, Sears Roebuck, HP, A T&T , Ford Motors, GE, DuPont and many others. See Table 5.2 and

T able 5.3 for a simplified example of function point count methodology . 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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TA BLE 5 .2 S im plif ie d B asic F unctio n P oin t C ou nt P ro cess f o r a P ro sp ec tiv e P ro je ct o r D eliv er a b le

From historical data the organization developed the weighting scheme for complexity found in Table 5.2 .

Function points are derived from multiplying the number of kinds of elements by weighted complexity .

Table 5.3 shows the data collected for a specific task or deliverable: Patient Admitting and Billing—the

number of inputs, outputs, inquiries, files, and interfaces along with the expected complexity rating. Finally, the

application of the element count is applied and the function point count total is 660. Given this count and the

fact that oneperson month has historic ally been equal to 5 function points, the job will require 132 person

months (660/5 = 132). Assuming you have 10 programmers who can work on this task, the duration would be

approximately 13 months. The cost is easily derived by multiplying the labor rate per month times 132 person

months. For example, if the monthly programmer 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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rate is $4,000, then the estimated cost would be $528,000 (132 × 4,000). Although function

point metrics are useful, their accuracy depends on adequate historical data, currency of data, and

relevancy of the project/deliverable to past averages.

TA BLE 5 .3 E xam ple : F unctio n P oin t C ou nt M eth od

L ea rn in g C urv es

Some projects require that the same task, group of tasks, or product be repeate d several times. Managers know

intuitively that the time to perform a task improves with repetition. This phenom enon is especially true of tasks

that are labor intensive. In these circumstances the pattern of improvement phenomenon can be used to predict

the reduct ion in time to perform the task. From empirical evidence across all in dustries , the pattern of this

improvement has been quantified in the learning curve ( also known as imp rovement curve, experience curve,

and industrial progress curve), which is described by the following relationship:

Each t im e t h e o utp ut q uantity d ouble s, t h e u nit l a bor h ours a re r e d uced a t a c o nsta nt r a te .

In practice the improvement ratio may vary from 60 percent, representing very large improvement, to 100

percent, representin g no improvement at all. Generally , as the difficulty of the work decreases the expected

improvement also decreases and the improvement ratio that is used becomes greater. One significant factor to

consider is the propo rtion of labor in the task in relation to machinepaced work. Obviously , a lower percentage

of improvement can occur only in operations with high labor content. Appendix 5.1 a t the end of the chapter

provides a detailed example of how the improvement phenomenon can be used to estimate time and cost for

repetitive tasks.

The main disadvant age of topdown approaches to estimating is simply that the time and cost for a specific

task are not considered. Grouping many tasks into a common basket encourages errors of omission and the use

of imposed times and costs.

Micro estimating methods are usually more accurate than macro methods.

Botto m U p A ppro ach es f o r E stim atin g P ro je ct T im es a n d C osts

T em pla te M eth ods

If the project is sim ilar to past projects, the costs from past projects can be use d as a starting point for the new

project. Differences in the new project can be noted and past times and costs adjusted to reflect these 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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differences. For example, a ship repair drydock firm has a set of standard repair projects (i.e., templates for

overhaul, electrical, mechanical) that are used as starting points for estimating the cost and duration of any new

project. Differences from the appropriate standardized project are noted (for times, costs, and resources) and

changes are made. This approach enables the firm to develop a potential schedule, estimate costs, and develop a

budget in a very short time span. Development of such templates in a database can quickly reduce estimate

errors.

Para m etr ic P ro ced u re s A pplie d t o S pecif ic T ask s

Just as pa rametric techniques such as cost per square foot can be the source of topdown estimates, the same

technique can be app lied to specific tasks. For example, as part of an MS Office conversion project, 36 different

computer workstations needed to be converted. Based on past conversion projects, the project 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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manager determined that on average one person could convert three workstations per day.

Therefore the task of converting the 36 workstations would take three technicians four days

[(36/3)/3]. Similarly, to estimate the wallpapering allowance on a house remodel, the contractor

figured a cost of $5 per square yard of wallpaper and $2 per yard to install it, for a total cost of $7. By measuring

the length and height of all the walls she was able to calculate the total area in square yards and multiply it by

$7.

Ran ge E stim atin g

When do you use range estimating? Range estimating works best when work packages have significant

uncertainty associated with the time or cost to complete. If the work package is routine and carries little

uncertainty , using a person most familia r with the work package is usually the best approach. They know from

experience or know where to find the information to estimate work package durations and costs. However , when

work packages have significant uncertainty associated with the time or cost to complete, it is a prudent policy to

require three time estimates—low , avera ge, and high (borrowed off of PER T methodology that uses probability

distributions). The low to high give a ran ge within which the average estimate will fall. Determining the low and

high estimates for the activity is influenced by factors such as complexity , technology, newness, familiarity .

How do you get the estimates? Since range estimating works best for work packages that have significant

uncertainty , having a group determine the low, average, and high cost or duration gives best results. Group

estimating tends to refine extremes by bringing more evaluative judgments to the estimate and potential risks.

The judgment of others in a group helps to moderate extreme perceived risks associated with a time or cost

estimate. Involving others in making activity estimates gains buy in and credibility to the estimate.

Figure 5.2 presents an abridged estimating template using three time estimates for work packages developed

by a cross functional group(s) of projec t stakeholders. The group estimates show the low, average, and high for

each work 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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package. The Risk Level column is the group's independent assessment of the degree of

confidence that the actual time will be very close to the estimate. In a sense this number

represents the group's evaluation of many factors (e.g., complexity , technology) that might impact

the average time estimate. In our example, the group feels work packages 104, 108, 110, 111, and 114 have a

high chance that the average time may vary from expected. Likewise, the group's confidence feels the risk of

work packages 102, 105 and 1 12 not materializing as expected is low .

FIG URE 5 .2 R an ge E stim atin g T em pla te

How do you use the estimate? Grou p ran ge estima ting gives the projec t manager and owner an opportunity to

assess the confidenc e associated with project times (and/or costs). For example, a contractor responsible for

building a high rise apartment building can tell the owner that the project will cost between 3.5 and 4.1 million

dollars and take between six and nine months to complete. The approach helps to reduce surprises as the project

progresses. The range estimating method also provides a basis for assessing risk, managing resources, and

determining the project contingency fund. (See Chapter 7 for a dis cussion of contingency funds.) Range

estimating is popular in software and new product projects where upfront requirements are fuzzy and not well

known. Group range estimating is often used with phase estimating, which is discussed next.

A H yb rid : P hase E stim atin g

This approach begins with a topdown estimate for the project and then refines estimates for phases of the

project as it is implemented. Some projects by their nature cannot be rigorously defined because of the

uncertainty of design or the final product. Although rare, such projects do exist . These projects are often found

in aerospace projects, IT projects, new technology projects, and construction projects where design is

incomplete. In these projects, phase or lifecycle estimating is frequently used.

Phase estimating is used when an unusual amount of uncertainty surrounds a project and it is impractical to

estimate times and costs for the entire project. Phase estimating uses a twoestimate system over the life of the

project. A detailed estimate is develo ped for the immediate phase and a macro estimate is made for the

remaining phases of the project. Figure 5.3 depi cts the phases of a project and the progression of estimates over

its life.

FIG URE 5 .3 P hase E stim atin g o ver P ro je ct L if e C ycle 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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SN APSH OT F R O M P R A CTIC E E stim ate A ccu ra cy

T he s m alle r th e e le m en t o f a w ork p ack ag e, th e m ore a ccu ra te th e o vera ll e stim ate is lik ely to b e. T he e x te n t o f th is

im pro vem en t v arie s b y ty pe o f p ro je ct. T he ta b le b elo w is d ev elo ped to re fle ct th is o bse rv atio n. F or ex am ple ,

in fo rm atio n te ch nolo gy p ro je cts th at d ete rm in e th eir tim e a n d c o st e stim ate s in th e c o ncep tu al s ta g e c an e x pect th eir

“ actu als ” to e rr u p to 2 00 p erc en t o ver c o st a n d d u ra tio n a n d, p erh ap s, a s m uch a s 3 0 p erc en t u nder e stim ate s.

C onvers e ly , e stim ate s f o r b uild in gs, r o ad s, e tc ., m ad e a fte r t h e w ork p ack ag es a re c le arly d efin ed , h av e a s m alle r e rro r

in a ctu al c o sts a n d tim es o f 1 5 p erc en t o ver e stim ate a n d 5 p erc en t le ss th an e stim ate . A lth ough th ese e stim ate s v ary

b y p ro je ct, th ey c an s e rv e a s b allp ark n um bers f o r p ro je ct s ta k eh old ers s e le ctin g h o w p ro je ct tim e a n d c o st e stim ate s

w ill b e d eriv ed .

For example, when the project need is determined, a macro estimate of the project cost and duration is made

so analysis and decisions can be made. Simultaneously a detailed estimate is made for deriving project

specifications and a macro estimate for the remainder of the project. As the project progresses and specifications

are solidified, a detailed estimate for design is made and a macro estimate for the remainder of the project is

computed. Clearly, as the project progresses through its life cycle and more information is available, the

reliability of the estimates should be improving. See Snapshot from Practice: Estimating Accuracy .

Phase estimating is preferred by those working on projects where the final product is not known and the

uncertainty is very lar ge—for example, the integration of wireless phones and computers. The commitment to

cost and schedule is only necessary over the next phase of the project and commitment to unrealistic future

schedules and costs based on poor information is avoided. This progressive macro/micro method provides a

stronger basis for using schedule and cost estimates to manage progress during the next phase.

Unfortunately your customer—internal or external—will want an accurate estimate of schedule and cost the

moment the decision is made to implem ent the project. Additionally , the customer who is paying for the project

often perceives phase estimating as a blank check because costs and schedules are not firm over most of the

project life cycle. Even though the reasons for phase estimating are sound and legitimate, most customers have

to be sold on its legitimacy . A major advantage for the customer is the opportunity to change features, re

evaluate, or even cancel the project in each new phase. In conclusion, phase estimating is very useful in projects

that possess huge uncertainties concerning the final nature (shape, size, features) of the project.

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FIG URE 5 .4 T op D ow n a n d B otto m U p E stim ate s

Obtaining accurate estimates is a challen ge. Committed organizations accept the challenge of coming up with

meaningful estimates and invest heavily in developing their capacity to do so. Accurate estimates reduce

uncertainty and support a discipline for ef fectively managing projects.

Lev el o f D eta il

Level of detail is dif ferent for different levels of management. At any level the detail should be no more than is

necessary and sufficient. Top management interests usually center on the total project and major milestone

events that mark major accomplishment s—e.g., “Build Oil Platform in the North Sea” or “Complete Prototype.”

Middle managemen t might center on one segment of the project or one milestone. Firstline managers' interests

may be limited to one task or work package. One of the beauties of WBS is the ability to aggregate network

information so each level of management can have the kind of information necessary to make decisions.

Getting the level of detail in the WBS to match management needs for effective implementation is crucial, but

the delicate balance is dif ficult to find. See Snapshot from Practice: Level of Detail. The level of detail in the

WBS varies with the complexity of the project; the need for control; the proje ct size, cost, duration; and other

factors. If the structure reflects excessive detail, there is a tendency to break the work effort into department

assignments. This tendency can become a barrier to success, since the emphasis will be on departmental

outcomes rather than on deliverable outcomes. Excessive detail also means more unproductive paperwork. Note

that if the level of the WBS is increased by one, the number of cost accounts may increase geometrically . On the

other hand, if the level of detail is not adequate, an or ganization unit may find the structure falls short of meeting

its needs. Fortunately , the WBS has builtin flexibility . Participating organization units may expand their portion

of the stru cture to meet their special needs. For example, the engineering department may wish to further break

their work on a deliverable into smaller packages by electrical, civil, and mechanical. Similarly, the marketing

department may wish to break their new product promotion into TV , radio, periodicals, and newspapers. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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SN APSH OT F R O M P R A CTIC E L ev el o f D eta il— Rule o f T hum b

Pra ctic in g p ro je ct m an ag ers a d vocate k eep in g t h e l e v el o f d eta il t o a m in im um . B ut t h ere a re l im its t o t h is s u ggestio n.

O ne o f t h e m ost f re q uen t e rro rs o f n ew p ro je ct m an ag ers i s t o f o rg et t h at t h e t a sk t im e e stim ate w ill b e u se d t o c o ntr o l

sc h ed ule a n d c o st p erfo rm an ce. A f re q uen t r u le o f t h um b u se d b y p ra ctic in g p ro je ct m an ag ers s a y s t h at a t a sk d ura tio n

sh ould n ot e x ceed 5 w ork day s o r a t th e m ost 1 0 w ork day s, if w ork day s a re th e tim e u nits u se d f o r th e p ro je ct. S uch a

r u le p ro bab ly w ill r e su lt i n a m ore d eta ile d n etw ork , b ut t h e a d ditio nal d eta il p ay s o ff i n c o ntr o llin g s c h ed ule a n d c o st

a s t h e p ro je ct p ro gre sse s.

S uppose t h e t a sk i s “ b uild p ro to ty pe c o m pute r c o ntr o lle d c o nvey or b elt,” t h e t im e e stim ate i s 4 0 w ork day s, a n d t h e

budget $ 300,0 00. I t m ay b e b ette r to d iv id e th e ta sk in to s e v en o r e ig ht s m alle r ta sk s f o r c o ntr o l p urp ose s. I f o ne o f

th e s m alle r t a sk s g ets b eh in d b ecau se o f p ro ble m s o r a p o or t i m e e stim ate , i t w ill b e p o ssib le t o t a k e c o rre ctiv e a ctio n

quic k ly a n d a v oid d ela y in g s u ccessiv e ta sk s a n d th e p ro je ct. I f th e s in gle ta sk o f 4 0 w ork day s is u se d , it is p ossib le

th at n o c o rre ctiv e a ctio n w ould b e ta k en u nti l d ay 4 0, s in ce m an y p eo ple h av e a te n den cy to “ w ait a n d s e e” o r a v oid

a d m ittin g t h ey a re b eh in d o r p assin g o n b ad n ew s; t h e r e su lt m ay m ea n f a r m ore t h an 5 d ay s b eh in d s c h ed ule .

T he 5 to 1 0d ay r u le o f th um b a p plie s to c o st a n d p erfo rm an ce g o als . I f u sin g th e r u le o f th um b s u ggeste d a b ove

re su lts in to o m an y n etw ork ta sk s, a n a lte rn ativ e is a v aila b le , b u t it h as c o nditio ns. T he a c tiv ity tim e c an b e e x te n ded

b ey ond th e 5 to 1 0d ay ru le o nly IF c o ntr o l m onito rin g c h eck poin ts fo r s e g m en ts o f th e ta sk c an b e e sta b lis h ed s o

c le ar m easu re s o f p ro gre ss c an b e i d en tif ie d b y a s p ecif ic p erc en t c o m ple te .

T his in fo rm atio n is in valu ab le to th e c o ntr o l p ro cess o f m easu rin g s c h ed ule a n d c o st p erfo rm an ce— fo r e x am ple ,

p ay m en ts f o r c o ntr a ct w ork a re p aid o n “ p erc en t c o m ple te ” b asis . D efin in g a ta sk w ith c le ar d efin ab le s ta rt a n d e n d

poin ts a n d in te rm ed ia te p oin ts e n han ces th e c h an ces o f e arly d ete ctio n o f p ro ble m s, c o rre ctiv e a ctio n, a n d o ntim e

pro je ct c o m ple tio n.

T ypes o f C osts

Assuming work packages are defined, detailed cost estimates can be made. Here are typical kinds of costs found

in a project:

1. Direct costs

a. Labor

b. Materials

c. Equipment

d. Other

2. Direct project overhead costs

3. General and administrative (G&A) overhead costs

The total project cost estimate is broken down in this fashion to sharpen the control process and improve

decision making.

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These costs are clea rly char geable to a specific work package. Direct costs can be influenced by the project

manager , project team, and individual s implementing the work package. These costs represent real cash

outflows and must be paid as the project progresses; therefore, direct costs are usually separated from overhead

costs. Lower level project rollups frequently include only direct costs. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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FIG URE 5 .5 C on tr a ct B id S um mary C osts

D ir e ct P ro je ct O verh ea d C osts

Direct overhead rates more closely pinpoint which resources of the organization are being used in the project.

Direct project overhead costs can be tied to project deliverables or work packages. Examples include the sala ry

of the proj ect manag er and temporary rental space for the project team. Althoug h overhead is not an immediate

outofpocket expense, it is real a nd must be covere d in the long run if the firm is to remain viable. These rates

are usually a ratio of the dollar value of the resources used—e.g., direct labor, materials, equipment. For

example, a direct labor burden rate of 20 percent would add a direct overhead charge of 20 percent to the direct

labor cost estimate. A direct charge rate of 50 percent for materials would carry an additional 50 percent charge

to the material cost estimate. Selective direct overhead charges provide a more accurate project (job or work

package) cost, rather than using a blanket overhead rate for the whole project.

Gen era l a n d A dm in is tr a tiv e ( G & A) O ve rh ea d C osts

These represent organization costs that are not directly linked to a specific project. These costs are carried for

the duration of the project. Examples include organization costs across all products and projects such as

advertising, accounting, and senior management above the project level. Allocation of G&A costs varies from

organization to organization. However, G&A costs are usually allocated as a percent of total direct cost, or a

percent of the total of a specific direct cost such as labor , materials, or equipment.

Given the totals of direct and overhead costs for individual work packages, it is possible to cumulate the costs

for any deliverable or for the entire project. A percentage can be added for profit if you are a contractor . A

breakdown of costs for a proposed contract bid is presented in Figure 5.5 .

Perceptions of costs and budgets vary depending on their users. The project manager must be very aware of

these dif ferences when setting up the project budget and when communicating these dif ferences to others. Figure

5.6 depi cts these different perceptions. The project manager can commit costs months before the resource is

used. This information is useful to the financial officer of the organization in forecasting future cash outflows.

The project manager is interested in wh en the budgeted cost is expected to occ ur, and when the budgeted cost

actually is char ged (earned); the respective timings of these two cost figures are used to measure project

schedule and cost variances. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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FIG URE 5 .6 T hre e V ie w s o f C ost

R efin in g E stim ate s

As described earlier in Chapter 4 , detailed work package estimates are aggregated and “rolled up” by deliverable

to est imate the total direct cost of the project. Similarly , estimated durations are entered into the project network

to establish the proj ect schedule and determine the overall duration of the project. Experience tells us that for

many projects the total estimates do not materialize and the actual costs and schedule of some projects

significantly exceed original work package–based estimates. In order to compensate for the problem of actual

cost and schedule exceeding estimates, some project managers adjust total costs by some multiplier (i.e., total

estimated costs × 1.20).

The practice of adjusting original estimates by 20 or even 100 percent begs the question of why , after

investing so much time and ener gy on detailed estimates, could the numbers be so far of f? There are a number of

reasons for this, most of which can be traced to the estimating process and the inherent uncertainty of predicting

the future. Some of these reasons are discussed below .

Interaction costs are hidden in estimates. According to the guidelines, each task estimate is supposed to

be done independently . However, tasks are rarely completed in a vacuum. W ork on one task is dependent

upon prior tasks, and the hand-offs between tasks require time and attention. For example, people working

on prototype development need to interact with design engineers after the design is completed, whether to

simply ask clarifying questions or to make adjustments in the original design. Similarly , the time necessary

to coordinate activities is typically not reﬂected in independent estimates. Coordination is reﬂected in

meetings and brieﬁngs as well as time necessary to resolve disconnects between tasks. T ime, and therefore

cost, devoted to managing interactions rises exponentially as the number of people and dif ferent

disciplines involved increases on a project.

Normal conditions do not apply. Estimates are supposed to be based on normal conditions. While this is

a good starting point, it rarely holds true in real life. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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This is especially true when it comes to the availability of resources. Resource shortages,

whether in the form of people, equipment, or materials, can extend original estimates. For

example, under normal conditions four bulldozers are typically used to clear a certain site

size in ﬁve days, but the availability of only three bulldozers would extend the task duration to eight days.

Similarly, the decision to outsource certain tasks can increase costs as well as extend task durations since

time is added to acclimating outsiders to the particulars of the project and the culture of the or ganization.

Things go wrong on projects. Design ﬂaws are revealed after the fact, extreme weather conditions occur ,

accidents happen, and so forth. Although you shouldn't plan for these risks to happen when estimating a

particular task, the likelihood and impact of such events need to be considered.

Changes in project scope and plans. As one gets further and further into the project, a manager obtains a

better understanding of what needs to be done to accomplish the project. This may lead to major changes

in project plans and costs. Likewise, if the project is a commercial project, changes often have to be made

midstream to respond to new demands by the customer and/or competition. Unstable project scopes are a

major source of cost overruns. While every ef fort should be made up front to nail down the project scope,

it is becoming increasingly difﬁcult to do so in our rapidly changing world.

Overly optimistic. There is solid research indicating that there is a tendency in people to overestimate

how quickly they can get things done and underestimate how long it will take them to complete tasks. This

would be especially true in organizational cultures where padding is not the norm. See Snapshot from

Practice: Mega Projects: A Special Case.

Strategic misrepresentation. There is growing evidence that some project promoters underestimate the

costs of projects and overestimate project beneﬁts in order to win approval. This appears to be particularly

true for lar ge-scale public works projects which have a notorious habit of coming in way over budget

(remember the earlier Council Fumes Snapshot).

The reality is that for many projects not all of the information needed to make accurate estimates is available,

and it is im possible to predict the future. The challenge is further compounded by human nature and the political

dynamics associated with gaining project approval. The dilemma is that without solid estimates, the credibility

of the pro ject plan is eroded. Deadlines become meaningless, budgets become rubbery, and accountability

becomes problematic.

Challenges similar to those described above will influence the final time and cost estimates. Even with the

best estimating efforts, it may be necessary to revise estimates based on relevant information prior to

establishing a baseline schedule and budget.

Ef fective organizations adjust estimates of specific tasks once risks, resources, and particulars of the situation

have been more clearly defined. They recognize that the rolled up estimates generated from a detailed estimate

based on the WBS are just the starting point. As they delve further into the projectplanning process, they make

appropriate revisions both in the time and cost of specific activities. They factor the final assignment of

resources into the project budget and schedule. For example, when they realize that only three instead of four

bulldozers are available to clear a site, they adjust both the time and cost of that activity . They adjust estimates

to account for specific actions to mitigate potential risks on the project. For example, to reduce the chances of

design code errors, they would add the cost of independent testers to the schedule and budget. Finally,

organizations adjust estimates to take into account abnormal conditions. For example, if soil samples reveal

excessive ground water , then they adjust foundation costs and times. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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Rese arc h H ig hlig ht M eg a Pr oje cts : A S pecia l C ase

T he re co rd o f c o st e stim ate s fo r m eg a p ro je cts is n o t ste lla r. P opula r e x am ple s o f la rg e c o st o verru ns in clu de th e

S ydney O pera H ouse , th e C hunnel c o nnectin g E ngla n d a n d F ra n ce, a n d B osto n's a rte ry /tu nnel “ B ig D ig .” I n a s tu dy

of g overn m en t a p pro v ed in fra str u ctu re p ro je cts , B en t F ly vbje rg f o und c o sts f o r b rid ges a n d tu nnels , f o r r o ad , a n d f o r

ra il t o b e u ndere stim ate d 3 3.8 % , 2 0.4 % , a n d 4 4.7 % , r e sp ectiv ely , f ro m i n itia l b ase lin e e stim ate s t o r e ality . 1

F ly vbje rg s u ggeste d “ … g overn m en t o ff ic ia ls s h ould n ot tr u st c o st e stim ate s p re se n te d b y p ro je ct p ro m ote rs w hose

m ain a m bitio n is to b uild a p ro je ct fo r th eir p riv ate o r p o litic al g ain . T hese e stim ate s te n d to b e o verly o ptim is tic .

A dvocate s k now th at h ig h c o sts re d uce th e li k elih ood o f fu ndin g.” T he is su e c o m es d ow n to h ow to m itig ate th ese

in flu en ces i n o ur e stim ate s.

O ne a p pro ach l ie s i n u sin g a n “ ex te rn al v ie w ” b ase d o n a ctu al o utc o m es o f s im il a r p ro je cts c o m ple te d i n t h e p ast. I t

is c alle d R efe re n ce C la ss F ore ca stin g ( R CF) a n d u se s F ly vbje rg 's r e se arc h a p pro ach .

R EFE R EN CE C LA SS F O REC AST IN G M ETH ODO LO GY

Fundam en ta lly , h is m eth od i s s im ple a n d s tr a ig htf o rw ard a n d i n volv es t h re e m ajo r s te p s:

1. S ele ct a r e fe re n ce c la ss o f p ro je cts s im ila r t o y o ur p ote n tia l p ro je ct, f o r e x am ple , c arg o s h ip s o r b rid ges.

2. C olle ct a nd a rra nge o utc o m e d ata a s a d is tr ib utio n. C re ate a d is tr ib utio n o f c o st o verru ns a s a p erc en t o f

orig in al p ro je ct e stim ate ( lo w t o h ig h).

3. U se t h e d is tr ib utio n d ata t o a rriv e a t a r e a lis ti c f o re ca st. C om pare t h e o rig in al c o st e stim ate f o r t h e p ro je ct w ith

th e r e fe re n ce c la ss p ro je cts . ( F or e x am ple , a sk a d vocate w hat s tr o ng e v id en ce d o y ou h av e t h at y our p ro je ct w ill

n ot f o llo w t h e p ro je cts i n t h e r e fe re n ce c la ss? )

A PPL IC AT IO N

Fly vbje rg 's s e m in al s tu die s s e rv ed a s a n im petu s fo r th e u se o f R efe re n ce C la ss F ore castin g. F or e x am ple , th e U K

Dep artm en t f o r T ra n sp ort a n d H M T re asu ry e m plo ys th e m eth od a s p art o f p ro je ct a p pra is a l f o r la rg e tr a n sp orta tio n

pro je cts u nder th eir ju ris d ic tio n. T he A m eric an P la n nin g A sso cia tio n (A PA ) re co m men ds th e R CF m eth od an d

str o ngly s u ggests p la n ners s h ould n ev er re ly s o le ly o n c o nven tio nal fo re castin g te ch niq ues w hen m ak in g fo re casts .

T he A ACE I n te rn atio nal ( th e A sso cia tio n f o r t h e A dvan cem en t o f C ost E ngin eerin g) r e co m m en ds t h e u se o f R CF a s a

v alid atio n o f c o st e stim ate s. R efe re n ce c la ss f o re castin g c an e asily b e a p plie d t o p ro je cts s u ch a s s p ort e v en ts , r e se arc h

an d d ev elo pm en t, i n fo rm atio n t e ch nolo gy s y ste m s, p o w er p la n ts a n d d am s, c o nstr u ctio n, s p ort a re n as, m ovie s, e n erg y

ex plo ra tio n, s p ace e x plo ra tio n, a n d m an y m ore c la sse s. 2 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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BEN EFIT S

The b en efits o f r e fe re n ce c la ss f o re castin g a re c o m pellin g:

O uts id e e m pir ic al d ata m itig ate s h um an b ia s.

P olitic al, s tr a te g ic , a n d p ro m ote r f o rc es h av e d if f ic u lty i g norin g o uts id e r e fe re n ce c la ss f o re cast i n fo rm atio n.

S erv es a s r e ality c h eck f o r f u ndin g l a rg e p ro je cts .

H elp s e x ecu tiv es a v oid u nso und o ptim is m .

Lead s t o i m pro ved a cco unta b ility .

P ro vid es b asis f o r p ro je ct c o ntin gen cy f u nds.

F U TU RE A PPL IC AT IO N B EY O ND I N FR AST R UCTU RE

Giv en c o st o verru ns in n in e o ut o f te n m eg a p ro je cts , in accu ra cie s h av e to b e r e d uced to im pro ve c h an ces o f f u ndin g.

T he u se o f R efe re n ce C la ss F ore castin g i s i n cre asin g a s g overn m en ts a n d o rg an iz atio ns r e q uir e t h e m eth od b e u se d t o

te m per p ro je ct a d vocate e stim ate s a n d r e d uce i n accu ra cie s.

1 S ee f o r e x am ple : L ovallo , D ., a n d D . K ah nem an , “ D elu sio ns o f S uccess: H ow O ptim is m U nderm in es E xecu tiv es’ D ecis io ns,”

H arv a rd B usin ess R evie w , J u ly 2 003, p p. 5 6–63; B ueh le r, R ., D . G rif f e n , a n d M . R oss, “ E xplo rin g t h e ‘ P la n nin g F all a cy ’: W hy

P eo ple U ndere stim ate T heir T ask C om ple tio n T im es,” Jo urn al o f P erso nality a nd S ocia l P sy ch olo gy, 6 7 ( 3 ), p p. 3 66–381.

2 F ly vbje rg , B en t, “ F ro m N obel P riz e t o P ro je ct M an ag em en t: G ett in g R is k s R ig ht,” P ro je ct M anagem en t J o urn al, A ugust 2 006,

pp. 5 –15. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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There will always be some mistakes, omissions, and adjustments that will require additional

changes in estimate s. Fortunately every project should have a change management system in

place to accommodate these situatio ns and any impact on the project baseline. Change

management and contingency funds will be discussed later in Chapter 7 .

Cre atin g a D ata b ase f o r E stim atin g

The best way to improve estimates is to collect and archive data on past proje ct estimates and actuals. Saving

historical data—estimates and actuals—provides a knowledge base for improving project time and cost

estimating. Creating an estimating database is a “best practice” among leading project management

organizations.

Some organizations have large estimati ng departments of professional estimators—e.g., Boeing, IBM—that

have developed large time and cost databases. O thers collect these data through the project office. This

database approach allows the project estimator to select a specific work package item from the database for

inclusion. The estimator then makes any necessary adjustments concerning the materials, labor, and equipment.

Of course any items not found in the database can be added to the project—a nd ultimately to the database if

desired. Again, the quality of the databa se estimates depends on the experience of the estimators, but over time

the data quality should improve. Such structured databases serve as feedback for estimators and as benchmarks

for cost and time for each project. In addition, comparison of estimate and actual for different projects can

suggest the degree of risk inherent in estimates. See Figure 5.7 for the structure of a database similar to those

found in practice.

FIG URE 5 .7 E stim atin g D ata b ase T em pla te s 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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Sum mary

Quality time and cost estimates are the bedrock of project control. Past experience is the best starting point for

these estimates. The quality of estimates is influenced by other factors such as people, technology , and

downtimes. The key for getting estimates that represent realistic average times and costs is to have an

organization culture that allows errors in estimates without incriminations. If times represent average time, we

should expect that 50 percent will be less than the estimate and 50 percent will exceed the estimate. The use of

teams that are highl y motivated can help in keeping task times and costs near the average. For this reason, it is

crucial to get the team to buy into time and cost estimates.

Using topdown estimates is good for initial and strategic decision making or in situations where the costs

associated with developing better estimates have little benefit. However , in most cases the bottomup approach

to estimating is preferred and more reliable because it assesses each work package, rather than the whole project,

section, or deliverable of a project. Estimating time and costs for each work package facilitates development of

the project schedule and a timephased budget, which are needed to control the project as it is implemented.

Using the estimating guidelines will help eliminate many common mistakes made by those unacquainted with

estimating times and costs for project control. Establishing a time and cost estimating database fits well with the

learning or ganization philosophy .

The level of time and cost detail should follow the old saying of “no more than is necessary and sufficient.”

Managers must remember to differentiate between committed outlays, actual costs, and scheduled costs. It is

well known that upfront efforts in clear ly defining project objectives, scope, and specifications vastly improve

time and cost estimate accuracy .

Finally, how estimates are gathered and how they are used can af fect their usefulness for planning and control.

The team climate, organization culture, and organization structure can strongly influence the importance

attached to time and cost estimates and how they are used in managing projects.

Key T erm s

Apportionment, 137

Bottomup estimates, 134

Delphi Method, 136

Direct costs, 144

Function points, 137

Learning curves, 139

Overhead costs, 145

Padding estimates, 130

Phase estimating, 141

Range estimating, 140

Ratio methods, 136

Reference Class Forecasting, 148

Template method, 139

T ime and cost databases, 145

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Rev ie w Q uestio n s

1. Why are accurate estimates critical to ef fective project management?

2. How does the culture of an organization influence the quality of estimates?

3. What are the differences between bottomup and topdown estimating approaches? Under what

conditions would you prefer one over the other?

4. What are the major types of costs? Which costs are controllable by the project manager?

Exerc is e s

1. Calculate the direct cost of labor for a project team member using the following data:

Hourly rate: $40/hr

Hours needed: 80

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Mrs. Tolstoy and her husband, Ser ge, are planning their dream house. The lot for the

house sits high on a hill with a beautiful view of the Appalachian Mountains. The

plans show the size of the house to be 2,900 square feet. The average price for a lot

and house similar to this one has been $120 per square foot. Fortunately , Serge is a retired plumber

and feels he can save money by installing the plumbing himself. Mrs. T olstoy feels she can take

care of the interior decorating.

The following average cost information is available from a local bank that makes loans to local

contractors and disperses progress payments to contractors when specific tasks are verified as

complete.

24% Excavation and framing complete

8% Roof and fireplace complete

3% Wiring roughed in

6% Plumbing roughed in

5% Siding on

17% Windows, insulation, walks, plaster , and garage complete

9% Furnace installed

4% Plumbing fixtures installed

10% Exterior paint, light fixtures installed, finish hardware installed

6% Carpet and trim installed

4% Interior decorating

4% Floors laid and finished

a. What is the estimated cost for the T olstoy's house if they use contractors to complete all of

the house?

b. Estimate what the cost of the house would be if the T olstoys use their talents to do some of

the work themselves.

3. Below is a project WBS with cost apportioned by percents. If the total project cost is estimated to

be $600,000, what are the estimated costs for the following deliverables?

a. Design?

b. Programming?

c. Inhouse testing?

What weaknesses are inherent in this estimating approach?

4. Firewall Project XT. Using the “complexity weighting” scheme shown in Exercise 5.3 and the

function point complexity weighted table shown below , estimate the total function point count.

Assume historical data suggest five function points equal one person a month and six people can

work on the project.

a. What is the estimated project duration?

b. If 20 people are available for the project, what is the estimated project duration?

c. If the project must be completed in six months, how many people will be needed for the

project? 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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EX ER CIS E 5 .3 W BS F ig u re

R efe re n ces

Buehler , R., D. Grif fen, and M. Ross, “Exploring the ‘Planning Fallacy’: Why People Underestimate

Their Task Completion T imes,” Journal of Personality and Social Psychology , vol. 67 (3), pp. 366–381.

Dalkey, N. C., D. L. Rourke, R. Lewis, and D. Snyder , Studies in the Quality of Life: Delphi and

Decision Making (Lexington, MA: Lexington Books, 1972).

Flyvbjerg, Bent, “From Nobel Prize to Project Management: Getting Risks Right,” Project Management

Journal, August 2006, pp. 5–15; Flyvbjer g, Bent, “Curbing Optimism Bias and Strategic

Misrepresentation in Planning: Reference Class Forecasting in Practice,” European Planning Studies,

vol. 16, No. 1 (January 2008), pp. 3–21; and Flyvbjer g, Bent, N. Bruzelius, and W. Rothengatter, Mega

Projects and Risk: An Anatomy of Ambition (Cambridge Press, 2003).

Gray , N. S., “Secrets to Creating the Elusive ‘Accurate Estimate,’” PM Network, 15 (8) August 2001, p.

56.

Jeffery , R., G. C. Low , and M. Barnes, “A Comparison of Function Point Counting T echniques,” IEEE

Transactions on Softwar e Engineering, 19 (5) 1993, pp. 529–32.

Jones, C., Applied Software Measurement (New York: McGrawHill, 1991).

Jones, C., Estimating Softwar e Costs (New York: McGrawHill, 1998).

Kharbanda, O. P ., and J. K. Pinto, What Made Gertie Gallop: Learning fr om Project Failur es (New

York: V on Nostrand Reinhold, 1996). 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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Lovallo, D., and D. Kahneman, “Delusions of Success: How Optimism Undermines Executives’

Decisions,” Harvard Business Review , July 2003, pp. 56–63.

Magne, E., K. Emhjellenm, and P . Osmundsen, “Cost Estimation Overruns in the North Sea,” Project

Management Journal 34 (1) 2003, pp. 23–29. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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McLeod, G., and D. Smith, Managing Information Technology Projects (Cambridge, MA:

Course Technology , 1996).

Milosevic, D. Z., Project Management T oolBox (Upper Saddle River , NJ: John Wiley, 2003), p. 229.

Pressman, R. S., Softwar e Engineering: A Practitioner's Appr oach, 4th ed. (New York: McGrawHill,

1997).

Symons, C. R., “Function Point Analysis: Dif ficulties and Improvements,” IEEE Transactions on

Softwar e Engineering, 14 (1) 1988, pp. 2–1 1.

Case

Sharp Printing, AG

Three years ago the Sharp Printing (SP) strategic management group set a goal of having a color laser printer

available for the consumer and small business market for less than $200. A few months later the senior

management met offsite to discuss the new product. The results of this meeting were a set of general technical

specifications along with major deliverables, a product launch date, and a cost estimate based on prior

experience.

Shortly afterward, a meeting was arranged for middle management explaining the project goals, major

responsibilities, the project start date, and importance of meeting the product launch date within the cost

estimate. Members of all departments involved attended the meeting. Excitement was high. Although everyone

saw the risks as high , the promised rewards for the company and the personnel were emblazoned in their minds.

A few participants questioned the legitimacy of the project duration and cost estimates. A couple of R&D

people were worried about the technology required to produce the highquality product for less than $200. But

given the excitement of the moment, everyone agreed the project was worth doing and doable. The color laser

printer project was to have the highest project priority in the company .

Lauren was selected to be the project manager . She had 15 years of experience in printer design and

manufacture, which included successful management of several projects related to printers for commercial

markets. Since she was one of those uncomfortable with the project cost and time estimates, she felt getting

good bottomup time and cost estimates for the deliverables was her first concern. She quickly had a meeting

with the significant stakeholders to create a WBS identifying the work packages and organizational unit

responsible for implementing the work packages. Lauren stressed she wanted time and cost estimates from

those who would do the work or were the most knowledgeable, if possible. Getting estimates from more than

one source was encouraged. Estimates were due in two weeks.

The compiled estimates were placed in the WBS/OBS. The corresponding cost estimate seemed to be in

error . The cost estimate was $1,250,000 over the senior management estimate; this represents about a 20 percent

overrun! The time estimate from the developed project network was only four months over the top management

time estimate. Another meeting was scheduled with the significant 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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stakeholders to check the estimates and to brainstorm for alternative solutions; the cost and

time estimates appeared to be reasonabl e. Some of the suggestions for the brainstorming session

are listed below .

Change scope.

Outsource technology design.

Use the priority matrix (found in Chapter 4 ) to get top management to clarify their priorities.

Partner with another or ganization or build a research consortium to share costs and to share the newly

developed technology and production methods.

Cancel the project.

Commission a breakeven study for the laser printer .

Very little in the way of concrete savings was identified, although there was consensus that time could be

compressed to the market launch date, but at additional costs.

Lauren met with the marketing (Connor), production (Kim), and design (Gage) managers who yielded some

ideas for cutting costs, but nothing significant enough to have a lar ge impact. Gage remarked, “I wouldn't want

to be the one to deliver the message to top management that their cost estimat e is $1,250,000 off! Good luck,

Lauren.”

1. At this point, what would you do if you were the project manager?

2. Was top management acting correctly in developing an estimate?

3. What estimating techniques should be used for a mission critical project such as this?

C ase

Post Graduation Adventur e

Josh and Mike met each other as roommates during freshmen year at MacAlister College in St. Paul,

Minnesota. Despite a rocky start they became best friends. They are planning on going on a two week adventure

together to celebrate their graduation in June. Josh has never been to Europe and wants to visit France or Spain.

Mike spent a semester abroad in Aarhus, Denmark, and traveled extensively in Northern Europe. Even though

he never went to France or Spain, Mike wants to go to some place more exotic like South Africa or Vietnam.

For the past week they have been arguing back and forth over where they should go. Josh argues that it will cost

too much to fly to South Africa or Vietnam, while Mike counters that it wil l be much cheaper to travel in

Vietnam or South Africa once they are there. Each of them agreed that they can spend no more than $3,500 each

on the trip and could be gone for only two weeks.

One evening when they were arguing with each other over beers with friends, Sara said, “Why don't you use

what you learned in your project management class to decide what to do?” Josh and Mike looked at each other

and agreed that made perfect sense.

1. Assume you are either Mike or Josh; how would you go about making a decision using project

management methodology? 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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Looking first at only cost, what decision would you make?

3. After cost, what other factors should be considered before making a decision?

Appendix 5.1

Learning Curves for Estimating

A forecast estimate of the time required to perform a work package or task is a basic necessity for scheduling the

project. In some cases, the manager simply uses judgment and past experience to estimate work package time, or

may use historical records of similar tasks.

Most managers and workers intuitively know that improvement in the amount of time required to perform a

task or group of tasks occurs with repetition. A worker can perform a task better/quicker the second time and

each succeeding time she/he performs it (without any technological change). It is this pattern of improvement

that is important to the project manager and project scheduler .

This improvement from repetition generally results in a reduction of labor hours for the accomplishment of

tasks and results in lower project costs. From empirical evidence across all indu stries, the pattern of this

improvement has been quantified in the learning curve (also known as improvement curve, experience curve,

and industrial progress curve), which is described by the following relationship:

Each t im e t h e o utp ut q uantity d ouble s, t h e u nit l a bor h ours a re r e d uced a t a c o nsta nt r a te .

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

was 80 percent. This relationship of improvement in labor hours is shown below:

By using Table A5.1 unit values, similar labor hours per unit can be determined. Looking across the 16 unit

level and down the 80 percent column, we find a ratio of .4096. By multiplying this ratio times the labor hours

for the first unit, we obtained the per unit value:

That is, the 16th unit should require close to 328 labor hours, assuming an 80 percent improvement ratio. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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TA BLE A 5.1 L ea rn in g C urv es U nit V alu es 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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Obviously, a project manager may need more than a single unit value for estimating the time

for some work packages. The cumulative values in Table A5.2 pr ovide factors for computing the

cumulative total labor hours of all units. In the previous example, for the first 16 units, the total

labor hours required would be

By dividing the total cumulative hours (7,136) by the units, the average unit labor hours can be obtained:

Note how the labor hours for the 16th unit (328) differs from the average for all 16 units (446). The project

manager , knowing the average labor costs and processing costs, could estimate the total prototype costs. (The

mathematical derivation of factors found in Tables A5.1 and A5.2 ca n be found in Jel en, F. C., and J. H. Black,

Cost and Optimization Engineering, 2nd ed. (New Y ork: McGrawHill, 1983.)

FO LLO W O N C O NTR ACT E X AM PL E

Assume the project manager gets a followon order of 74 units; how should she estimate labor hours and cost?

Going to the cumulative Table A5.2 we find at the 80 percent ratio and 90 total units intersection—a 30.35 ratio.

Labor hours for the 90th unit can be obtained from Table A5.1 : .2 349 × 800 = 187 .9 labor hours. (For ratios

between given values, simply estimate.)

Exerc is e A 5.1

Norwegian Satellite Development Company

Cost Estimates

for

W orld Satellite T elephone Exchange Pr oject

NSDC has a contract to produce eight satellites to support a worldwide telephone system (for Alaska Telecom,

Inc.) that allows individuals to use a single, portable telephone in any location on earth to call in and out. NSDC

will devel op and produce the eight units. NSDC has estimated that the R&D costs will be NOK (Norwegian

Krone) 12,000,000. Material costs are expected to be NOK 6,000,000. They have estimated the design and

production of the first satellite will require 100,000 labor hours and an 80 percent improvement curve is

expected. Skilled labor cost is NOK 300 per hour . Desired profit for all projects is 25 percent of total costs. 6/24/2017 University of Phoenix: Project Management: The Managerial Process

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How many labor hours should the eighth satellite require?

B. How many labor hours for the whole project of eight satellites?

C. What price would you ask for the project? Why?

D . Midway through the project your design and production people realize that a 75 percent improvement

curve is more appropriate. What impact does this have on the project?

E. Near the end of the project Deutsch Telefon AG has requested a cost estimate for four satellites identical to

those you have already produced. What price will you quote them? Justify your price.

* O . P . K harb an da a n d J . K . P in to , W hat M ade G ertie G allo p: L ea rn in g f r o m P ro je ct F ailu re s ( N ew Y ork : V on N ostr a n d

R ein hold , 1 996), p . 7 3.