. Chapter 14 A. Significance of Pricing & Estimating - support good decisions - determine how much a project should cost - determine whether the project is worth doing - determine cash flow needs B. Estimating Guidelines - responsibility: estimates made by person(s) most familiar with task - multiple sources - based on normal conditions, efficient methods, and normal level of resources - time units (work days, minutes, months) - independence: tasks are independent of other tasks - contingencies: should NOT include allowances for contingencies - adding risk assessments to estimates: identify degree of risk to allow stakeholders to consider alternatives C. Top-Down Methods for Estimating - uses experience and/or information to determine project duration and total cost - made by top managers with little knowledge of processes used to complete the project 1. Consensus Methods: - pooled experience of senior and/or middle managers to estimate total project duration and cost - experts reach a cumulative decision for their best guess estimate
- Delphi Method: involves a group decision process by a panel of experts about the likelihood that certain events will occur 2. Ratio (Parametric) Methods: uses ratios or surrogates to estimate project times or costs - ex. using square feet to estimate cost/time to build a house 3. Apportion Methods: extension of ratio methods where costs are apportioned as percentage of total cost - used when projects closely follow past projects in features and costs - ex. foundation: 3%; framing 25%; electric, plumbing, and heating: 15% - utilizes WBS 4. Learning Curves Methods - time to perform a task improves withrepetition - each time output quantity doubles, unit labor hours are reduced at a constant rate D. Bottom-Up Methods for Estimating - work package level - estimates come from people closest to the work - possible to roll up work packages and associated cost elements into major deliverables - allows customer to make comparisons and understand restrictions 1. Template Methods - costs from similar past projects can be used as a starting point for estimate of new project - note differences in new project and adjust costs/times accordingly 2. Parametric Procedures Applied to Specific Tasks - applied to tasks at the work packages level 3. Range Estimating Method - work best when work packages have significant uncertainty associated with cost/cost to complete - calls for three time estimates: Low, Average, and High E. Costs Classification - direct: clearly chargeable to specific work package (labor, materials, equipment, etc.) - direct project overhead: tied to deliverables or work packages (salary of PM, temporary rental space, etc.) - applied as a percentage to materials and labor - general and administrative overhead: organizational costs not directly linked to specific project - carried for the duration of project - ex. advertising, accounting, etc. - applied as a percentage of total direct cost - labor costs: hiring and paying the various personnel involved in developing the project - salary v. hourly, pensions and benefits, type of personnel to be hired, etc. - material costs: specific equipment and supplies required to complete project tasks - subcontractors: must be factored into preliminary cost estimate for project (ex. marketing firm) - equipment and facilities - travel: car rentals, airfare, hotels, meals, etc. - cost classifications: 1. Type: direct or indirect 2. Frequency: recurring or nonrecurring 3. Adjustment: fixed or variable 4. Schedule: normal or expedited F. Problems with cost estimation 1. low initial estimates 2. unexpected technical difficulties 3. lack of definition 4. specification changes (“scope creep”) 5. external factors (ex. inflation) 6. interaction costs
