Project Management: Achieving Competitive Advantage
Fifth Edition
Chapter 8
Cost Estimation and Budgeting
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Learning Objectives
8.1 Understand the various types of common project costs and key differences between them.
8.2 Apply common forms of cost estimation for project work, including ballpark estimates, definitive estimates, parametric estimates, and learning curve.
8.3 Apply top-down, bottom-up, activity-based, and time-phased budgeting procedures for cost management.
8.4 Recognize the appropriateness of applying contingency funds for cost estimation.
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P M B o K Core Concepts
Project Management Body of Knowledge (P M B o K) covered in this chapter includes:
Plan Cost Management (P M B o K 7.1)
Estimate Costs (P M B o K 7.2)
Determine Budget (P M B o K 7.3)
Control Costs (P M B o K 7.4)
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Cost Management
Cost management has been defined to encompass data collection, cost accounting, and cost control.
Cost accounting and cost control serve as the chief mechanisms for identifying and maintaining control over project costs.
Cost estimation processes create a reasonable budget baseline for the project.
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Common Sources of Project Cost
Labor
Materials
Subcontractors
Equipment and facilities
Travel
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Types of Costs
Direct Versus Indirect
Recurring Versus Nonrecurring
Fixed Versus Variable
Normal Versus Expedited
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Figure 8.2 Project Price Breakdown
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Table 8.2 Cost Classifications
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Cost Estimation
Ballpark ( of magnitude)
Comparative
Feasibility
Definitive
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Learning Curves
Each doubling of output results in a reduction in time to perform the last iteration.
Where :
Yx = the time required for the x unit of output
a = the time required for the initial unit of output
X = the number of units to be produced
b = learning curve slope
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Figure 8.6 Unit Learning Curve Log-Linear Model
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Software Project Estimation—Function Points
Function Point Analysis is a system for estimating the size of software projects based on what the software does.
Function Points are a standard unit of measure that represents the functional size of a software application.
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Figure 8.7 Software Project Development Activities as a Function of Size
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Table 8.4 Complexity Weighting Table for Function Point Analysis
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Table 8.5 Function Point Calculations for Restaurant Re System
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Problems with Cost Estimation
Low initial estimates
Unexpected technical difficulties
Lack of definition
Specification changes
External factors
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Creating a Project Budget
The budget is a plan that identifies the resources, goals, and schedule that allows a firm to achieve those goals.
Figure 8.8 The Relationship Among W B S, Scheduling, and Budgeting
Top-down
Bottom-up
Activity-based costing (A B C)
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Activity-Based Costing
Projects use activities and activities use resources.
Assign costs to activities that use resources.
Identify cost drivers associated with this activity.
Compute a cost rate per cost driver unit or transaction.
Multiply the cost driver rate times the volume of cost
driver units used by the project.
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Table 8.6 Sample Project Budget
Activity Direct Costs Budget Overhead Total Cost
Survey 3,500 500 4,000
Design 7,000 1,000 8,000
Clear Site 3,500 500 4,000
Foundation 6,750 750 7,500
Framing 8,000 2,000 10,000
Plumb and Wire 3,750 1,250 5,000
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Table 8.7 Sample Budget Tracking Planned and Actual Activity Costs
Activity Direct Costs Budget Overhead Total Cost
Survey 4,000 4,250 250
Design 8,000 8,000 – 0 –
Clear Site 4,000 3,500 (500)
Foundation 7,500 8,500 1,000
Framing 10,000 11,250 1,250
Plumb and Wire 5,000 5,150 150
Total 38,500 40,650 2,150
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Table 8.8 Example of a Time-Phased Budget
Activity January February Months March April May Total by Activity
Survey 4,000 Blank Blank Blank Blank 4,000
Design Blank 5,000 3,000 Blank Blank 8,000
Clear Site Blank 4,000 Blank Blank Blank 4,000
Foundation Blank Blank 7,500 Blank Blank 7,500
Framing Blank Blank Blank 8,000 2,000 10,000
Plumb and Wire Blank Blank Blank 1,000 4,000 5,000
Monthly Planned 4,000 9,000 10,500 9,000 6,000 Blank
Cumulative 4,000 13,000 23,500 32,500 38,500 38,500
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Figure 8.9 Cumulative Budgeted Cost of the Project
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Budget Contingencies
The allocation of extra funds to cover uncertainties and improve the chance of finishing on time.
Contingencies are needed because:
Project scope may change
Murphy’s Law is present
Cost estimation must anticipate interaction costs
Normal conditions are rarely encountered
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Benefits to Contingency Funding
Recognizes future contains unknowns
Adds provision for company plans for an increase in project cost
Applies contingency fund as an early warning signal to a potential overdrawn budget
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Summary
Understand the various types of common project costs and key differences between them.
Apply common forms of cost estimation for project work, including ballpark estimates, definitive estimates, parametric estimates, and learning curve.
Apply top-down, bottom-up, activity-based, and time-phased budgeting procedures for cost management.
Recognize the appropriateness of applying contingency funds for cost estimation.
Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved
Copyright
Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved
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