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Agenda
• Integrative Project – Part 3 due today– Part 4 Due Nov 10 (page 276) – Any of the first five sections can be resubmitted for rescoring prior to finals week. The
recorded score will the average of the original score and the score on the resubmitted section.
• Quiz 2 corrected – 3 A’s, 3 B’s and 2 C’s
• Assignment 6 Posted – Problems 1-7 on Page 272 & 3– Due Nov 6, 1008
• Cost Estimations and Budgeting (Chap 8)• Next Class (Nov 3) we will be covering Projects 3 & 4 in Project
Essentials • Nov 6 will be group work for part 4 of IP project
6-2
8-5
Big Dig
Year Budget
(billions)
1983 2.56
1989 4.44
1992 6.44
1996 10.84
2000 14.08
2003 14.63
http://www.masspike.com/bigdig/index.html
8-7
Types of Costs
Direct Vs. Indirect
Recurring Vs. Nonrecurring
Fixed Vs. Variable
Normal Vs. Expedited
8-8
Cost Classifications
Direct Labor X X X X
Building Lease X X X X
Expedite X X X X
Material X X X X
Non
-rec
urrin
g
Dire
ct
Indi
rect
Fix
ed
Rec
urrin
g
Var
iabl
e
Nor
mal
Exp
edite
d
Costs
8-9
Cost Estimation
Ballpark (order of magnitude) ±30%
Comparative ±15%
Parametric estimation
Feasibility ±10%
Definitive ±5%
8-12
Learning CurvesEach doubling of output results in a reduction in time to perform the last iteration.
x
:
Y = time required for the x unit of output
a = time required for the initial unit of output
X = the number of units to be produced
b = learning curve slope = log(learning %)/log(2)
bxY aX
Where
Curvilinear Handout.docLearning curve results.xls
Examples in Text Book are WRONG! Author used natural Logarithms. ln(2)=0.693USE Excel and log(#,base) functions
8-13
Problems with Cost Estimation
Low initial estimates
Unexpected technical difficulties
Lack of definition
Specification changes
External factors
8-14
Creating a Project Budget
• Top-down
• Bottom-up
Project Plan
WBS
Scheduling Budgeting
The budget is a plan that identifies the resources, goals and schedule that allows a firm to achieve those goals
8-15
Activity-Based Costing
Projects use activities & activities use resources
1. Assign costs to activities that use resources
2. Identify cost drivers associated with this activity
3. Compute a cost rate per cost driver unit or transaction
4. Multiply the cost driver rate times the volume of cost driver units used by the project
8-16
Example of ABC
Name Hours Needed Overhead Charge
Personal Time Rate
Hourly Rate Total Direct Labor Cost
John 40 1.80 1.12 $21/hr. $1,693.44
Bill 40 1.80 1.12 $40/hr. 3,225.60
J.P. 60 1.35 1.05 $10/hr. 850.50
Sonny 25 1.80 1.12 $32/hr. 1,612.80
Total Direct Labor Cost =
$7,382.34
8-17
Time-Phased budget
Months
Activity January February March April May Total by Activity
Survey 4,000 4,000
Design 5,000 3,000 8,000
Clear Site 4,000 4,000
Foundation 7,500 7,500
Framing 8,000 2,000 10,000
Plumb & Wire
1,000 4,000 5,000
Monthly Planned
4,000 9,000 10,500 9,000 6,000
Cumulative 4,000 13,000 23,500 32,500 38,500 38,500
8-19
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
8-20
Tony’s View of Cost Estimates
• Much more of an art than a science– Experience counts
• Cost estimates usually turn into actual budgets used for cost controls • Things you should discover prior to developing a budget
– What is the highest possible budget you can get away with• What the customer/sponsor/management will bear
– What is the cheapest budget possible• All things work out perfectly
• All budgets must be between these two numbers for the project to be successful
• Watch Variances! – It is the mosty important part of cost control!– Going over in one part of the project is fine if you have banked enough positive
variance • Example estimate budget
– csrd budget.xls
Examples
• Solved problems on page 271
6-21
Name Hours Needed Overhead Charge
Personal Time Rate
Hourly Rate Total Direct Labor Cost
John 40 1.80 1.12 $21/hr.
Bill 40 1.80 1.12 $40/hr.
J.P. 60 1.35 1.05 $10/hr.
Sonny 25 1.80 1.12 $32/hr.
Total Direct Labor Cost =
14 iterations, learning rate is 0.90, 15 hours to complete the first
Yx =aXb where b = log2 (learning rate)