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Chapter 8Cost Estimation and Budgeting08-01Chapter 8 Learning ObjectivesAfter completing this chapter, students will be able to:Understand the various types of common project costs.Recognize the difference between various forms of project costs.Apply common forms of cost estimation for project work, including ballpark estimates and definitive estimates.Understand the advantages of parametric cost estimation and the application of learning curve models in cost estimation.

08-02Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallChapter 8 Learning ObjectivesAfter completing this chapter, students will be able to:Discern the various reasons why project cost estimation is often done poorly.Apply both top-down and bottom-up budgeting procedures for cost management.Understand the uses of activity-based budgeting and time-phased budgets for cost estimation and control.Recognize the appropriateness of applying contingency funds for cost estimation.

08-03Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallCost ManagementCost 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.08-04Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallCommon Sources of Project CostLaborMaterialsSubcontractorsEquipment & facilitiesTravel

08-05Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallTypes of CostsDirect Vs. IndirectRecurring Vs. NonrecurringFixed Vs. VariableNormal Vs. Expedited08-06Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallCost ClassificationsDirect LaborXXXXBuilding LeaseXXXXExpediteXXXXMaterialXXXXNon-recurringDirectIndirectFixedRecurringVariableNormalExpeditedCosts08-07Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallCost EstimationBallpark (order of magnitude) 30%Comparative 15%Feasibility 10%Definitive 5%08-08Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallFIGURE 8.2

Parametric Estimate for Design Costs for Concorde08-9Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallLearning CurvesEach doubling of output results in a reduction in time to perform the last iteration.

08-10Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

FIGURE 8.4Unit Learning Curve Log-Linear Model08-11Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallSoftware Project Estimation Function PointsFunction 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.08-12Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallFIGURE 8.5

Software Project Development Activities as a Function of Size08-13Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallComplexity Weighting Table for Function Point Analysis08-14

Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallFunction Point Calculations for Restaurant Reorder System08-15

Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallProblems with Cost EstimationLow initial estimatesUnexpected technical difficultiesLack of definitionSpecification changesExternal factors08-16Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallCreating a Project BudgetTop-downBottom-upActivity-based costing (ABC)Project PlanWBSSchedulingBudgetingThe budget is a plan that identifies the resources, goals and schedule that allows a firm to achieve those goals08-17Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallActivity-Based CostingProjects use activities & activities use resources

Assign costs to activities that use resourcesIdentify cost drivers associated with this activityCompute a cost rate per cost driver unit or transactionMultiply the cost driver rate times the volume of cost driver units used by the project

08-18Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallSample Project Budget08-19

Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallTable 8.6Sample Budget Tracking Planned and Actual Activity Costs08-20

Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallTable 8.7Example of a Time-Phased Budget08-21

Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallTable 8.8

Cumulative Budgeted Cost of the ProjectFigure 8.708-22Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallBudget ContingenciesThe allocation of extra funds to cover uncertainties and improve the chance of finishing on time.

Contingencies are needed becauseProject scope may changeMurphys Law is presentCost estimation must anticipate interaction costsNormal conditions are rarely encountered08-23Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallSummaryUnderstand the various types of common project costs.Recognize the difference between various forms of project costs.Apply common forms of cost estimation for project work, including ballpark estimates and definitive estimates.Understand the advantages of parametric cost estimation and the application of learning curve models in cost estimation.

08-24Copyright 2013 Pearson Education, Inc. Publishing as Prentice HallSummaryDiscern the various reasons why project cost estimation is often done poorly.Apply both top-down and bottom-up budgeting procedures for cost management.Understand the uses of activity-based budgeting and time-phased budgets for cost estimation and control.Recognize the appropriateness of applying contingency funds for cost estimation.

08-25Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

08-26Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall