TOPIC 4

TOPIC 4COST ESTIMATINGON IN CONTRACT AND PROJECTS

Compiled by:Shukri Mohamed Salleh

2Worth to Ponder..9.4 PROJECT COST MANAGEMENT9.4.1Estimate Cost

Identifies cost needed to complete project activities.39.4 PROJECT COST MANAGEMENT cont.9.4.2Determine Budget

Establish a cost baseline.4Definition of Estimation

Process of establishing prices for products & services.

In business estimating involves preparing, proposing and negotiating contracts.

59.4 PROJECT COST MANAGEMENT cont.Definition of Budget

Business function to cost target for accomplishing required task, usually after award of contract.

Establish for tracking performance against the negotiation target cost.

69.4 PROJECT COST MANAGEMENT cont.Types of Estimates

Macro estimatesMicro estimates

79.4 PROJECT COST MANAGEMENT cont.Top down - Usually are derived from someone who uses experience indicator and/or information to decideBottom up - Can serve as a check on cost elements in the WBS by rolling up the work packages and associated cost accounts to major deliverables at the work package level.7Macro Estimates Characteristics

Intended UseFeasibility/ conceptual phaseRough time/ cost estimateFund requirementsResource capacity planning

89.4 PROJECT COST MANAGEMENT cont.Macro Estimates Characteristics cont.

Preparation cost1/10 to 3/10 of a percent of total project cost

AccuracyMinus 20% to plus 50%

99.4 PROJECT COST MANAGEMENT cont.Micro Estimates Characteristics

Intended UseBudgetingSchedulingResource requirementResource timing

109.4 PROJECT COST MANAGEMENT cont.Engineering EstimateDisclose similar programs.Explain reason for not using historical data.State that the estimate is based on judgment only.Break the task down to the lowest practical level of detail.

10Micro Estimates Characteristics cont.

Preparation cost3/10 of a percent to 1 percent of total project cost

AccuracyMinus 10% to plus 30%

119.4 PROJECT COST MANAGEMENT cont.Macro EstimatesCharacteristicMicro EstimatesFeasibility/ conceptual phaseRough time/ cost estimateFund requirementsResource capacity planningIntended UseBudgetingSchedulingResource requirementResource timing1/10 to 3/10 of a percent of total project cost

Preparation Cost3/10 of a percent to 1 percent of total project costMinus 20% to plus 50%AccuracyMinus 10% to plus 30%129.4 PROJECT COST MANAGEMENT cont.Macro Estimates vs. Micro Estimates

Estimation Techniques

Analogous estimation use cost information from similar task or activities.Same as in previous projects.Similar to previous projects (with complexity factors/ normalizing)

139.4 PROJECT COST MANAGEMENT cont.Depends on adjuster expertise.Same as in previous projects.might experience slight deviation due to learning curverate factor might have an impact to estimates.

13Estimation Techniques cont.

Parametric estimation uses some parameter and statistical relationship. If a unit cost is known then the whole package can be determined.

Bottom up estimation uses the cost of the part of a component and then aggregating the cost of the cost of those part to calculate the whole components.

149.4 PROJECT COST MANAGEMENT cont.

9.4 PROJECT COST MANAGEMENT cont.Estimation Techniques cont.

Reserve analysis a.k.a contingency allowance. Contingency reserves are provisions in project management plan to mitigate risk.

Vendor bid analysis may include analysis of what the project should cost, based on the responsive bids from qualified vendors.

169.4 PROJECT COST MANAGEMENT cont.Estimation Techniques cont.

Cost of quality - Sum of costs incurred in maintaining acceptable quality levels plus the cost of failure to maintain that level (cost of poor quality).

Percentage of effort - 10 manufacturing hours require 6 hours inspection / setup : the level of effort is 60%

179.4 PROJECT COST MANAGEMENT cont.Discussion

Decide each estimation technique type of estimates.

In your opinion, does estimation is important or not? Please support your answer with details.189.4 PROJECT COST MANAGEMENT cont.To support good decision to develop cash flow needsTo schedule work/ task to determine the project health (progress)To determine the project duration and cost to develop time-phased budget and establish the project baselineTo determine whether the project is worth doing18

9.4 PROJECT COST MANAGEMENT cont.

20Worth to Ponder..

So what are we doing in here????

Economic Project Selection Criteria

Payback periodReturn on Investment (ROI) Net Present Value (NPV)Weighted Scoring ModelInternal Rate of Return (IRR)

219.4 PROJECT COST MANAGEMENT cont.Economic Project Selection Criteria cont.

Payback periodThe length of time required to recover the cost of an investment.229.4 PROJECT COST MANAGEMENT cont.Economic Project Selection Criteria cont.

Return on Investment (ROI)A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.

239.4 PROJECT COST MANAGEMENT cont.Economic Project Selection Criteria cont.

Return on Investment (ROI) cont.

The return on investment formula:

ROI = Gain from investment Cost of investmentCost of investment249.4 PROJECT COST MANAGEMENT cont.Economic Project Selection Criteria cont.

Net Present Value (NPV)NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. 259.4 PROJECT COST MANAGEMENT cont.26

9.4 PROJECT COST MANAGEMENT cont.27

9.4 PROJECT COST MANAGEMENT cont.Economic Project Selection Criteria cont.

Weighted Scoring ModelA weighted scoring model is a tool that provides a systematic process for selecting projects based on many criteria

289.4 PROJECT COST MANAGEMENT cont.29

9.4 PROJECT COST MANAGEMENT cont.Break Even Point

DefinitionBreak-even point is the level of sales at which profit is zero.

At break even point total sales are equal to total cost (variable + fixed). 309.4 PROJECT COST MANAGEMENT cont.Break Even Point

31

9.4 PROJECT COST MANAGEMENT cont.

32Worth to Ponder..