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Lesson 5: Estimating Project Times and Costs

Terms in this set (36)

Managers recognize time, cost, and resource estimates must be accurate if project planning, scheduling, and controlling are to be effective. However, there is substantial evidence suggesting poor estimates are a major contributor to projects that have failed.

Even though a project has never been done before, a manager can follow seven guidelines to develop useful work package estimates:
1. Responsibility. At the work package level, estimates should be made by the person(s) most familiar with the task.
2. Use several people to estimate. It is well known that a cost or time estimate usually has a better chance of being reasonable and realistic when several people with relevant experience and/or knowledge of the task are used.
3. Normal conditions. When task time, cost, and resource estimates are determined, they are based on certain assumptions. Estimates should be based on normal conditions, efficient methods, and a normal level of resources.
4. Time units. Specific time units to use should be selected early in the development phase of the project network. All task time estimates need consistent time units. Estimates of time must consider whether normal time is represented by calendar days, workdays, workweeks, person days, single shift, hours, minutes, etc.
5. Independence. Estimators should treat each task as independent of other tasks that might be integrated by the WBS.
6. Contingencies. Work package estimates should not include allowances for contingencies.
7. Adding risk assessment to the estimate helps to avoid surprises to stakeholders. It is obvious some tasks carry more time and cost risks than others.
Top-Down Approaches for Estimating Project Times and Costs.
At the strategic level top-down estimating methods are used to evaluate the project proposal. In these situations top-down estimates are used until the tasks in the WBS are clearly defined.

1. CONSENSUS METHODS: This method simply uses the pooled experience of senior and/or middle managers to estimate the total project duration and cost. This typically involves a meeting where experts discuss, argue, and ultimately reach a decision as to their best guess estimate.
Firms seeking greater rigour will use the Delphi Method to make macro estimates.
The Delphi Method makes use of a panel of experts familiar with the kind of project in question. The notion is that well-informed individuals, calling on their insights and experience, are better equipped to estimate project costs/times than theoretical approaches or statistical methods. Their responses to estimate questionnaires are anonymous, and they are provided with a summary of opinions.
2. RATIO METHODS:
Uses the ratio of past actual costs for similar work to estimate the cost for a potential project. This macro method of forecasting cost does not provide a sound basis for project cost control since it does not recognize differences among projects

Top-down methods (sometimes called parametric) usually use ratios, or surrogates, to estimate project times or costs. Top-down approaches are often used in the concept or "need" phase of a project to get an initial duration and cost estimate for the project. For example, contractors frequently use number of square feet to estimate cost and time to build a house. that is, a house of 2,700 square feet might cost $160 per square foot (2,700 feet 3 $160 per foot equals $432,000).

3. APPORTION METHODS:
Costs allocated to a specific segment of a project by using a percentage of planned total cost.

This method is an extension to the ratio method. Apportionment is used when projects closely follow past projects in features and costs. Given good historical data, estimates can be made quickly with little effort and reasonable accuracy. This method is very common in projects that are relatively standard but have some small variation or customization.

4. Function Point Methods for Software and System Projects

Points derived from past software projects to estimate project time and cost, given specific features of the project.

In the software industry, software development projects are frequently estimated using weighted macro variables called "function points" or major parameters such as number of inputs, number of outputs, number of inquiries, number of data files, and number of interfaces. These weighted variables are adjusted for a complexity factor and added. The total adjusted count provides the basis for estimating the labor effort and cost for a project (usually using a regression formula derived from data of past projects).

5. LEARNING CURVE:
A mathematical curve used to predict a pattern of time reduction as a task is performed over and over

Some projects require that the same task, group of tasks, or product be repeated several times. Managers know intuitively that the time to perform a task improves with repetition. This phenomenon is especially true of tasks that are labor intensive. In these circumstances the pattern of improvement phenomenon can be used to predict the reduction in time to perform the task.


The main DISADVANTAGE of top-down approaches to estimating is simply that the time and cost for a specific task are not considered. Grouping many tasks into a common basket encourages errors of omission and the use of imposed time.