Project Management Chapter 5

Project Estimating

• Estimating is the process of forecasting or approximating the time and cost of completing project deliverables.
• It's a trade-off, balancing the benefits of better accuracy against the costs of securing increased accuracy.

Types of Estimates

• Top-down (macro) estimates: analogy, group consensus, or mathematical relationships
• Bottom-up (micro) estimates: based on estimates of elements found in the work breakdown structure

Factors Influencing the Quality of Estimates

• Planning horizon
• Project complexity
• People
• Project structure and organization
• Padding estimates
• Organizational culture
• Other factors

Estimating Guidelines for Times, Costs, and Resources

• Responsibility
• Use of several people to estimate
• Normal conditions
• Time units
• Independence
• Contingencies
• Risk assessment added to the estimate to avoid surprises to stakeholders

Top-Down versus Bottom-Up Estimating

• Top-down estimates: usually derived from someone who uses experience and/or information to determine the project duration and total cost
• Bottom-up estimates: can take place after the project has been defined in detail, can serve as a check on cost elements in the WBS, and provide the customer with an opportunity to compare the low-cost, efficient method approach with any imposed restrictions

Conditions for Preferring Top-Down or Bottom-Up Time and Cost Estimates

• Conditions listed in Table 5.1

The Preferred Approach in Defining the Project

• Make rough top-down estimates
• Develop the WBS/OBS
• Make bottom-up estimates
• Develop schedules and budgets
• Reconcile differences between top-down and bottom-up estimates

Methods for Estimating Project Times and Costs

• Top-down approaches: consensus method, ratio method, apportion method, function point methods for software and system projects, learning curves
• Bottom-up approaches: template method, parametric procedures applied to specific tasks, range estimating

Level of Detail

• The level of detail in the WBS varies with the complexity of the project, the need for control, the project size, cost, and duration, and other factors
• Excessive detail: emphasizes departmental outcomes rather than deliverable outcomes, creates more unproductive paperwork
• Inadequate detail: falls short of meeting the structure's needs

Types of Costs

• Direct costs: clearly chargeable to a specific work package, examples: labor, materials, equipment, and other
• Direct project overhead costs: can be tied to project deliverables or work packages, examples: salary of the project manager, temporary rental space for the project team, supplies, specialized machinery
• General and administrative (G&A) overhead costs: not directly linked to a specific project, examples: advertising, accounting, salary of senior management above the project level

Refining Estimates

• Reasons for adjusting estimates: interaction costs are hidden in estimates, normal conditions do not apply, things go wrong on projects, project scope and plans change, people are overly optimistic, people engage in strategic misrepresentation

Creating a Database for Estimating

• Database for estimating: a repository of historical data to support future estimates

Mega Projects: A Special Case

• Mega projects: large-scale, complex ventures that typically cost $1 billion or more, take many years to complete, and involve multiple private and public stakeholders
• Examples: high-speed rail lines, airports, healthcare reform, the Olympics, development of new aircraft
• Mega projects often involve a double whammy: projects cost much more than expected and under-deliver on benefits the projects were to provide
• Sometimes referred to as “white elephant”: projects are over budget, under value, and the costs of maintaining the project exceed the benefits received

The Reference Class Forecasting (RCF)

• Three major steps: select a reference class of projects similar to your potential project, collect and arrange outcome data as a distribution, and use the distribution data to arrive at a realistic forecast
• Benefits: outside empirical data mitigates human bias, politics, strategic, and promoter forces have difficulty ignoring outside RCF information, RCF serves as a reality check for funding large projects, RCF helps executives avoid unsound optimism, and RCF leads to improved accountability