Project Management: Cost Estimation

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Questions and Answers

What is the purpose of definitive estimates?

To estimate final project costs (correct)
To make purchasing decisions
To create project budget plans
To identify cost variances

When are definitive estimates typically made?

During the project execution phase
At the end of the project
At the start of the project
Less than 1 year before project completion (correct)

What happens to cost estimates as the project progresses?

They become irrelevant
They remain the same
They become more accurate (correct)
They become less accurate

Why is it important to provide supporting details for estimates and updates to project documents?

To ensure transparency and accountability (D) Signup and view all the answers

What is a common characteristic of labor costs in a project?

They are a large percentage of total project costs (C) Signup and view all the answers

Why are cost estimates done at various stages of a project?

To improve estimation accuracy over time (C) Signup and view all the answers

What is the primary reason project managers should take cost estimates seriously?

To complete projects within budget constraints (A) Signup and view all the answers

What is the typical range of a rough order of magnitude (ROM) estimate?

-50% to +100% (B) Signup and view all the answers

When is a rough order of magnitude (ROM) estimate typically done?

Very early in the project life cycle (B) Signup and view all the answers

What is the purpose of a budgetary estimate?

To allocate money into an organization's budget (B) Signup and view all the answers

What is the primary purpose of a rough order of magnitude (ROM) estimate?

To provide an estimate for selection decisions (B) Signup and view all the answers

What is a characteristic of a budgetary estimate?

It is used to allocate money into an organization's budget (B) Signup and view all the answers

What is a limitation of a rough order of magnitude (ROM) estimate?

It has a wide range of -50% to +100% (B) Signup and view all the answers

What is the primary goal of cost estimation in IT project management?

To complete projects within budget constraints (B) Signup and view all the answers

What is the total direct cost of the Requirement Analysis phase?

SAR 99,836.85 (D) Signup and view all the answers

What is the total resource cost in the project?

SAR 105,195.00 (D) Signup and view all the answers

Which phase has the highest total direct cost?

Development Phase (B) Signup and view all the answers

What is the cost of the software for system architecture design?

SAR 7,650.00 (C) Signup and view all the answers

What is the total project direct cost?

SAR 1,347,788.10 (A) Signup and view all the answers

How many units of office supplies are needed for workflow design?

4 (D) Signup and view all the answers

What is the total direct cost of the Testing & QA phase?

SAR 144,330.00 (B) Signup and view all the answers

What is the cost of the deployment software licenses?

SAR 2,400.00 (C) Signup and view all the answers

Which phase has the lowest total direct cost?

Training & Documentation (C) Signup and view all the answers

What is the total direct cost of the Project Administration phase?

SAR 278,250.00 (C) Signup and view all the answers

How many units of hardware and software are needed for testing environments?

6 (A) Signup and view all the answers

What is the cost of the software for UI/UX design?

SAR 5,550.00 (C) Signup and view all the answers

What is the cost of the printing and binding of training materials?

SAR 9,000.00 (D) Signup and view all the answers

What is the cost of the venue rental for training sessions?

SAR 16,500.00 (B) Signup and view all the answers

What is the formula to calculate the residual?

Actual Cost - Estimated Cost (D) Signup and view all the answers

What is the purpose of aggregating the residuals across all projects?

To calculate the error term (C) Signup and view all the answers

What is the error term (𝜖) in the given example?

∑ Residuals / n (A) Signup and view all the answers

What is the actual cost of Project 3?

SAR 21,000 (C) Signup and view all the answers

What is the estimated cost of Project 2?

SAR 15,000 (D) Signup and view all the answers

What is the purpose of calculating the residuals?

To compare estimated and actual costs (A) Signup and view all the answers

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Study Notes

Estimating Costs

Project managers must take cost estimates seriously to complete projects within budget constraints.
There are three types of cost estimates:
- Rough Order of Magnitude (ROM) estimate: provides an estimate of the project's cost magnitude, done very early in the project, and has a typical range of -50% to +100%.
- Budgetary estimate: provides an accurate estimate of project costs, done early, and has a typical range of -10% to +25%.
- Definitive estimate: provides an accurate estimate of project costs, done later in the project, and has a typical range of -5% to +10%.
The number and type of cost estimates vary by application area, and estimates are usually done at various stages of a project.
Estimates should become more accurate as time progresses.
It is important to provide supporting details for estimates and updates to project documents.
A large percentage of total project costs are often labor costs.

Bottom-up Estimates

Bottom-up estimates involve breaking down the project into smaller tasks and estimating the costs of each task.
The costs of each task are then added up to get the total project cost.
A bottom-up estimate example is shown, which includes costs for resources, labor, travel, and permits.

Calculating Residuals

Residuals can be calculated by subtracting the estimated project costs from the actual project costs.
Residuals can be aggregated across all projects and used to calculate summary statistics.

Parametric Estimating

Parametric estimating involves using data from previous projects to estimate the cost of a new project.
An example is shown where the error term is calculated using data from five previous projects.
The error term is calculated as the sum of the residuals divided by the number of projects.

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