Project Cost Estimation

Project Cost Estimation
The Problem

The Program Manager’s (PM’s) Job
Plan the Project
Estimate the Cost and Establish the Budget
Identify and Acquire Necessary Resources (People, Equipment, etc.)
Manage it (to the schedule, within budget)

The PM’s Dilemma
Cost is Usually the Boundary that Cannot be Crossed
Cost is a Determined by How Much (labor, materials, etc.) and How Long (Schedule)
So How Do You Figure Out What it Will Take Before You’ve Done It??

Understanding "What’s in the Cost"

Elements of Costs
Direct Costs - Attributable to the Project:

Salaries and Associated Benefits, Materials, Payments to Subcontractors or Consultants, Project Related Travel

Indirect (Overhead) Costs - Necessary Business Expenses:

General Administrative Costs, Facility (Space, Utilities, Insurance), Marketing, Ongoing Research and Development

Basic Equation:
Cost = Labor$ x Time + Other Direct Costs + Indirect Costs

Note: Indirect Costs are Usually Allocated on Some Proportional Basis Each project a Business is Executing

The Process (Figuring Our What it Takes)

Step 1 - Break the Project Down into a Set of Definable Tasks
Iterative, Top Down Process

Identify Major Activities (Design, Development, Integration, Test, Production)
Break Down Further into "Self Contained" tasks (Design User Interface, Develop Database Software, Develop Prototype xyz Board…)
Take it Down One or More Steps Depending on Size and Complexity (Layout All Display Formats, Determine Operator Action/Entry Sequences, Define Limit Tests and Error Notifications)

Too Little Breakdown is Bad, Too Much is Bad - it takes a Balance
Tools - Logic, Analysis, Experience

The Process - Estimating Each Task

Determine What it Takes to Address Each Task in the WBS
Usually Focused on Labor
What Type (Programmer, Engineer, Network Administrator, Writer/Illustrator)
Experience Mix

May Look Like Mini Project Teams (Some Guidance from a Senior Type + 2 Juniors doing details and a Writer)

Estimate How Long the Task Should Take
Very Subjective

Historical Performance Metrics and/or or Personal Experience Helps
Capabilities/Limitations of Candidate Project Team Members Must be Considered

Cover the Gaps (the Team is usually Fixed and Finite)

Plan for Continuous Tasking for each member Until No Longer needed

The Process - Preparing The Schedule

Schedule the Tasks
Assess Start Point for Each (Possibly Relative to Progress of Others)
Assumes Some Sequence/Dependency Analysis Has Been Conducted
Insert Milestones
Key Review/Delivery/Test Points
Evaluate the Result
Staff Profile (is it Reasonable)
Make Necessary Adjustments (Schedule, Resource Mix, etc.)

The Process - Calculating the Cost

Labor
Schedule and Staff Profile Summarizes labor Types and How Much of Each (Total Hours, Days Weeks etc.)
Labor Hour Costs Normally are Salary + Fringe Multiplier
Materials
Delivered or Consumed as Part of Project

Computers, Software Licenses, Peripherals, etc. Delivered to Customer
Usually a "Firm Number" Supported by Vendor Quotes
Paper, Special Materials to be Used During Job for Books, Pictures, Etc.
Typically a "Best Estimate" and Minor Relative to Materials and Labor

Consultants and Subcontractors Costs
Consultants Costs Predicted Based on Hourly Quote and Usage Estimate
Subcontractors Based on Firm Quote for Services
Other (Travel, Etc.)
Estimates Based on Job Requirements
Add it Up:
Cost =Labor (w/Fringe) + Materials +Consultants/Subs +Other + Indirect

We Have a WBS, Schedule Cost - Now What..
A Final Look

Prepare to Track It
Set Up a Total Cost Profile (How the Project Flows Financially)
Set Up a Labor Profile (Either by Hours, Labor Cost - or Both)
During Execution
Account for Expenses Against WBS items
Review "Progress" Against Cost Profile Regularly
If behind Schedule, Ahead of Cost Profile, Must be problems…
Another Dilemma
"If You Can’t Measure It - You Can’t Track It."
"If You Don’t Know Where You’re Going - You Might End Up Somewhere Else"