ESTIMATING PROJECT TIMES AND COSTS

CHAPTER 5
●​ Is a trade-off, balancing the benefits of better
WHERE ARE WE NOW accuracy against the costs of secured
increased accuracy.

TYPES OF ESTIMATES
●​ Top-down (macro) estimates—analogy, group
consensus, or mathematical relationships
○​ Usually done by senior management
●​ Bottom-up (micro) estimates—based on
estimates of elements found in the work
breakdown structure
○​ Typically performed by the people who are
doing the work

LEARNING OBJECTIVES All project stakeholders prefer accurate cost and

time estimates, but they also understand the inherent
●​ Understand estimating project times and
uncertainty in all projects. Inaccurate estimates lead
costs is the foundation for project planning
to false expectations and consumer dissatisfaction.
and control.
Accuracy is improved with greater effort, but is it
●​ Describe guidelines for estimating time, costs,
worth the time and cost—estimating costs money!
and resources.
Project estimating becomes a trade-off, balancing
●​ Describe the methods, uses, and advantages
the benefits of better accuracy against the costs for
and disadvantages of top-down and
securing increased accuracy.
bottom-up estimating methods.
●​ Distinguish different kinds of costs associated
WHY ESTIMATING TIME AND COST IS
with a project.
IMPORTANT
●​ Suggest a scheme for developing an
estimating database for future​projects. ●​ Estimates are needed to support good
●​ Understand the challenge of estimating mega decisions.
projects and describe​ steps that lead to ●​ Estimates are needed to schedule work.
better informed decisions. ●​ Estimates are needed to determine how long
●​ Define a “white elephant” in project the project should take and its cots.
management and provide examples. ●​ Estimates are needed to determine whether
the project is with doing.
●​ Estimates are needed to develop cash flow
CHAPTER OUTLINE needs.
●​ Estimates are needed to determine gow well
5.1. Factors Influencing the Quality of Estimates the project is progressing.
5.2. Estimating Guidelines for Times, Costs, and
Resources Cost, time, and budget estimates are the lifeline for
5.3. Top-Down versus Bottom-Up Estimating control; they serve as the standard for comparison of
5.4. Top-Down versus Bottom-Up Estimating actual and plan throughout the life of the project.
5.5. Level of Detail Project status reports depend on reliable estimates
5.6. Level of Detail as the major input for measuring variances and
5.7 Refining Estimates taking corrective action. Ideally, the project
5.8 Creating a Database for Estimating manager, and in most cases the customer, would
5.9 Mega Projects: A Special Case prefer to have a database of detailed schedule and
cost estimates for every work package in the project.
Regrettably, such detailed data gathering is not
PROJECT ESTIMATING
always possible or practical and other methods are
used to develop project estimates.
ESTIMATING DEFINED
●​ Is the process of forecasting or 5.1. FACTORS INFLUENCING THE QUALITY OF
approximating the time and cost of ESTIMATES
completing project deliverables.

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 Chapter 5: Estimating Project Times and Costs

PLANNING HORIZON ●​ In work situations where you are asked for time
●​ The quality of the estimate depends on the and cost estimates, most of us are inclined to
planning horizon; estimates of current events add a little padding to increase the probability
are close to 100 percent accurate but are and reduce the risk of being late. If everyone at
reduced for more distant events. all levels of the project adds a little padding to
●​ The accuracy of time and cost estimates should reduce risk, the project duration and cost are
improve as you move from the conceptual seriously overstated. This phenomenon causes
phase to the point where individual work some managers or owners to call for a 10–15
packages are defined. percent cut in time and/or cost for the project.

PROJECT DURATION ORGANIZATIONAL CULTURE

●​ Time to implement new technology has a habit ●​ Organization culture can significantly influence
of expanding in an increasing, nonlinear project estimates.
fashion. Sometimes poorly written scope ●​ In some organizations padding estimates is
specifications for new technology result in tolerated and even privately encouraged. Other
errors in estimating times and costs. organizations place a premium on accuracy
●​ Long-duration projects increase the uncertainty and strongly discourage estimating
in estimates. gamesmanship.
●​ Organizations vary in the importance they
PEOPLE attach to estimates. The prevailing belief in
●​ The people factor can also introduce errors in some organizations is that detailed estimating
estimating times and cost. For example, takes too much time and is not worth the effort
accuracy of estimates depends on the skills of or that it’s impossible to predict the future.
the people making the estimates. ●​ Other organizations subscribe to the belief that
●​ A close match of people skills to the task will accurate estimates are the bedrock of effective
influence productivity and learning time. project management.
●​ Similarly, whether members of the project team ●​ Organization culture shapes every dimension of
have worked together before on similar project management; estimating is not immune
projects will influence the time it takes to to this influence.
coalesce into an effective team.
●​ Sometimes factors such as staff turnover can OTHER FACTORS
influence estimates. It should be noted that ●​ Finally, nonproject factors can impact time and
adding new people to a project increases time cost estimates. For example, equipment
spent communicating. down-time can alter time estimates. National
●​ Typically, people have only five to six holidays, vacations, and legal limits can
productive hours available for each working influence project estimates. Project priority can
day; the other hours are taken up with indirect influence resource assignment and impact time
work, such as meetings, paperwork, answering and cost.
e-mail. ●​ Project estimating is a complex process. The
quality of time and cost estimates can be
PROJECT STRUCTURE AND ORGANIZATION improved when these variables are considered
●​ Which project structure is chosen to manage in making the estimates.
the project will influence time and cost ●​ Estimates of time and cost together allow the
estimates. One of the major advantages of a manager to develop a time-phased budget,
dedicated project team discussed earlier is the which is imperative for project control. Before
speed gained from concentrated focus and discussing macro and micro estimating
localized project decisions. This speed comes at methods for times and costs, a review of
an additional cost of tying up personnel full estimating guidelines will remind us of some of
time. Conversely, projects operating in a matrix the important “rules of the game” that can
environment may reduce costs by more improve estimating.
efficientlysharing personnel across projects but
may take longer to complete since attention is 5.2. ESTIMATING GUIDELINES FOR TIMES,
divided and coordination demands are higher. COSTS, AND RESOURCES
1.​ Responsibility
PADDING ESTIMATES 2.​ The use of several people to estimate

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 Chapter 5: Estimating Project Times and Costs

3.​ Normal conditions be considered independently of other

●​ Estimates should be based on normal activities
conditions, efficient methods, and a 6.​ Contingencies
normal level of resources. ●​ Work package estimates should not
●​ Normal conditions are sometimes difficult include allowances for contingencies. The
to discern, but it is necessary to have a estimate should assume normal or
consensus in the organization as to what average conditions even though every
normal conditions mean in this project. If work package will not materialize as
the normal workday is eight hours, the planned. For this reason top management
time estimate should be based on an needs to create an extra fund for
eight-hour day. contingencies that can be used to cover
●​ Similarly, if the normal workday is two unforeseen events
shifts, the time estimate should be based 7.​ Risk assessment added to the estimate to
on a two-shift workday. Any time estimate avoid surprises to stakeholders
should reflect efficient methods for the ●​ Simply identifying the degree of risk lets
resources normally available. The time stakeholders consider alternative methods
estimate should represent the normal level and alter process decisions. A simple
of resources—people or equipment. breakdown by optimistic, most likely, and
4.​ Time units pessimistic for task time could provide
●​ Specific time units to use should be valuable information regarding time and
selected early in the development phase of cost.
the project network.
●​ All task time estimates need consistent
5.3. TOP-DOWN VERSUS BOTTOM-UP
time units. Estimates of time must
ESTIMATING
consider whether normal time is
represented by calendar days, workdays,
workweeks, person days, single shift, TOP-DOWN ESTIMATES
hours, minutes, etc. In practice the use of ●​ Are usually derived from someone who uses
workdays is the dominant choice for experience and/or information to determine
expressing task duration. the project duration and total cost.
5.​ Independence ●​ Are sometimes made by top managers who
●​ Estimators should treat each task as have very little knowledge of the component
independent of other tasks that might be activities used to complete the project.
integrated by the WBS.
●​ Use of first-line managers usually results in BOTTOM-UP ESTIMATES
considering tasks independently; this is ●​ Can take place after the project has been
good. Top managers are prone to defined in detail.
aggregate many tasks into one time ●​ Can serve as a check on cost elements in the
estimate and then deductively make the WBS by rolling up the work packages and
individual task time estimates add to the associated cost accounts to major
total. If tasks are in a chain and deliverables.
performed by the same group or ●​ Provide the customer with an opportunity to
department, it is best not to ask for all the compare the low-cost, efficient method
time estimates in the sequence at once to approach with any imposed restrictions.
avoid the tendency for a planner or a
supervisor to look at the whole path and
CONDITIONS FOR PREFERRING TOP-DOWN
try to adjust individual task times in the
OR BOTTOM-UP AND COST ESTIMATES
sequence to meet an arbitrary imposed
schedule or some rough “guesstimate” of
the total time for the whole path or
segment of the project. This tendency does
not reflect the uncertainties of individual
activities and generally results in
optimistic task time estimates. In
summary, each task time estimate should

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 Chapter 5: Estimating Project Times and Costs

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

5.4. METHODS FOR ESTIMATING PROJECT

TIMES AND COSTS
RANGE ESTIMATING TEMPLATE

Top-Down Approaches Bottom-Up

Approaches

●​ Consensus Method ●​ Template Method

●​ Ratio Method ●​ Parametric
●​ Apportion Method Procedures
●​ Function Point Applied to Specific
Methods for Tasks
Software and ●​ Range Estimating
System Projects
●​ Learning Curves

APPORTION METHOD OF ALLOCATING

A HYBRID: PHASE ESTIMATING
PROJECT COSTS USING THE WBS

TOP-DOWN AND BOTTOM-UP ESTIMATES

SIMPLIFIED BASIC FUNCTION POINT COUNT

PROCESS FOR A PROSPECTIVE PROJECT OR
DELIVERABLE

Example: Function Point Count Method

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 Chapter 5: Estimating Project Times and 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

CONTRACT BID SUMMARY COSTS

THREE VIEWS OF COST

5.5. 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
●​ 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 5.7. REFINING ESTIMATES
Reasons for adjusting estimates
5.6. TYPES OF COSTS ●​ Interaction costs are hidden in estimates.
●​ Normal conditions do not apply.
DIRECT COSTS ●​ Things go wrong on projects.
●​ Project scope and plans change.
●​ Are clearly chargeable to a specific work
●​ People are overly optimistic.
package
●​ People engage in strategic misrepresentation.
○​ Examples: Labor, materials, equipment,
and other
5.8 CREATING A DATABASE FOR ESTIMATING
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

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 Chapter 5: Estimating Project Times and Costs

●​ 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.
●​ RCF leads to improved accountability.
●​ RCF provides a basis for project contingency
funds.

KEY TERMS
●​ Apportionment
●​ Bottom-up estimates
●​ Delphi Method
●​ Direct costs
●​ Function points
●​ Learning curve
5.9 MEGA PROJECTS: A SPECIAL CASE
●​ Overhead costs
●​ Phase estimating
MEGA PROJECTS DEFINED ●​ Range estimating
●​ Are large-scale, complex ventures that ●​ Ratio method
typically cost $1 billion or more, take many ●​ Reference class forecasting (RCF)
years to complete, and involve multiple ●​ Template method
private and public stakeholders. ●​ Time and cost databases
○​ Examples: High-speed rail lines, airports, ●​ Top-down estimates
healthcare reform, the Olympics, ●​ White elephant
development of new aircraft
●​ Often involve a double whammy.
○​ Projects cost much more than expected
and under-deliver on benefits the
projects were to provide.
●​ Are 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

1.​ Select a reference class of projects similar to
your potential project.
2.​ Collect and arrange outcome data as a
distribution. Create a distribution of cost
overruns as a percentage of the original
project estimate (low to high).
3.​ Use the distribution data to arrive at a
realistic forecast. Compare the original cost
estimate for the project with the reference
class projects.

BENEFITS
●​ Outside empirical data mitigates human bias.

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