Estimates

• OBJECTIVES : -
• Factors influencing the Quality of Estimates
• Estimating guidelines for time, cost and resources
• Macro & Micro estimating
• Methods for estimating & level of detail,
• Developing budgets, types of costs.
• Refining estimates
• Contingency fund
• Selection / approval of project
 ESTIMATING TIME & COST

Estimating is the process of approximating the time

and cost required to complete the project. Accuracy
of estimation improves with greater effort ----
estimating costs money.

Many Projects are failures in terms of meeting the

time and cost projections.
Time is one variable which has the least flexibility.
Accountants define cost as value of resource
sacrificed to achieve a specific objective.
 ESTIMATING TIME & COST

Project Managers must make sure that :

• Projects are well defined

• Have accurate time estimate
• Have a realistic cost budget
• They are involved in approving

Cost and time estimating involves developing an

approximation of costs of the resources needed and
estimating the time frame required to complete the
project.
 ESTIMATING TIME & COST

Estimating cost and time involve :

• Assessing the overall cost and time for entire

project
• Allocating the overall to individual work items /
activity to establish a baseline for measuring.
• Monitoring and Controlling

Project estimating is a task of balancing the

expectations of major stakeholders and the need for
control while the project is implemented.
 ESTIMATING TIME & COST

Factors influencing the Quality of Estimates :

It is desirable to have very close approximation and past

experience is a good starting point. However ;

• Uniqueness or the specific requirement of project

• People involved / required(Varying skills)
• External factors
• Planning horizon
• Time factor
 ESTIMATING TIME & COST

Factors influencing the Quality of Estimates :

• Project structure – Matrix or exclusive

• Organization structure(decentralized/ centralized)
• Padding mentality leading to pruning 10-15 %
• Organizational / individual culture
• Other factors
– Unexpected events
– Efficiency of work time
– Mistakes / Learning Curve
 ESTIMATING TIME & COST

METHODS OF ESTIMATING TIME DURATION &

COST :

• Extrapolated based on similar project

• Historical data - ‘Knowledge’ base serve for
estimating
• Macro Estimate
• Micro Estimate
 ESTIMATING TIME & COST

METHODS OF ESTIMATING TIME DURATION &

COST :

• Macro Estimate

This is Top-down approach where the time and cost

is set at the overall level first and then it is
disseminated down the sub-activity level.
• Quick and faster
• Require an expert or expertise
• Rough cut/ rough estimate
 ESTIMATING TIME & COST

METHODS OF ESTIMATING TIME DURATION &

COST :
• Macro Estimate

• Off the mark and not to the detail reqd.

• Helpful in initial dev. of project, Strategic decision
making, High uncertainty and unstable scope,
Internal-small projects
• May not be realistic but still helps in initial
development of complete plan.
• Accuracy – off to the extent of 40%
 ESTIMATING TIME & COST

MACRO APPROACH FOR ESTIMATING TIME

DURATION & COST :

• At the strategic level macro estimating methods

used for review of the project proposal. When
complete tasks are to be listed, then macro
estimation is not suitable.

• RATIO method – Top down and use ratios or

surrogates to estimate the time and cost.
Construction, new plants based on capacity etc.
 ESTIMATING TIME & COST

MACRO APPROACH FOR ESTIMATING TIME

DURATION & COST :

• Function point method – In software or IT projects,

the estimation is done using weighted macro
variables called function points such as no. of inputs
/ no. of licences / data file size, no. of interfaces
etc.,
• Learning curves – applicable for repeat projects
where in the efficiency improves with repetition.
 ESTIMATING TIME & COST

MACRO APPROACH FOR ESTIMATING TIME

DURATION & COST :

• Apportion method – Apportionment is used when

projects closely follow past projects in features and
costs. Common for standard projects with little
variation or customization. Here the total % of
cost/time is apportioned in terms of % for various
sub-activities / deliverables based on historical data.
 ESTIMATING TIME & COST

THE TOTAL PROJECT COST ESTIMATED TO BE RS. 120

LAKHS WHICH IS DIVIDED AMONG THE VARIOUS
ACTIVITIES AS FOLLOWS ;

PLANNING – 10 %(Objectives 4 % and scoping – 6 %)

DESIGN – 40 % (inputs 3 %, output 3%, programming 20 %,
verification 10% and review 4 %)
IMPLEMENTATION – 50 %( In-house development 40 % and
customer testing 10 %)
ESTIMATE THE COSTS FOR EACH HEAD AND ACTIVITY.
 ESTIMATING TIME & COST

THE TOTAL PROJECT SOST ESTIMATED FOR BUILDING

A HOUSE IS RS. 220 LAKHS WHICH IS DIVIDED AMONG
THE VARIOUS ACTIVITIES AS FOLLOWS ;

PLAN, DESIGN AND APPROVAL – 5 %(Architecture fees 2 % and

Approval – 3 %)
FOUNDATION – 20 % (Foundation concreting 10%, stone masonry
10%,)
STRUCTURE – 40 %( Wall 10 % , Roof casting 20 %, plastering 5
% and flooring 5 %)
FINISHING 25 % ( Interiors 10 %, Electricals 10 % Plumbing 5 %)
Others 10 % (Wood work 8% and Fitments 2 %)
ESTIMATE THE COSTS FOR EACH HEAD AND ACTIVITY. If they
take care of the Interiors themselves, what is the savings?
 ESTIMATING TIME & COST

METHODS OF ESTIMATING TIME DURATION &

COST :
• Micro Estimate

• Coming from people down the line actually involved

in the job(Knowledge experts)
• This will improve the accuracy of time and cost
estimate
• May be close to being realistic or approximation
• Takes time to estimate
• Detailed and verifiable later
 ESTIMATING TIME & COST

METHODS OF ESTIMATING TIME DURATION &

COST :
• Micro Estimate
Able to set the performance at various WBS/PBS
levels for control and monitoring.
• The preferred approach is to make rough Top-down
estimates and then develop WBS related bottom-up
estimates before the final negotiation and then sign
off.
• Recommended for projects with fixed-price
contracts, customer wants details, high accuracy
demanded.
 ESTIMATING TIME & COST

MICRO APPROACH FOR ESTIMATING TIME

DURATION & COST :

• Template method – If the project is similar to past

project, same data can be used where in the
templates are available for each sub activity. For the
standardized sub-activities exists and any changes
to the same are noted and effected.
• Parametric procedure – apply the parametric
procedure as being done in macro approach for all
the sub activities and arrive at the estimate. Per sft,
per capacity etc
 ESTIMATING TIME & COST

MICRO APPROACH FOR ESTIMATING TIME

DURATION & COST :

• Detailed estimate for WBS packages – most reliable

method and people responsible for the activity are
asked to make the estimate. Can also have 3 levels
of estimation at the low, avg and high estimation at
each WBS level
• Hybrid estimation – this begins with the macro
estimate for the overall project and then refinement
effected at the phase level or at the project life cycle
level.
 Project for new Machine
Most Likely estimated Project cost = $1,000,000
Most Optimistic Estimate = $ 900,000
Most pessimistic project cost= $1,200,000.
How to ensure the total Project cost does not exceed $ 1,425,000

Head Optimistic Most Likely Pessimistic

Engg Labour Hrs 600 – 15 % 600 600+15%

Cost per Hour $80 $80 $80

Non-Engg Hours 1200 1500 2200

Cost per Hour $35 $35 $35

Material Cost $100000 $135000 $155000
Prodn Line loss 105 hr 110 hr 120 hr
Line Contributn $ 500/hr $ 500/hr $ 500/hr
 ESTIMATING TIME & COST
MICRO APPROACH FOR ESTIMATING TIME
DURATION & COST :

• Hybrid estimation – Phase estimating is employed

when uncertainty surrounds a project like
aerospace, IT, new technology projects and it
employs two estimate system over the life of the
project. Detailed(micro) estimates for the immediate
phase and Macro for remaining phases. Reliability
improves as the project progresses through its life
cycle.
This is highly recommended for projects which are
R & D in nature with huge uncertainty concerning
the shape and nature of product / project.
 ESTIMATING TIME & COST

LEVEL OF DETAIL

This is influenced by :

Organization / individual culture

Different for different management levels where it
should be just sufficient as reqd. Each level can
have the kind of information necessary to make
decisions.
It varies with the complexity of the project, size,
need for control, time frame and cost of the project
 ESTIMATING TIME & COST

GUIDELINES FOR ESTIMATING TIME , COST &

RESOURCES :

1. Responsibility
2. Use several People to Estimate
3. Normal Conditions (Assumptions)
4. Time Units
5. Independence
6. Contingencies
7. Add or mention risk elements / factors affecting the project
 ESTIMATING TIME & COST

DEVELOPING BUDGETS

It is a process of developing the cost estimate

indicating the timeframe for the availability of funds.
Each project require time phased Budget based on
which an organization plans for fund provisioning
and takes decision how it can be funded. This will
help the financial manager to project the future cash
outflows.
 ESTIMATING TIME & COST

DEVELOPING BUDGETS

The time phased budgets for work packages are

assigned start time and end time indicating the
schedule and also the fund requirement at each
stage.

Funds are provisioned accordingly and from time to

time the project status are reviewed for changes to
fund requirement and assess its impact on overall
project.
 DEVELOP A BUDGET

Work Estimated Estimated Preceding Following

Package(W Cost, Rs Time, WP WP
P) Months
A 40000 1 Start B
B 60000 2 A C,D
C 150000 3 B E
D 21000 5 B F
 DEVELOP A BUDGET FOR FIRST 5
MONTHS

Work Estimated Estimated Preceding Following

Package(W Cost, Rs Time, WP WP
P) Months
A 20000 1 Start B
B 80000 2 A C,D
C 180000 3 B E
D 14000 1 B F
 ESTIMATING TIME & COST

TYPES OF COST
Direct Cost : the amount spent on resources directly
involved in the generation of activity / product /
service or project.

These are directly chargeable to the specific work of

the project and all the expenses are monitored
relative to this project.

These are real cash outgo which is spent during

various phases of project.
 ESTIMATING TIME & COST

TYPES OF COST

Normally the cost of resources engaged at the

direct level / lower levels are considered as direct
expenses.

• Labour
• Materials
• Equipment related to specific project
• Others – travel expenses for project team
• Project Manager + members
 ESTIMATING TIME & COST

TYPES OF COST

Direct Overheads - Costs that are related to the

project for the common services from where certain
resources are committed to the project.

• Salary for the project team and associated

members in other deptt.
• Power / energy cost related to projects.
• Specific expenses exclusively for the project –
training, travel, advertisement expenses etc.
 ESTIMATING TIME & COST

TYPES OF COST

Indirect Cost - Costs that are not directly related to

the product / service / project but are indirectly
related to performing of the project. Power cost,
cost of administration, facility cost etc are added to
the project cost on an actual or on % basis as per
company’s standard method and it is not under
Project Manager’s control
 ESTIMATING TIME & COST

TYPES OF COST

Indirect Cost -

General Admn. Overhead cost (common services

deptt.)
Corporate OH cost / Marketing expenditure
General Expenditure / General facility expenses
 ESTIMATING TIME & COST

ESTIMATE HARDWARE COST / COMPUTER

BASED ON FOLLOWING INPUT COSTS ;
R& D Technology for Hardware development Rs. 100 Lakhs
(to be recovered for 10000 units of sales)
Raw materials / PCB/Plastic components etc – Rs 8000/unit
Labour cost – Rs. 350 per hour
Labour hour required per unit – 15 hr
Other Overheads including finance cost – 30 % of Raw Material
cost.
Profit – 10 % of total cost.
Find the cost and price per unit for first 10000 units and also for
beyond 10000 units.
 ESTIMATING TIME & COST

DEVELOPING RESIDENTIAL LAYOUT

20 Acres of Land required for converting into residential
plots with 30*40 ft sites. Each Acre yield 20 sites of
30*40 ft dimension.
Land Cost – Rs. 20 Lakhs per acre
Land development with amenities – Rs. 200 per sft
Other amenities – swimming pool, sports club etc – Rs.
150 per sft
Documentation / admin expenses Rs 25 per sft
Calculate the overall Project cost and Selling Price per
site with 40 % profit margin.
 ESTIMATING TIME & COST

REFINING ESTIMATES AND CONTINGENCY

FUND :

Even after investing required resources(time and

energy) for making a good estimate, the total
estimates do not materialize with the actual and can
be off by any yardstick.

These could be attributed to many reasons the

prime being the uncertainty of predicting the future.
 ESTIMATING TIME & COST

REFINING ESTIMATES AND CONTINGENCY

FUND :

• Estimates are done too quickly – need to explain

rationale for the estimate. Budgetary estimate
sometimes taken as the final validated cost.

• Lack of estimating experience – those in project

team may not have been exposed to the intricacies
of finance/cost management.
 ESTIMATING TIME & COST

REFINING ESTIMATES AND CONTINGENCY

FUND :

• Bias towards under-estimation – you cost it based

on the higher efficiency and expertise and some
times juniors run the projects.

• Top Management demands speed than accuracy –

 ESTIMATING TIME & COST

REFINING ESTIMATES AND CONTINGENCY

FUND :

• Interaction costs are hidden in estimates - Time

required for co-ordination, interaction times with
other deptt, meetings, review costs are not taken.

• Normal conditions do not apply – Fluctuations,

abnormal conditions throw special surprises to the
elements of cost and duration.
 ESTIMATING TIME & COST
REFINING ESTIMATES AND CONTINGENCY
FUND :
• Things can go wrong ! Accidents, Political,
Economical, Technological and environmental
factors affect, which are totally unforeseen.
• Changes to the scope and plans – Unstable
projects major source of cost overruns. Lot of effort
need to be established while nailing down the
project scope in the beginning.
• Adjusting the Estimates - Make approximate
revisions from time to time. This may project
completely different outlook as compared to the
original budgeted figures.
 ESTIMATING TIME & COST

REFINING ESTIMATES AND CONTINGENCY

FUND :

Contingency Fund and time buffers –

To offset uncertainty, contingency funds and time

buffers are created. Less well defined the project is ,
the greater the contingency.

It can be added to specific activity in WBS or for

whole project.
 ESTIMATING TIME & COST

REFINING ESTIMATES AND CONTINGENCY

FUND :

Contingency Fund and time buffers –

More the risks associated with the project, greater

provisioning for contingency. It is directly
proportional.
 ESTIMATING TIME & COST

REFINING ESTIMATES AND CONTINGENCY

FUND :
Changing the budget/baseline - Another way is to go for
amendment justifying the cost / time overruns to the user and
get the approval. In such situations, original estimates no
longer apply and new estimates are to be created and
stakeholders need to approve.

• Change in product concept

• Change in scope / added features
• Labor strikes / legal entanglements
• Sky-rocketing wage / material costs
• Political / other technicalities
 ESTIMATING TIME & COST

R & D cost for development of a Tatra vehicle for Defense is Rs.

50,00,000 and the project is for delivering 10 such vehicles to
Indian Army. First proto require 20,000 labour hours and the
labor hour cost is Rs. 200. Expected improvement in labour
productivity from 2nd vehicle onwards is 75 % from the proto
version. Material cost per vehicle is Rs. 10,00,000. Profit
margin is 50 %.

1. How many labour hours for the 10th vehicle and what is the
labour cost ?.
2. Calculate the total labour hrs and labour cost for the project.
3. Calculate the total project cost and selling price for first proto
and the balance 9 vehicles.
4. Suppose the Navy deptt. comes with requirement for 5 such
vehicles, what is the S.P you offer and why ?.
 Measuring Forecast Error

• Forecasts are never perfect

• Need to know how much we should
rely on our chosen forecasting
method
• Measuring forecast error:
E t  A t  Ft

• Note that over-forecasts = negative

errors and under-forecasts = positive
errors
 Measuring Forecasting Accuracy

• Mean Absolute Deviation MAD 

 actual  forecast
(MAD) n
– measures the total error in a
CFE   actual  forecast 
forecast without regard to sign
• Cumulative Forecast Error
(CFE)
– Measures any bias in the
forecast  actual - forecast 2

MSE 
n

• Mean Square Error (MSE) CFE

TS 
– Penalizes larger errors M AD

• Tracking Signal
– Measures if your model is
working
 Accuracy & Tracking Signal Problem: A company is comparing the
accuracy of two forecasting methods. Forecasts using both methods are
shown below along with the actual values for January through May. The
company also uses a tracking signal with ±4 limits to decide when a
forecast should be reviewed. Which forecasting method is best?

Method A Method B
Month Actual F’cast Error Cum. Tracking F’cast Error Cum. Tracking
sales Signal Error Signal
Error

Jan. 30 28 28

Feb. 26 25 25
March 32 32 29
April 29 30 27
May 31 30 29

MAD
MSE
 Accuracy & Tracking Signal Problem: A company is comparing the
accuracy of two forecasting methods. Forecasts using both methods are
shown below along with the actual values for January through May. The
company also uses a tracking signal with ±4 limits to decide when a
forecast should be reviewed. Which forecasting method is best?

Method A Method B
Month Actual F’cast Error Cum. Tracking F’cast Error Cum. Tracking
sales Signal Error Signal
Error

Jan. 30 28 2 2 2 28 2 2 1

Feb. 26 25 1 3 3 25 1 3 1.5
March 32 32 0 3 3 29 3 6 3
April 29 30 -1 2 2 27 2 8 4
May 31 30 1 3 3 29 2 10 5

MAD 1 2
MSE 1.4 4.4