Cost Estimation

1. Cost Estimation “Good cooking takes time. If you are made to wait, it is to serve you better, and to please you.” Menu of restaurant Antoine, New Orleans. (Quoted in the mythical man-month by Brooks)

2. Objectives • Project Cost Management Process • Cost Estimating • Cost Budgeting • Cost Control is not covered – See Earned Value for that. Reference for seminar: MBA Fundamentals by Kanabar & Warburton, 2008 (Kaplan Publishing).

3. Big Dig • Order of Magnitude Estimate $2.8 Billion. • Final Costs  $14 Billion + WHY?

4. Process Planning Planning Control

5. Estimate Costs: What are the Outputs?

6. Cost Estimating Vs. Pricing • Cost estimating and Pricing: • Cost estimating: how much will it cost the performing organization to provide the product or service involved? • Pricing: how much will the performing organization charge for the product or service? This is a business decision and will consider profit • Our focus is on cost estimating.

7. Why are so many Cost Estimates Wrong? • We need to define the work first and then estimate the work. • Generally we are asked to estimate and then define the work. The cart is before the horse!

8. Many other reasons • Failure to assess and mitigate risks • Risk Quantification is not done. • Contingency Budget is not included. • Poor change control: Not saying ‘No’ to requests for changes. (or no Process exists) • Poor quality—work has to be redone • Poor communication channels • New technology. From your experience give us one reason.

9. Types of Estimates & Accuracy • As project unfolds we gather more data about the project and the accuracy improves +75 +25 Estimate +10 -5 -10 -25 Project Completion Time Early/ Order of Magnitude Approximate/ Budget Estimate Definitive Estimate

10. Accuracy • Most difficult to estimate as very little project info is available • Used to finalize the Request for Authorization (RFA), and establish commitment • Development stage estimate. Needed to predict revised project completion date

11. Approaches to Estimating Generic Approach Top Down • analogous method • parametric method • experience based. Focus on overall development process. Task Based Approach • Add up WBS tasks. • Detailed estimating. • More definitive estimate. Bottom-Up Focus on individual project process.

12. Poor Project Management (1 of 2) • Inexperienced project managers can mess up projects. • To compress duration it is logical to add more resources. But this might create a problem. • The extra human communications required to add another member to a programming team takes away valuable time from other resources.

13. Poor Project Management (2 of 2) Brook's law "Adding manpower to a late software project makes it later." By Fred Brooks, author of "The Mythical Man-Month."

14. Impact of Communications Impact of Communication, etc. Months Resources More resources should decrease duration. BUT if additional co-ordination is required for each task then the Effort increases even more. Communication Effort = n(n-1)/2 Number of people = 3. 3(3-1)/2 = 3 * 2/2 = 3 Number of people = 4 4(4-1)/2 = 4 * 3/ 2 = 6

15. Estimating Techniques Experience (focus on Delphi) Projective & Parametric Detailed WBS)

16. Delphi • Provides a formal structured approach for the exchange of “opinions”. • Can be used when no historical data exists. Useful when • installing a new product methodology • making a significant change to an existing one. • implementing a unique product/project • Based on the theory that • Group opinions are fairly reliable. • Extreme views get annulled. • Informal one-on-one conversations are susceptible to bias & intimidation.

17. Delphi Group Experience: Delphi Delphi Monitor Group should consist of experts on the topic under discussion. Can include: marketing people, vendors, customers Should consist of ten people at least. All communications is done in writing.

18. Process • The Delphi group is given the program’s specifications, and an estimation form. • They meet to discuss project goals, assumptions, and estimation issues. • They then each anonymously list project tasks and estimate size. • The estimates are given to the Delphi monitor who tabulates the results and returns them to the experts. • Only each expert’s personal estimate is identified on the form. All others are anonymous. • The experts meet to discuss the results. They each review the tasks they have defined/estimated. • The cycle continues until the estimates converge. (Go back to step 3.)

19. Delphi Template Project: ______________ Estimator:_____________ Date:____________ Here is the range of estimates from Round: __ x x y x m x 25 50 75 100 0 Please enter your estimate for round : _____ Your rationale for the estimate: _____________________________________ _____________________________________ x = Estimates Y = Your estimate M = Median

20. PERT Method • Find the Pessimistic (P), Optimistic (O) and Likely estimate (L). P + 4 L + O Mean = ---------------------- 6 Maximum - Minimum Standard Deviation= ----------------------------- 6 Estimate = Mean +/- 1 SD For 95% confidence use 2 SD. For 99% confidence use 3 SD. 68% confidence (1 SD)

21. Combining Delphi with PERT • While both the methods are independent methods it is possible to combine the two methods. Procedure: • Use Delphi. • Consider the lowest estimate as O • Consider the highest estimate as P • Consider the median as L • Calculate the Pert Mean • Calculate the Standard Deviation. • Add 1, 2 or 3 SD to the Pert Mean

22. Parametric Models Good tool for early estimating. Most, if not all, cost models use predictors. A predictor has correlation with later results. Effort = K * Predictor House Cost per sq... foot = $100/sq... foot. Purchase cost of a 2500 sq.. foot house: = $2500 * 100 = $ 250,000.

23. Software Parametric Model • Cocomo • Function Point • 4GT

24. Using Life Cycle Effort Distribution to Estimate if you have metrics data Initiation & Requirements 8% 80 PD Functional Design 15% 150 PD Detail Design 15% 150 PD Coding (plus unit test) 30% 300 PD System Testing 13% 130 PD Acceptance Testing 10% 100 PD Implementation 7% 70 PD Wrap-Up 2% 20 PD Historic Ratio Total Effort Estimate: _ 100%___1000 PD__ Estimated Project effort is 1000 Person-Days One can estimate the project effort if the effort associated with coding is known

25. Estimating Resources – Top Down • Calculating Team Size (FTE Person) • Square Root of Effort • Square Root of 40 person-months • = 6.5 people * Barry Boehm – Cocomo Model

26. You can calculate Duration • Calculating Duration (months) • Person-Months • = ----------------------- • Persons • 40 person-months • = --------------------------- • 6.5 person(s) • = 6.4 months

27. Bottom Up Estimating • Requires construction of WBS. • Should be more accurate • But not necessarily always. If you miss out the broader picture you will miss some detailed estimates. • Case Study: Site Analysis and Excavation costs ignored.

28. WBS Outline Roll up

29. PERT Tool BAR

30. PERT

31. NEXT Determine Budget: What are the Outputs? Allocate the overall cost estimates to individual activities or work packages to establish a cost baseline for measuring project performance.

32. Core Concept • Effort, Duration, and Cost • Effort: The number of labor units required to • complete an activity • Availability: Time a staff person is able to work • Productivity: The relative measure of work in a time unit • Duration = ( Effort / Productivity ) / Availability • Cost = ( Effort / Productivity ) x Unit Cost Duration = Work_Hours / Work

33. Cost Budgeting Process Inputs Tools Outputs • Cost estimates • WBS • Project schedule • Cost management plan • Cost budgeting tools and techniques Cost baseline Project Funding Requirements Document Updates

34. Consider Direct and Indirect Costs • Direct costs: Costs incurred for a specific project • Salaries of project staff • Equipment bought specifically for the project • Indirect costs: Costs span over multiple projects (“overhead”) • Quality assurance department • Rooms, electricity, heating

35. Cost Distribution Model- Wellman’s Data for IT Projects

36. Costs to consider • Labor: Wages paid to all staff. • Overhead: Cost of payroll taxes and fringe benefits. • Usually % of Labor • Materials: Items used in the project. • cement, lumber, paint • Supplies: Cost of tools, office supplies, equipment. • Should be prorated if expected life is beyond the project. • General & Administrative: Cost of management & support services such as: • purchasing, accounting, secretarial • usually % of project cost. • Equipment Rental: • computers, printers • compressors, cranes, trucks • Profit • Reward for successfully completing the project • Calculated as % of project cost.

37. Cost Budgeting  Cost control • Cost baseline will be used to measure and monitor cost performance of the project – see Earned Value Slides Expected Cash Flow Cumulative Values Cost Baseline

38. Control Costs Process • Monitor Cost Performance • Understand variances from plan • Ensure all changes are recorded and agreed upon • Prevent unauthorized changes from being included in cost baseline • Inform stakeholders of authorized changes

39. Final Thoughts Accuracy can be achieved if you have historical data. Introduce an estimating Framework such as what is shown here.

40. Final Thoughts Project Costs: Are incurred while the project is being fulfilled. Life Cycle Costs: Includes the costs after project completion. There may be temptation to lower project costs at the expense of long term costs. Life Cycle Costing gives the PM a way to consider costs outside of the scope of project fulfillment. You need to know concepts such as: sunk costs, present value, IRR, Net Present Value, Benefit Cost Ratio.

41. Key Points to Remember • You must get the team members to provide estimates where possible. • When doing bottom-up estimating, use the rule of “one to two people for one to two weeks.” You can calculate the duration by dividing the total effort by the number of resources. • You can calculate the duration by dividing the total effort by the number of resources. • You can calculate the effort by multiplying the duration with the number of resources.

42. Key Points to Remember • For many types of projects it is preferable to estimate in days and not hours as people are not productive 8 hours every day. • You should always communicate the type of estimate to the stakeholder—the type of estimate is “order of magnitude”, “budget estimate” and “definitive estimate”. During the initiation phase you only have order of magnitude estimates. • You must consider more than one estimating tool or technique when developing estimates.

43. Key Points to Remember • Reliable budget estimates are arrived only after creating a work-break-down structure. • You must combine both the top-down and bottom-up estimating techniques for good budget estimates. • Once you’ve completed cost estimation you do cost budgeting. • Cost Control follows Cost Budgeting. This process involves reviewing project progress reports and comparing the results against the cost baseline and determining if management action must be taken.