Project Cost Estimation Essay Example

optimize the allocation and integration of inputs necessary to meet pre-defined objectives.

Project Cost Management

How do we know what a project will cost? We really don't, until the project is complete. We can't know the final project cost until the project is complete because we can't accurately predict the future.

Project cost management (PCM) is a method which uses technology to measure cost and productivity through the full life cycle of enterprise level projects. PCM encompasses several specific functions of project management that include estimating, job controls, field data collection, scheduling, accounting and design. Beginning with estimating, a vital tool in PCM, actual historical data is used to accurately plan all aspects of the project. As the project continues, job control uses data from the estimate with the information reported from the field to measure the cost and production in the project. From project initiation to completion, project cost management has an objective to simplify and cheapen the project experience.

Cost Estimating

This document describes the methodology for establishing cost estimates for projects managed by LBNL in a manner that is compliant with the standards for implementation of appropriate Project Management controls and Earned Value Management.

Cost estimates, including Estimate to Complete (ETC), are prepared in a clear, consistent, comprehensive format that facilitates review of details and assumptions throughout the cost estimation process. Activities to be estimated are identified in sufficient detail to support the cost estimate methodology used.

The objectives of the cost estimating process are to: support the establishment of the Performance Measurement Baseline (PMB); serve as the basis for change control; and Support the establishment of the ETC. Project cost estimates shall be traceable to documented sources and

based on accepted methodologies.

Procedure

Estimate Preparation and Review

The estimate preparation phase begins with the issuance of guidance and instructions from the Project Manager and encompasses those activities that translate technical design and fabrication into detailed labor and procurement elements (organized by Work Breakdown Structure (WBS)) and identified costs.

Labor rate tables, indirect costs, and escalation rates will be provided by Project Controls to assist Control Account Managers (CAMs) in budget development. The Project Manager will review this information and approve all budget plans prior to implementation. Escalation should generally be based on rates provided by the Department of Energy (DOE) as published in the LBNL Forward Pricing Sheet (aka CFO Rate Book). If work is being executed by collaborator or subcontractor in another geographic area where the escalation rates are different, rates for those areas should be used in lieu of the LBNL rates.

Judgment should be used to verify the appropriateness of the published rate in light of current market conditions. Documentation of the rates used and the basis should be maintained. The resulting cost estimate should be analyzed for appropriate time-phasing with budget authority and budget outlay, consistent with the project appropriation profile, as directed by the Funding Agency.

Preparation of Detailed Estimate

CAMs shall be responsible for preparing or obtaining cost estimates for Work Packages and Planning Packages. The CAMs will forward copies of the estimates to Project Controls for validation. Cost Estimate Methodology The result of the project cost estimate process shall be the CAMs most current, detailed cost estimate, commensurate with design maturity. The CAM will use one of the approved methodologies.

CAMs should use Categories 1, 2, 3, and 7 when possible, especially for high-cost

items, as this will provide maximum estimate support. The CAMs’ basis for all estimates will be documented for each project and retained by the Project Manager, with a copy provided to Project Controls. The documentation includes files to support project cost estimates (such as books, vendor quotes, engineering notes, memos, records of conversations with vendors, drawings, code output) with appropriate safeguards for proprietary information provided. Cost estimates are developed for each WBS element at the Work Package level or lower as deemed necessary by the CAMs. They shall be broken down by project phase, institution, and labor discipline as appropriate. Items and activities in the estimate shall be of sufficient detail to support interpretation by independent reviewers.

When the project includes collaborating institutions, estimates prepared by non-LBNL CAMs shall use equivalent methodologies.

Documentation

The Project Manager shall control supporting documentation and ensure that it is retained by WBS element. The Project Manager shall forward copies of the documentation to Project Controls. Proper care shall be given to protect business-confidential and proprietary information from unauthorized disclosure.

Documents and records generated as a result of implementing this procedure shall be generated in a manner suitable for reproduction and signed and dated at the time of completion or approval. Official signed documents shall be retained by the Project Manager, with copies to Project Controls. Documents, records, and work papers shall include but not be limited to the following:

Estimate spreadsheets. Work papers, including vendor quotes, telephone records, material take-offs, basis notes, calculations, etc. Analysis, such as contingencies, escalation application, and quantity discounts. Estimating codes, such as labor disciplines and phase codes. Application rates and associated application methodology.

Project Budgeting Introduction A robust project budget

enables you to make key decisions regarding the constraints with which you need to complete the project. For example, the project budget will help you determine the scope items that should be included and which items should be removed. Alternatively, if the key constraint is to complete a project before a specified date, then the project budget will help you determine the degree of schedule crashing permitted so that you can deliver the project on-time. The project budget is created after the Estimate Costs process. The cost estimates from this process are directly fed into the creation of the project budget. In the PMBOK version 4, the project budget is part of the Determine Budget process. There are several techniques used to determine the project budget:

• Cost Aggregation
• Reserve Analysis
• Historical Data
• Funding Limit Reconciliation

Cost Aggregation

Cost aggregation requires you to aggregate costs from an activity level to the work package level. This is because costs are measured, managed and controlled at the work package level during the project life-cycle. The final sum of the cost estimates are applied to the cost baseline (a tool project managers use to monitor and control project expenditures).

Reserve Analysis

To protect the project from cost overruns, most projects have a buffer. This buffer is called a Contingency or Management Reserve. The degree of protection provided is proportional to the risk foreseen in the project and the norms within your organization. The buffer is part of the project budget, but not the cost baseline. No amount of buffer can protect the project, if you don't follow the golden rules of managing risks Historical Data

Historical data from a closed project can be used

to determine the estimates for the new project. For example, if your organization has developed a block of apartments, you could use the same estimates for the development of another block of apartments. This is similar to analogous (parametric) estimation and is dependent on the similarities between the two projects.

Funding Limit Reconciliation

Many organizations have limited funding for projects, which affects the project cash flow. The funding may be based on a fiscal year or a quarter. Either way, your project budget must adhere to the constraints imposed by the funding limit. For example, suppose you have outsourced a part of a project and the vendor delivers and invoices you in the first quarter. However, the invoice and consequent payment was planned for in the second quarter. In this case, as a Project Manager you wouldn’t have the funds to pay the vendor in the first quarter.

You will use funding limit reconciliation to avoid large variations in the expenditure of project funds. Funding Limit Reconciliation may lead to revisions in the schedule and resource allocation. Therefore, the project budget directly impacts not only the cost, but also the schedule and scope of work that will be completed. Best Practice: Instead of committing to a budget for the entire project, commit to the budget for each release. In addition, watch out for scope creep during project execution. Otherwise, you will surely run out funds.

Cash Flow Forecasting

Cash Flow forecasts help you to build a model of the way in which cash moves within a project or organization. They help you to predict whether the sales or income you forecast will cover the costs of operation. They also allow

you to analyze whether a project will be sufficiently profitable to justify the effort put into it. Cash flow forecasts can also be useful for analyzing your own personal finances. This is useful when you are about to make difficult financial decisions. By carrying out a Cash Flow forecast on a spreadsheet package you can investigate the impact of changing factors within the forecast. If you have structured the spreadsheet correctly then you will be able to see, more or less instantly, the effect that changes will have.

Normally we structure Cash Flow Forecasts in a standard way. This is explained below. Other sorts of forecasting can be carried out with spreadsheets. A good way of structuring these is to firstly analyse the system being forecasted with a system diagram. This system diagram will show the relationships between factors. You can then quantify these relationships, and build a model based on them. The structure of the model will depend on the system being modeled.

The next row shows the total of the income rows minus the total of the out-going rows for the month. This shows you your profit or loss for the month. Underneath this, put in a running total. In this row add your profit or loss for the period to the previous running total. This shows your financial position at the end of the period.

Estimate values

By now you should have a table marked out with column headings and row titles. Now fill in the values of the cells on your table. An easy way of doing this is to fill in the first column, and then use the spreadsheet 'Fill. Right' function to copy

values across. Then adjust values in the other columns appropriately. When you are entering projections for sales for a new business, bear in mind you will not sell much until your customers have seen mention of your business several times (often 6 or 7 times). Your estimates for sales will be much more reliable if you base them either on previous years' revenues, on trial marketing, or on good quality market research. When you are entering values for costs, try, where possible, to base projections on costs from previous years. If this is not possible, base your estimates on real prices quoted. This keeps your estimates as realistic as possible. Calculate!

On most modern spreadsheet packages this will happen automatically, providing you have set up totals correctly as described in section 2. As you enter and change the values of cells within the spreadsheet, you should see that the period totals and running totals change appropriately. Cash Flow Forecasting is a relatively simple technique for checking the viability of a project. Cost/Benefit Analysis is another. These are good techniques for decisions involving relatively small amounts of money.

Where large sums are involved (for example, in financial market transactions), project evaluation can become an extremely complex and sophisticated art, which uses more formal techniques. The fundamentals of this are explained in Principles of Corporate Finance by Richard Brealey and Stewart Myers – this is something of an authority on the subject. The book is reviewed at the top of our right hand side bar.

Example

A motor home enthusiast has decided that he wants to set up a motor home hire company. He has researched the costs of set up,

and estimated the number of weeks of hire he can sell during the year. Note that he has been quite optimistic in hoping to sell all the weeks of holiday available during the high season of July and August. He will charge the same price as his competitors for a holiday.