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ELC 347 project management

Day 16

Agenda

• Integrative Project – Part 3 due today– Part 4 Due Nov 10 (page 276) – Any of the first five sections can be resubmitted for rescoring prior to finals week. The

recorded score will the average of the original score and the score on the resubmitted section.

• Quiz 2 corrected – 3 A’s, 3 B’s and 2 C’s

• Assignment 6 Posted – Problems 1-7 on Page 272 & 3– Due Nov 6, 1008

• Cost Estimations and Budgeting (Chap 8)• Next Class (Nov 3) we will be covering Projects 3 & 4 in Project

Essentials • Nov 6 will be group work for part 4 of IP project

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8-3

Cost Estimation and Budgeting

Chapter 8

© 2007 Pearson Education

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8-5

Big Dig

Year Budget

(billions)

1983 2.56

1989 4.44

1992 6.44

1996 10.84

2000 14.08

2003 14.63

http://www.masspike.com/bigdig/index.html

8-6

Common Sources of Project Cost

Labor

Materials

Subcontractors

Equipment & facilities

Travel

8-7

Types of Costs

Direct Vs. Indirect

Recurring Vs. Nonrecurring

Fixed Vs. Variable

Normal Vs. Expedited

8-8

Cost Classifications

Direct Labor X X X X

Building Lease X X X X

Expedite X X X X

Material X X X X

Non

-rec

urrin

g

Dire

ct

Indi

rect

Fix

ed

Rec

urrin

g

Var

iabl

e

Nor

mal

Exp

edite

d

Costs

8-9

Cost Estimation

Ballpark (order of magnitude) ±30%

Comparative ±15%

Parametric estimation

Feasibility ±10%

Definitive ±5%

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8-11

Learning Curve

8-12

Learning CurvesEach doubling of output results in a reduction in time to perform the last iteration.

x

:

Y = time required for the x unit of output

a = time required for the initial unit of output

X = the number of units to be produced

b = learning curve slope = log(learning %)/log(2)

bxY aX

Where

Curvilinear Handout.docLearning curve results.xls

Examples in Text Book are WRONG! Author used natural Logarithms. ln(2)=0.693USE Excel and log(#,base) functions

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Problems with Cost Estimation

Low initial estimates

Unexpected technical difficulties

Lack of definition

Specification changes

External factors

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Creating a Project Budget

• Top-down

• Bottom-up

Project Plan

WBS

Scheduling Budgeting

The budget is a plan that identifies the resources, goals and schedule that allows a firm to achieve those goals

8-15

Activity-Based Costing

Projects use activities & activities use resources

1. Assign costs to activities that use resources

2. Identify cost drivers associated with this activity

3. Compute a cost rate per cost driver unit or transaction

4. Multiply the cost driver rate times the volume of cost driver units used by the project

8-16

Example of ABC

Name Hours Needed Overhead Charge

Personal Time Rate

Hourly Rate Total Direct Labor Cost

John 40 1.80 1.12 $21/hr. $1,693.44

Bill 40 1.80 1.12 $40/hr. 3,225.60

J.P. 60 1.35 1.05 $10/hr. 850.50

Sonny 25 1.80 1.12 $32/hr. 1,612.80

Total Direct Labor Cost =

$7,382.34

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Time-Phased budget

Months

Activity January February March April May Total by Activity

Survey 4,000 4,000

Design 5,000 3,000 8,000

Clear Site 4,000 4,000

Foundation 7,500 7,500

Framing 8,000 2,000 10,000

Plumb & Wire

1,000 4,000 5,000

Monthly Planned

4,000 9,000 10,500 9,000 6,000

Cumulative 4,000 13,000 23,500 32,500 38,500 38,500

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8-19

Budget Contingencies

The allocation of extra funds to cover uncertainties and improve the chance of finishing on time.

Contingencies are needed because

Project scope may change

Murphy’s Law is present

Cost estimation must anticipate interaction costs

Normal conditions are rarely encountered

8-20

Tony’s View of Cost Estimates

• Much more of an art than a science– Experience counts

• Cost estimates usually turn into actual budgets used for cost controls • Things you should discover prior to developing a budget

– What is the highest possible budget you can get away with• What the customer/sponsor/management will bear

– What is the cheapest budget possible• All things work out perfectly

• All budgets must be between these two numbers for the project to be successful

• Watch Variances! – It is the mosty important part of cost control!– Going over in one part of the project is fine if you have banked enough positive

variance • Example estimate budget

– csrd budget.xls

Examples

• Solved problems on page 271

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Name Hours Needed Overhead Charge

Personal Time Rate

Hourly Rate Total Direct Labor Cost

John 40 1.80 1.12 $21/hr.

Bill 40 1.80 1.12 $40/hr.

J.P. 60 1.35 1.05 $10/hr.

Sonny 25 1.80 1.12 $32/hr.

Total Direct Labor Cost =

14 iterations, learning rate is 0.90, 15 hours to complete the first

Yx =aXb where b = log2 (learning rate)