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8/3/2019 5- Project Cost Estimating
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PROJECT COST MANAGEMENTSession-5
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o Introduction and importance of project cost estimation
o Cost estimation stages
o Estimation techniques
February 3, 2012 Sana Ullah Khan PE, PMP 2
Session Objectives
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Optimal Connections, LLC
Importance of cost Estimation
o Poor cost estimation is the leading source of project failure
o When you promise to do a $ 100 job for $50, your are definitely inviting cost
over run, schedule slippages, inadequate performance and project scope
creep.
o Ultimate project failure
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February 3, 2012 Sana Ullah Khan PE, PMP 4
Reasons of bad cost estimates
oo Marketing people promise customers low priced projects to make sale andMarketing people promise customers low priced projects to make sale andgenerate commissiongenerate commission
oo Technical people underestimate the technical difficulties envolved or they areTechnical people underestimate the technical difficulties envolved or they areignorant of it.ignorant of it.
oo The planning people making estimates have no knowledge of proper The planning people making estimates have no knowledge of proper estimation or total negligance.estimation or total negligance.
oo The estimates often make unrealistic assumptionsThe estimates often make unrealistic assumptions
oo No risk or contigency paramters evaluatedNo risk or contigency paramters evaluated
oo Political influencesPolitical influences
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5
How estimates are used?
o They provide managers with infor mation on specific project
alternatives and give them opportunity to go for the best option.
o Serve as the basis of bid.
o Establish customer expectations about the project or job
costing
o Provide foundation for developing the project budgets
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Cost categories
o Before estimation or budgeting one should be aware of different cost
categories.
o Direct Vs Indirect Cost
o Variable Vs Fixed Cost
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Direct Vs Indirect Cost
o Direct costs reflect work equipment and materials employed directly
on a project activity.
o For example, the salaries of engineers employed on a project, the
cement and sand used on some construction activity.
o Indirect costs are costs incurred to support the project indirectly.
o Example, office rent, pool vehicles, utility bills, benefits like life
insurance, pension, profit sharing schemes.
o An objective of a cost- conscious mgr is to reduce indirect cost on
the project.
o Decorated offices, use of corporate jets, Luxury hotels stays areindirect costs that adds to the business loss and reducing profit.
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Variable Vs fixed costs
o Variable costs are directly link to execution of project activities.
o When building a house, cost of daily wage labor is variable cost. The
more labor used the higher will be the cost.
o Fixed Costs are costs the will be incurred on assets.
o Example is real estate and installed machinery.
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Type of Cost Estimates
o Tope Down estimates or Parametric Estimates
o Bottom Up Estimates
o Three Point Estimates
o Analogous Estimates
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Type of Cost Estimates
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