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LECTURE 9
Pricing and Estimating
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Introduction
Estimating: The process of forecasting or approximating the time
and cost of completing project deliverables.
Good estimation is critical for successful completion of a
project on time, on budget and on the mark.
Use the WBS as the basis for creating activity estimations.
Estimating is not an exact science.
Projects often involve a greater degree of uncertainty. 2
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Introduction
Many managers regard this as an art !
Information available to one bidder is generally available to
others.
This is an essential part of the planning process.
Forms the basis for establishing standards for budgets,
man-hours, material costs, contingencies, etc.
Specific pricing strategies must be developed for each
situation.
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Four common Estimating Methods
Order of magnitude estimates- Made without any detailed
engineering data
- May use past experience
- Accuracy +- 35% within the scope of the project
Approximate (rule of thumb) estimates- Made without any detailed
engineering data
- May use previous similar projects --
- Accuracy +- 15%
Definitive (or detailed) estimates- Prepared from well-defined
engineering data, vendor
quotes, unit prices, etc. Accuracy +- 5%
Estimating manual- Developed over time
- Use to price out effort. Accuracy +-10%4
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Additional Estimating Methods
Direct Estimate
- Estimate/experienced person
- Requires judgement
Estimate by analogy
- Compare with similar activities
- Requires judgement
Factored method
- Based on historical data
- Requires equipment lists, sizes
- Starts with equipment quotes
Gross proration method
- Based on historical data
- Near duplicate information5
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Detailed estimate
- Uses the WBS
- Takes the WBS down several levels
Quotation method
- Compare three quotations
- Select the best quotation
Handbook manuals
Learning curves
Additional Estimating Methods
(continued)
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Estimation Pitfalls
Underestimating main causes are: overly optimistic team
members,
underestimation of the amount of non-productive time,
incomplete recall of previous experience (pain goes away and
only glory remains), or
team mates have no experience with the activity to draw
upon.
Inflating estimates sometimes novice project managers may want
to inflate estimates in order to come in under budget, or time.
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Cost/Hour Estimates
EstimatingMethod
Generic Type
WBSRelationship Accuracy Time to
Prepare
Parametric ROM* Top Down -25% to +75% Days
Analogy Budget Top Down -25% to +75% Weeks
Engineering(Grass Roots)
Definitive Bottom Up -5% to +10% Months
* Rough Order of Magnitude
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Construction Cost Estimates
Fixed-Price or Lump Sum - i.e. $4,000 for the entire project
Unit-Price - i.e. $90/hour for professional services
Cost-Plus or Time and Materials or Cost-Reimbursable Contracts -
i.e. cost of actual materials plus 20% profit.
Project EstimateTimesCosts
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Explanation of Project Costs
Project Indirect Costs
Costs that cannot be associated with any particular work package
or project activity.
Supervision, administration, consultants, and interest
Costs that vary (increase) with time.
Reducing project time directly reduces indirect costs.
Direct Costs
Normal costs that can be assigned directly to a specific work
package or project activity.
Labor, materials, equipment, and subcontractors
Crashing activities increases direct costs.10
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Classroom Activity 9a
Why is estimating not an exact science?
Why do people tend to underestimateactivities?
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Questions?
