5- project cost estimating

8/3/2019 5- Project Cost Estimating

http://slidepdf.com/reader/full/5-project-cost-estimating 1/12

PROJECT COST MANAGEMENTSession-5



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



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



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



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



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



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.



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.



Type of Cost Estimates

o Tope Down estimates or Parametric Estimates

o Bottom Up Estimates

o Three Point Estimates

o Analogous Estimates



Type of Cost Estimates

5- project cost estimating

Documents