Project Cost Estimation


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ESTIMATION OF RESOURCES INTRODUCTION The success of the estimation and control of resources have a major impact on the overall success of the project. The overall process by which resources are controlled is often termed budgeting. The estimate is a model of the cost performance of the project. Estimates do not exist in isolation and a number of factors impinge on the estimate. Time, resource availability, materials, equipment requirements and quality all have a major impact on the estimate. The budget serves as a baseline for measurement. Deviations of cost plans from original estimates should be examined and analyzed. As projects are usually funded from external sources, the importance of the budget from the client’s point of view has become pervasive. Budgets are often used as a straight jacket that can inhibit the investigation of opportunities that arise during a project. Budgets should always be investigated to determine the expected resource usage at the relevant stage of execution. This allows corrective action to be taken before the budget is exceeded. BUDGETING METHODS PREAMBLE Development of a project budget is more difficult than an operating budget. The ability to use past data is limited and the use of this data for project budgeting should be undertaken with care. Past data can serve as a guide to the budget for the project in question. Many corporations have extensive historical records of past projects that allow information to be transferred from project to project. In project budgeting inflows and outflows must be task linked. The WBS provides the account numbers for accumulation of this information. TOP DOWN BUDGETING Cost estimates are determined at a senior level based on judgment and experience. These estimates are successively broken down by lower level managers. It is assumed that this process will prevent lower level managers from building an excessive scope based contingency into estimates. To maintain this contingency intense rivalry can occur between lower level managers. This method provides some stability to the budgeting process. This method also reduces the need for excessively detailed estimates. BOTTOM UP BUDGETING Elemental tasks are costed and added to form the project budget. Man-hours and materials are costed for direct work items and accumulated to provide the project budget. At the conclusion of this process, management will assign indirect costs, a contingency and profit to determine the final cost for undertaking the project. It is essential that all items are included. Budgetary games do occur including scaling and lobbying. This method is associated with participative management and provides the possibility of greater commitment to the budget by lower order managers. BUDGET REQUESTS
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This note was uploaded on 01/05/2011 for the course IE IE377 taught by Professor Hani during the Spring '10 term at German University in Cairo.

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