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8/10/2019 Estimating II

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COST MANAGEMENT 642

Paper 10

ESTIMATING II

GENERAL


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Paper 10 - ESTIMATING II

1.0. COST ESTIMATING - ACCURACY

2.0 COST ESTIMATING - ASPECTS

3.0. COST ESTIMATING - COST ESCALATION

4.0. COST ESTIMATING - CONTINGENCY


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COST ESTIMATING

QUESTIONS

1. What factors determine the accuracyof a cost

estimate?

2. What are the specific difficulties of estimating

the costs of projects?


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COST ESTIMATING -ACCURACY

estimating is not an exact science: it is much an art as a

science, and involves intuition and expertjudgement

cost estimates should be as accurate as possible.

Accuracy expressed as+/-% range around point estimate

Factors which determine the level of accuracy include:

project definition

quality of cost database

quality of estimator

estimating method

level of effort

project characteristics


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ACCURACY:PROJECT DEFINITION - PLC Link: growth of information during PLC & estimating accuracy

project definition increases, expected accuracy improves

Earlier in PLC, problems of estimate accuracy

Quality of info. increases through PLC, accuracy range narrows

CONCEPT PHASE

Estimates used for economic viability of project reasonably accurate estimates essential for go/no-go decision

but minimal information, so concerted effort required

Estimates - 'order-of-magnitude' based on parametric estimating

"early estimates have wide variability ... most often notoriously low.

DEVELOPMENT PHASE

Scope developed - allows more accurate estimates

As more inform, estimate continually updated & accuracy improved.


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ACCURACY:PROJECT DEFINITION - PLC


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ACCURACY:PROJECT DEFINITION - PLC


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ACCURACY: COST DATABASE

Accuracy dependent on quality of reference cost data

Accuracy better when verified data used rather than

assumptions

So comprehensive, relevant, up-to-date database of cost

information required for accurate cost estimating


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ACCURACY: QUALITY OF ESTIMATOR

1 major cause of poor estimation in that the people making

the estimates dont know what they are doing.

Greater accuracy if estimator is capable, unbiased,

experienced, knowledgeable, methodical,

Estimator should:

be able to forecast and interpret trends;

work intuitively where information is limited;

motivated & enthusiastic

most significant human factor is estimators knowledge ofgeneral price levels, acquired through experience


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ACCURACY: QUALITY OF ESTIMATOR

Desirable qualities in good estimator :

basic numerate education;

ability to communicate;

ability to understand & interpret project information;

patience;

curiosity;

confidence;

ability to question the basis of assumptions


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ACCURACY: Estimating Methods

several estimating methods - some inherently more

accurate

EG parametric typically less accurate than bottom-up

But, choice & accuracy of estimating method is

fundamentally affected by quality of information available.


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ACCURACY: Level of Effort

it costs money to estimate costs

Accuracy depends time & effort devoted to estimating greater accuracy, greater the cost of producing estimates

Beyond certain level of effort, only modest improvement in

accuracy

Research - significant obstacle to accurate estimates =

unwilling to invest resources to develop better estimating

practice Type of Estimate Accuracy (%) level of effort, % of project cost*

Proposal +/- 30 to +/- 50 0.02 - 0.1

Budget +/- 20 to +/- 35 0.1 - 0.3

Sanction +/- 10 to +/- 25 0.4 - 0.8

Control +/- 5 to +/- 15 1 - 3

Tender +/- 2 to +/- 5 5 - 10


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ACCURACY: Project Characteristics

Technical uniqueness & complexity of a project affects

estimate accuracy

first-of-a-kind project more difficult to estimate accuracy

compared to a project that repeats past practices.


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Accuracy - Classification Systems

Awareness of Accuracy

Important - those using estimates are aware of accuracy. Reasons:

Feasibility Studies

If known accuracy = +/-10%, sensitivity analysis can be

applied to feasibility study.

Management Attitude

Management appreciate why earlier estimate to be too low


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Classification Systems

1 way to indicate accuracy - classification system. Benefits:

highlights missing information required for more accurate

estimate

good means of communicating estimate quality

Action by management which uses estimate done in full

understanding of its accuracy

management aware of degree of reliance that should be

placed on it when making decisions.


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Concept Develop Design Execution

Unclassified Class B or AClass E

Class C

Class D

Class B


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Project Cost Estimating - Problems

Project = uniqueness = lack of suitable precedents.

project changes due to scope changes & new knowledge

poorly defined scope = incorrect estimates. Often due to

time pressure

long projects - further project extends from original

estimating base, less accurate original estimates likely tobe


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Project Cost Estimating - Problems

Problems in estimating for software development :

Priority of Project Objectives- Historically, strong focus of

meeting deadlines & quality.

Task-Orientated Environment- emphasis on creativity and

technical excellence. Less effort on cost estimation

Lack of Managerial Expertise- favour young specialists asPMs, technically expert but perhaps poor PM & cost

estimators

Lack of Cost Data- SD firms do not keep comprehensive,accurate and detailed time sheets from previous projects

Technological Change.-past cost data, however good, is of

little use for preparing cost estimates of present SD

projects


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COST ESTIMATING

QUESTION

3. What would be the typical sectionsin a cost estimate

REPORT ?

C


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Cost Estimating - Documentation

estimate should always include written documentation on

how it was developed, and what is included and excluded

Written document should include

The Purpose of the Estimate

The Scope of the Estimate

Assumptions & Exclusions

Source of Cost Information

Escalation Allowances

Contingency Allowances

Significant Findings

COST ESTIMATING COST ESCALATION


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COST ESTIMATING - COST ESCALATION

Escalation = "provision in estimated costs for continuing

price level increase over time"

Oftenreceives less attention than other smaller items"

Escalation a result of two factors:

general inflation in costs, invariably upwards.

specific market factors.

COST ESTIMATING


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COST ESTIMATING

QUESTION

4. ost ontingency

i. Definecontingency

ii. What type of items is it meantto cater for?

iii. What type of items is it notmeant to cater for

iii. By what methodsmight it be calculated?

COST CONTINGENCY INTRODUCTION


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COST CONTINGENCY- INTRODUCTION

3 basic types of C - tolerance in specification, float in

schedule, money in budget.

C= mostmisunderstood, misinterpreted, misapplied word

in projects. C means different things to different people

C is highly subjective, inconsistently interpreted,

inadequately estimated

imperative to have a policy regarding C definition that is

understood and accepted by all project participants

COST CONTINGENCY DEFINITION


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COST CONTINGENCY- DEFINITION

"amount of money added to the estimate to allow for

changes that experience shows will likely be required"

allowances added to an estimate to represent the bestjudgement of undefined or uncertain items of work which it

is considered should be provided for. ... They are 'areas of

space' in an estimate which help a PM to meet the projectcost objectives, as they face exposure to project risk and

uncertainty"

ATTRIBUTES OF COST CONTINGENCY


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ATTRIBUTES OF COST CONTINGENCY It is a reserve of a sum of money.

It is part of the project cost estimating process

Its necessity & amount is linked to the existence of risk - caters for

events unknown, undefined, uncertain, or unforeseeable.

It is a risk management tool - reduces impact if risks eventuate

Inclusion means estimate represents total financial commitment:

estimatewithout contingency is simply not a complete estimate

increases probability that final cost will not exceed our estimate

Can have major impact on decision-making:

Client - if too high, encourages sloppy cost management or causeproject to be uneconomic & aborted; if too low, too rigid & set

unrealistic financial environment unsatisfactory outcomes.

Contractor, balance risk of overrunning costs against probability

of winning contract

C ti C


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Contingency - Coverage Incomplete Scope Definition

Allows for incomplete scope definition.

Order-of-magnitude & budget estimates developed early in PLC. With

more scope definition, estimate invariably increases.

C caters for increases in costs due to present incomplete definition

Inaccuracy of Estimating Methods & Data

no method or data is perfect, & historically result in low estimate

C added to the estimate to cover for these inadequacies.

But C should not be an excuse for poor estimating

C ti C


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Contingency - Coverage

Identified risks

C may be created for specifically identified risks. Eg contractor

tendering, allow C for:

scope error interpretations,

minor design changes,

inaccuracy in quantification,

abnormal construction problems,

liabilities in the contract,

unforeseen regulations,

safety requirements, equipment breakdowns,

weather interruptions,

labour productivity,

technological change

Contingency Coverage


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Contingency - Coverage Unknown Unknowns

C set up to allow for unidentified risks:

"It is important to identify contingency allowances associated

with all significant individual risks, plus a residual allowance for

other unidentified risks"

This excludes unforeseeable major events (see below).

Items not part of contingencies

C should cover for scope development but not scope changes. Other items not considered appropriate for inclusion in C:

escalation,

unforeseeable major events - extreme weather, earthquakes, riots,

acts of war, new government regulations, economic collapse

Contingency Calculation PERCENTAGE ADD ON


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Contingency - Calculation: PERCENTAGE ADD-ON C calculated as % on base estimate, based on from experience &

historical data. For example:

incomplete scope definition in early estimates, 30%- 50%; oncescope fully developed 3% to 5%"

inaccuracy of estimating method &/or data 5%-10%,

Level of contingencies will depend on:

organisation and the type of business

type of estimate. (eg. order-of-magnitude estimate demands a

high C to cover for the inherent inaccuracies of this method)

PLC phase (eg estimate at concept phase = high C to allow for

limited information used to prepare an estimate)

type of project. (eg new/unproven technology High C

type of work - eg underground work = uncertainty = High C

Variation to single % additional to base estimate - apply different %to each major component of the estimate.

Contingency Calculation Risk Analysis


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Contingency - Calculation Risk Analysis contingencies by % mark-up not recommended:

"all too often risk is either ignored or dealt with in an arbitrary

way: simply adding a 10% 'contingency' onto the estimated cost ofa project is typical. This is virtually certain to be inadequate and

cause expensive delay, litigation, and perhaps bankruptcy"

contingency should definitely be based on an experienced

review of uncertainties of estimate details. An arbitrary bottompercentage is not good enough.

Allocating % insufficient unless linked to a confidence level. i.e. level

of probability that final cost will be within estimate (including C).

Nowadays, more rigorous & defendable approaches for calculation

ofC , typically derived from probability analysis, eg Central Limit

Theorem and Monte Carlo simulation.

Contingency Management


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Contingency - Management Level of C constantly monitored & reassessed through PLC

Success of contingency management:

establish procedures for proper use of C

establish information system showing each responsible manager

& C under their control, C used, trends, when possible to transfer

balances to other less successful areas or general reserve

2 basic ways to manage C

Single account - single line item account. Disadvantages:

tendency to use C first-come, first-serve basis with potential

exhaustion well before project is over

control likely to be responsibility of PM - but other commitments

are intense and may lead to neglect of contingency management.

Individual Allocations - & responsibility assigned for their control. If

expenditure exceedsC, negative variance reported. Unexpended C

can be transferred to a general contingency account.

ALLOWANCES


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ALLOWANCES Contingency = unforeseeable and undefined items

Allowance - = for known and undefined items, foreseen to be spent

Redefined each time an estimate is revised

allowance should only be made if "there is a better than 50% chance

of it happening"

Allowance added to estimate, identified with documented basis

Allowances - Exclusions:

major scope changes

weather extremes, earthquakes

accidents acts of God

strikes

because "these items are unpredictable, both in terms of

probability magnitude of cost impact if they do occur".

Paper 10 ESTIMATING II


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Paper 10 - ESTIMATING II 1.0. COST ESTIMATING - ACCURACY

1.1. Factors affecting Accuracy

1.2. Accuracy - Classification Systems 2.0 COST ESTIMATING - ASPECTS

2.1. Cost Estimating - Problems

2.2. Cost Estimating - Do's and Don'ts

2.3. Cost Estimating - Documentation

3.0. COST ESTIMATING - COST ESCALATION

3.1. Cost Escalation - Introduction

3.2. Cost Escalation - Process

3.3. Cost Escalation - Cost Indices

4.0. COST ESTIMATING - CONTINGENCY 4.1. Contingency - Definition

4.2. Contingency - Coverage

4.3. Contingency - Calculation Methods

4 4 Contingency Management

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