journeyman budgeting and cost estimation

8/10/2019 JOURNEYMAN Budgeting and Cost Estimation

1/27

JOURNEYMAN WELDING & PIPING SERVICESINTERNATIONAL CORPORATION

Estimated by: Venjie Menchavez JWPSI


2/27

Manpower Sub Contracting Services toDaelim Engineering

Project Bataan Refinery & Power Plan Project



3/27

Forecast investment to set up office on project siteplus canteen and housing of the workers and servicetransport, Ph. 1,500.00 to Ph.2,800.00

Organizations will have well worn (and reasonablyaccurate) methods for creating the initial projectestimate based on past experience.

However - every project is unique So the estimating process always has some level of

uncertainty (and therefore RISK) associated with it. The PM must understand the organizationsaccounting practices to the extent that they areimposed on the project budgeting and controlprocess.



4/27

Cost estimation is part science, part art.

Office & staff house Rent Ph. 35,000 Monthly (1month deposit 3 monthsadvance)

Telephone bill, Power bill, Water bill, Internet, janitorial. Office equipment, supply, materials estimated cost 250,000

2 unit 1HP aircon 7 office table 6 computer set I unit Fax Machine I unit 3 in 1 Printer scanner, xerox Telephone Line Internet connection

Office staff salaries Project manager ph. 75,000 Monthly

Admin officer 15,200.00 Project Coordinator ph. 12,000 Monthly Accounting Clerk ph. 10,000 Field Coordinator Ph. 11,000 Monthly Time keeper Ph. 10,000 Monthly

Workers Canteen estimated budget 1,500,000 depending on the numbers ofthe workers being feed 3 times a day plus O.T

Company Service car ????



5/27

Position Given Salary Projected Income # of workers Required Supervisor mix - 30,000 = 35,000 Plus O.T QA QC Piping Welding 22,000 Monthly fix Plus O.T Foreman Piping 850 Plus O.T Foreman Welding 900 Plus O.T Foreman Electrical 850 Plus O.T Foreman Rigger 800 Plus O.T

Foreman Painting Blasting - 800 Plus O.T Crane Operator 800 Plus O.T Gtaw/Smaw Welder SS - 800 Plus O.T Gtaw/Smaw Welder CS - 650 Plus O.T 6G smaw Pipe welder CS 550 Plus O.T FCAW Welder 3G/4G - 500 Plus O.T Plate Welder 3G/4G 400 Plus O.T Pipe Fitter 650 Plus O.T Pipe Fabricator 650 Plus O.T Structural Fitters 550 Plus O.T Millwright 650 Plus O.T Instrument Tech 600 Plus O.T Rigger Erector 500 Plus O.T Scaffolder - 500 Plus O.T Helper Welder 400 Plus O.T



6/27

The budget for an activity also implies management

support for that activity

The higher the budget, relative to cost, the higher

the managerial support

The budget is also a control mechanism Many organizations have controls in place that prohibit

exceeding the budget

Comparisons are against the budget



7/27

On most projects

Material + Labor + Equipment + Capital +

Overhead + Profits = Bid In other words

Resources + Profits = Bid

So budgeting is in effect, the task offorecasting resources



8/27

Like any forecast, this includes some uncertainty

There is uncertainty regarding usage and price

Especially true for material and labor

The more standardized the project andcomponents, the lower the uncertainty

The more experienced the cost estimator, the lowerthe uncertainty (and therefore the RISK)



9/27

1. There may not be as much historical data or none

at all

2. Even with similar projects, there may be significant

differences

3. Multiple people have input to the budget4. Multiple people have some control over the budget5. There is more flexibility regarding the estimates

of inputs (material and labor)6. The accounting system may not be set up to track

project data



10/27

1. Top-down2. Bottom-up

3. Negotiated



11/27

The technique of developing a budget by comparing

this project to past ones using the judgment and

experience of management.

Typically an overall budget is assigned to theproject to be distributed to the individual tasks.

If the projects being used for comparison are similar

enough, this process can result in a fairly accuratetotal number.

The process of distributing the total can create a lot

of conflict among the management team.



12/27

ADVANTAGES

Overall project budgets can

be set/controlled veryaccurately Management has more

control over budgets Do not need to do as much

up-front planning

DISADVANTAGES

More difficult to get buy in

Leads to low levelcompetition for largershares of budget



13/27

The process of developing budgets by askingthe people who will perform the individual

tasks on the WBS for their estimates. These individual numbers are then rolled up

to a summary for presentation tomanagement.



14/27

ADVANTAGES

Greater buy in by low level

managers More likely to catch

unusual expenses

DISADVANTAGES

Need a good WBS

Can lead to game playingwhen individuals pad theirestimates in anticipation ofmanagement cuts.

Management has a

tendency to trim thebudget as they have notoriginated it



15/27

Using the bottom-up estimates, costs can be

applied to each WBS element. These are typically calculated by taking the labor

hour estimate and dollarizing it using appropriatelabor and overhead rates. To be accurate, the estimator needs to understand

the relationship between the labor estimate and the

actual number of hours that will be charged to theproject because of personal time and inefficiencies.

A similar process must be used if machine time or

other resources are charged to the project.



16/27

Typically the budgeting process requires some negotiationbetween the PM and senior management.

This is because the PM will be better informed on the

technical details while management will know more aboutthe financial realities of the business.

Together they need to discuss the project requirements andlife cycle.

If the project is heavily dependent on testing and integrationat the end, then its important to not short change thebudget for the completion process.



17/27

Organizations are use to budgeting (and collectingdata) by category

These activities correspond to line items in the

budget Examples include phone, utilities, direct labor,

Projects need to accumulate data and control

expenses differently by collecting project costsaccording to the WBS This results in program or activity budgeting



18/27

Table 7-1Estimated by: Venjie Menchavez JWPSI


19/27

Table 7-2Estimated by: Venjie Menchavez JWPSI


20/27

Inputs from a lot of areas are required to estimate a project

May have a professional cost estimator to do the job

Project manager will work closely with cost estimator whenplanning a project

Most projects are concerned only with estimating directcosts rather than indirect costs (although the PM will need toknow which is required)

PM must build contingencies into the process to account foruncertainty. One way to do this is to use the process ofdeveloping likely , optimistic and pessimistic estimates. Most firms add 5-10 percent for contingencies



21/27

Projects are known for being over budget It is unlikely that this is due to deliberate underestimating

There are two types of errors

Random Systematic

There is nothing we can do about random errors Want to eliminate systematic errors



22/27

Studies and common sense have shown that as

people repeat a task they get better at it.

This idea is formalized in the concept of the learning

curve, which states that each time the outputdoubles the worker hours per unit decrease to a fixed

percentage of their previous value.

This effect is important because the estimator must

determine the impact learning had on past projects

(and their rates) and predict its impact on the one

being estimated.



23/27

Projects that involve new technologies or processes

are very difficult to estimate because past

performance is not a useful guide.

An almost certain, immediate result of installing anew cost-saving program is that costs rise

May be resistance to change.or When we alter a system, we disturb its functioning and it

reacts in unpredictable ways



24/27

Changes in resource costs due to factors likeinflation PM must build in appropriatecontingencies identifying areas of greatest

exposure Waste, spoilage, and labour turnover People, as resources are not freely

interchangeable with each other. The projectmay require five people, but if they are notthe right people, the number available is

irrelevant.Estimated by: Venjie Menchavez JWPSI


25/27

Ideas based on work by Fred Brooks The Mythical ManMonth

Tendency to underestimate the time intellectual work willtake

A lot of risk is involved in projects that consist of a series ofcomponents, all of which must work for the project to

succeed



26/27

We have a (mistaken) tendency to assumethat workers and time are interchangeable,

so adding more workers should reduce thetime taken Brooks asserts that: adding manpower to a

late software project makes it later

Why?



27/27

Data can be collected on the quality of project

estimates by using statistical techniques.

The estimate is compared to the actual, and

statistics like the Mean Absolute Deviation (MAD),the Mean Absolute Ratio (MAR) and the TrackingSignal can be calculated.

These are all used to detect bias or non-random

error in the estimate.

E ti t d b V ji M h JWPSI

journeyman budgeting and cost estimation

Documents