Pragmatic Approaches to Project Costs Estimation
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The document discusses pragmatic approaches to project cost estimation. It outlines key approaches such as parametric estimation, bottom-up estimation, and PERT estimation. It emphasizes comparing the "inside view" of a project with the "outside view" of similar past projects to avoid overly optimistic forecasts. Employing techniques like considering base rates of reference classes can help overcome the "planning fallacy" and arrive at more realistic cost estimates.
Pragmatic Approaches to Project Costs Estimation
- 1. 1 Pragmatic Approaches to Project Costs Estimation Christopher O. Akinlade, PMP March 12, 2019
- 2. 2 Pragmatic Approaches to Project Cost Estimation Highlights: 1. Introduction 2. The Need For Cost Estimation. 3. Project Management Costs 4. Approaches to Project Cost Estimation. 5. The Cost Estimation Process 6. Doing It Right. 7. The Pragmatic Approach 8. Summary 9. Feedback / Discussions 10. References & Acknowledgements Pragmatic Approaches to Project Cost Estimation.
- 3. 3 Pragmatic Approaches to Project Cost Estimation 1. Introduction: A cost estimate is the determination of the likely future cost of a product or service based on an analysis of data. Estimating that future cost involves employing inter-disciplinary quantitative analysis techniques. It is partly science, art and judgment.1 Pragmatic Approaches to Project Cost Estimation.
- 4. 4 Pragmatic Approaches to Project Cost Estimation 2. The Need For Cost Estimation Without it resources cannot be allocated correctly. Estimating costs enable the PM to provide order of magnitude estimates for size, cost and dates needed for project completion. Long term and strategic planning. Needed for budgeting activities – preparation, justify and amending it as circumstances change.. Provides the basis for selecting from among alternatives. (E.g rent or buy decisions, internal/contractor source, sole source / competitive) Who to blame when things go wrong. Pragmatic Approaches to Project Cost Estimation.
- 5. 5 Pragmatic Approaches to Project Cost Estimation 2. The Need For Cost Estimation Projects cost estimates and projections do often fail. Why? • Estimates and projections are based on information available. • External events beyond the PMs control to which the PM has to make adjustments. • You will likely face external events and circumstances different from the ones you planned for. (“unknown unknowns”) Unknown unknowns – risks that cannot be anticipated based on past experience or investigations Donald Rumsfeld Former US Defense Secretary Author of: Known and Unknown, Pragmatic Approaches to Project Cost Estimation.
- 6. 6 Pragmatic Approaches to Project Cost Estimation 2. The Need For Cost Estimation Fundamentally: Cost Estimation focuses on the Costs and not the price. Discuss. Pragmatic Approaches to Project Cost Estimation.
- 7. 7 Pragmatic Approaches to Project Cost Estimation 3. Project Management Costs The Various Types Recurring versus s Non Recurring Direct versus Indirect Fixed versus variable Overhead Costs Sunk Costs Opportunity Costs Life Cycles Cost Pragmatic Approaches to Project Cost Estimation.
- 8. 8 Pragmatic Approaches to Project Cost Estimation 4. Approaches to Cost Estimation Parametric Estimation Uses historical data to calculate the estimation. Works well and saves time. Bottom-Up (Definitive Technique) All the project activities are broken up to the microscope level where the cost estimation is done. It is the most accurate but could be more costly and time consuming. Pragmatic Approaches to Project Cost Estimation.
- 9. 9 Pragmatic Approaches to Project Cost Estimation 4. Approaches to Cost Estimation Parametric Estimation Uses historical data to calculate the estimation. Works well and saves time. Three Point or PERT (Program Evaluation and Review Technique) Encompasses all the possibilities, assumptions and uncertainties in cost estimation. Pragmatic Approaches to Project Cost Estimation.
- 10. 10 Pragmatic Approaches to Project Cost Estimation 4. Approaches to Cost Estimation PERT Formula Ec = Co + 4Cm + Cp Ec = Expected Cost Co = Optimistic Cost - everything work better than planned. Cm = Pessimistic Cost – Everything works against the plan Cp = Most Likely Cost – Everything goes well Pragmatic Approaches to Project Cost Estimation.
- 11. 11 Pragmatic Approaches to Project Cost Estimation 4. Approaches to Cost Estimation Which approach do I use? The PERT method is considered as the best and most accurate method to calculate the project cost estimation. However, as a PM, it’s your responsibility to identify which method would work better for your project. Sometimes combination of all three would work well. Again it’s at discretion of the project manager . Pragmatic Approaches to Project Cost Estimation.
- 12. 12 Pragmatic Approaches to Project Cost Estimation 5. The Cost Estimation Process How do I go about it? Various industries have various approaches. But broadly, the following steps are encompassed. (This list is not exhaustive) Definition & Planning which includes: • The purpose of the estimate. • Defining the system. • Establish the ground rules and assumptions. • The base year • Participants including contractors • Specific inflation indices • Scope and possible limitations • Determining relationship and dependencies • Determining logistics and maintenance support concepts. • Selecting the estimation method (already discussed) • Data collection • Formulation of the estimate. • Review and documentation. Pragmatic Approaches to Project Cost Estimation.
- 13. 13 Pragmatic Approaches to Project Cost Estimation 6. Doing It Right How will I know if I’m doing it right? i. Based on data from previous or similar projects. ii. It accommodate current and future potential process improvements. iii. Understood by the program and business leaders. iv. What are the cost drivers. Pragmatic Approaches to Project Cost Estimation.
- 14. 14 Pragmatic Approaches to Project Cost Estimation 6. Doing It Right How will I know if I’m doing it right? v. Estimation is based on sound underlying statistics vi. Know the assumptions and rules upon which it is based. vii. Likely risks in the project lifecycle. viii. Have a clear understanding of what the goal is. Pragmatic Approaches to Project Cost Estimation.
- 15. 15 Pragmatic Approaches to Project Cost Estimation 6. Doing It Right How will I know if I’m doing it right? ix. The project is well defined along with the risks areas. x. Can be validated by third parties or independent means xi. Traceable and auditable Pragmatic Approaches to Project Cost Estimation.
- 16. 16 Pragmatic Approaches to Project Cost Estimation 7. The Pragmatic Approach Pragmatic Approaches to Project Cost Estimation. SOURCE: Meriam Webster Dictionary (Android version)
- 17. 17 Pragmatic Approaches to Project Cost Estimation 7. The Pragmatic Approach Examples of projects with catastrophically high2 cost overruns and lessons learnt; I. Scottish Parliament building. (Estimated cost in 1997 = £40m; Completed in 2004 at a cost of ~ £431m II. Study in 2005; Worldwide railway projects costs overruns by 45%. Passenger utilization overestimated by 106% III. 2002 Survey; Kitchen remodeling by American homeowners; Expected Costs $18,658; Actual Costs of than 207% increase to $38,709 average. Pragmatic Approaches to Project Cost Estimation.
- 18. 18 Pragmatic Approaches to Project Cost Estimation 7. The Pragmatic Approach Lessons 1. Two distinct approaches to planning The Inside View & the Outside View The inside view is the approach that will generally be spontaneously adopted to assess the project. Plans tends to be sketchy and overly dependent and extrapolating on presently available information based on the assumption that What You See Is All There Is (WYSIATI) Pragmatic Approaches to Project Cost Estimation.
- 19. 19 Pragmatic Approaches to Project Cost Estimation 7. The Pragmatic Approach Lessons 1. Two distinct approaches to planning The Inside View & the Outside View The outside view entails directing the attention away from what you have in house to a class of similar projects external to the organization. • What is the base rate of success? • Not relying exclusively on the information available in-house. Pragmatic Approaches to Project Cost Estimation.
- 20. 20 Pragmatic Approaches to Project Cost Estimation 7. The Pragmatic Approach Lessons Comparing the outside view with the inside view helps to avoid overly optimistic forecasts (planning fallacy). Pragmatic Approaches to Project Cost Estimation.
- 21. 21 Pragmatic Approaches to Project Cost Estimation 7. The Pragmatic Approach Lessons Planning Fallacy: • Plans that are unrealistically close to best case scenarios • Plans that could be improved upon by consulting the statistics of similar cases. (Don’t neglect base rate). Pragmatic Approaches to Project Cost Estimation.
- 22. 22 Pragmatic Approaches to Project Cost Estimation 7. The Pragmatic Approach Lessons: 2. Overcoming The Planning Fallacy • Identify an appropriate reference class (road construction, railway projects, buildings etc) • Obtain the statistics of the reference class (in terms of cost per mile of road or railway or the percentage by which expenditure exceeded budgets). • Use specific information about the case to adjust the baseline prediction, if there are particular reasons to expect the optimistic bias to be more or less pronounced in this project than in others of the same type. Pragmatic Approaches to Project Cost Estimation.
- 23. 23 Pragmatic Approaches to Project Cost Estimation 8. Summary • Project Cost Estimation is needed in other for the PM to allocate resources and make budgeting decisions towards the successful delivery of the project. • Executives and PMs often take on risky projects because they are over optimistic about the odds they face – overestimating benefits, underestimating costs and down playing pitfalls of mistakes and miscalculations leading to failure in delivering the project on budget. • Employing the pragmatic approach will help PMs and executives to arrive at more realistic cost estimates for their projects. Pragmatic Approaches to Project Cost Estimation.
- 24. 24 Pragmatic Approaches to Project Cost Estimation 9. Feedback / Discussions Pragmatic Approaches to Project Cost Estimation.
- 25. 25 Pragmatic Approaches to Project Cost Estimation 10. References & Acknowledgements 1. Cost Estimation – Methods and Tools, Gregory K. Mislick; Daniel A. Nussbaum; John Wiley & Sons Inc, 2015 2. Thinking Fast and Slow, Daniel Kahneman; Farrar, Strauss & Giroux, 2011 3. Predicting the Unpredictable - Pragmatic Approaches to Estimating Project Schedule or Cost, Johanna Rothman; Practical Ink, 2015 4. Pragmatic Approaches to Estimating Project Schedule or Cost https://www.youtube.com/watch?v=D4PRK8j-aHA cited on 10 March, 2019 5. PMBOK® Guide 5th Edition, ©Project Management Institute, 2013 Pragmatic Approaches to Project Cost Estimation.
- 26. 26 Pragmatic Approaches to Project Cost Estimation The End Pragmatic Approaches to Project Cost Estimation. Thank you for your participation.