Improving The Process Of Cost Estimation

The cooperation of several people is required to prepare cost estimates for a project. If the firm is in a business that regularly requires bids to be submitted to its customers, it will have "professional" cost estimators on its staff. In these cases, it is the job of the PM to generate a description of the work to be done on the project in sufficient detail that the estimator can know what cost data must be collected. Frequently, the project will be too complex for the PM to generate such a description without considerable help from experts in the functional areas.

Even with the finest of experts working to estimate resource usage, the one thing that is certain is that things will not go precisely as planned. There are two fundamentally different ways to deal with the chance events that occur on every project. The simpler and far more common way is to make an allowance for contingencies—usually 5 or 10 percent of the estimated cost. lust why these numbers are chosen in preference to 6i or 9., for instance, we do not know. We strongly prefer another method in which the forecaster selects "most likely, optimistic, and pessimistic" estimates. This method is described in detail in Chapter 8 when we cover the issue of estimating the duration of elements in the action plan. The method described in Chapter 8 is applicable, unchanged, to the estimation of resource requirements.

Turning now to the problem of estimating direct costs,* project managers often find it helpful to collect direct cost estimates on a form that not only lists the level of resource needs, but also indicates when each resource will be needed, and notes if it is available (or will be available at the appropriate time). Figure 7-3 shows such a form. It also has a column for identifying the person to contact in order to get specific resources. This table can be used for collating the resource requirements for each task element in a project, or for aggregating the information from a series of tasks onto a single form.

Note that Figure 7-3 contains no information on overhead costs. The matter of what overhead costs are to be added and in what amounts is unique to the firm, be-• yond the PM's control, and generally a source of annoyance and frustration to one and all. The allocation of overhead is arbitrary by its nature, and when the addition of overhead cost causes an otherwise attractive project to fail to meet the organization's economic objectives, the project's supporters are apt to complain bitterly about the "unfairness" of overhead cost allocation.

•Our emphasis on estimating direct costs and on focusing on resources that are "direct costed" in the action plan is based on our feeling that the PM should be concerned with only those items over which he/she has some control—which certainly excludes overheads. The PM, however, may wish to add some nonchargable items to the resource column of the action plan simply to "reserve" that item for use at a specific time.

304 CHAPTER 7 / BUDGETING AND COST ESTIMATION

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Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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