Cost Estimation and Budgeting

Cost Estimation and Budgeting

1. Cost Management

   • reflects the project organizatio´s strategic goals, mission statement, and business plan. Cost Management has been defined to encompass data collection, cost accounting and cost control.
     • Direct Costs
       • are those clearly assigned to the aspect of the project that generated the cost.
     • Indirect cost
       • generally are linked to two features: overhead, and selling and general administration

2. Recurring versus nonrecurring costs

   • Nonrecurring
     • might be those associated with charges applied once at the beginning or end of the project, such as preliminary marketing analysis, personnel training, or outplacement services.
   • Recurring
     • are those that typically continue to operate over the project’s life cycle. Most labor, material, logistics, and sales costs are considered recurring because some budgetary charge is applied against them throughout significant portions of the project development cycle.

3. Fixed versus variable costs

   • Fixed cost
     • as their title suggests, do not vary with respect to their usage
   • Variable cost
     • are those that accelerate or increase through usage; that is, the cost is in direct proportion to the usage level.

4. Normal versus expedited costs

   • Normal costs
     • refer to those incurred in the routine process of working to complete the project per the original, planned schedule agreed to by all project stakeholders at the beginning of the project.
   • Expedited costs
     • are unplanned costs incurred when steps are taken to speed up the project’s completion.

5. Cost estimation

   • Ballpark estimates
     • are typically used when either information or time is scarce. Companies often use them as preliminary estimates for resource requirements or to determine if a competitive bid can be attempted for a project contract.
   • Comparative estimates
     • assume that historical data can be used as a frame of reference for current estimates on similar projects
   • Feasibility estimates
     • These estimates are based on real numbers or figures derived after the completion of the preliminary project design work.
   • Definitive estimates
     • These estimates can be given only upon the completion of most design work, at a point when the scope and capabilities of the project are quite well understood

6. Problems with cost estimation

   • Low initial estimates
     • Caused by misperception of the scope of the project to be undertaken, low initial estimates are a double-edged sword.
   • Unexpected technical difficulties
     • A common problem with estimating the costs associated with many project activities is to assume that technical problems will be minimal.
   • Lack of definition
     • The result of poor initial scope development is often the creation of projects with poorly defined features, goals, or even pupose
   • Specification changes
     • One of the banes of project management cost estimation and control is the midcourse specifications changes (sometimes referred to as “scope creep”) that many projects are so prone to.
   • External factors
     • Inflation and other economic impacts can cause a project to overrun its estimates, sometimes seriously.