INSTRUCTOR’S RESOURCE MANUAL
Cost Estimation and Budgeting
Achieving Competitive Advantage
Jeffrey K. Pinto
PROJECT PROFILE – Boston’s Central Artery/Tunnel Project: Updated and Complete 8.1
Direct vs. Indirect Costs
Recurring Versus Nonrecurring Costs
Fixed Versus Variable Costs
Normal versus Expedited Costs
Learning Curves in Cost Estimation
Project Management Research in Brief: Software Cost Estimation Problems with Cost Estimation
PROJECT PROFILE – Heathrow Airport’s New Terminal Five Development 8.3
CREATING A BUDGET
DEVELOPING BUDGET CONTINGENCIES
Case Study 8.1: The Dulhasti Power Plant
Case Study 8.2: London’s Millennium Dome
PMP Certification Sample Questions
Integrated Project: Developing the Cost Estimates and Budget Bibliography
8.1 SOURCES OF PROJECT COSTS
1. DIRECT VS. INDIRECT COSTS
2. RECURRING VS. NON-RECURRING COSTS
3. FIXED VS. VARIABLE COSTS
4. NORMAL VS. EXPEDITED COSTS
8.2 LEARNING CURVE MODEL
8.3 PROBLEMS WITH COST ESTIMATION
1. LOW INITIAL ESTIMATES
2. UNEXPECTED TECHNICAL DIFFICULTIES
3. LACK OF DEFINITION
4. SPECIFICATION CHANGES
1. EXTERNAL FACTORS
8.4 EXAMPLE OF A TIME-PHASED BUDGET
8.5 CALCULATING DIRECT LABOR COSTS
Personal Time Rate
Total Direct Labor Cost
Total Direct Labor Cost =
1. The first two questions refer to the Aalborg case at the beginning of the chapter. Describe an environment in which it would be common to bid for contracts with such low profit margins. What does this environment suggest about the competition levels?
Low barriers to entry, a lack of economies of scale, easier access to technology and, often times, powerful buyers commonly characterize an environment with very low profit margins. The relative ease of competing in such industries increases competition levels both domestically and internationally.
2. How has the global economy affected the importance of cost estimation and cost control for many project organizations?
Globalization of the economy has resulted in lower barriers to trade, market-driven economies, deregulation and privatization. These effects have created greater competition and larger markets. With the ease of competing internationally, companies need to be sure to provide accurate, competitive bids. Bids need to be low in order to be competitive in the heightened competition of the global economy. Secondly, accuracy takes on new complications when consider bids abroad. Exchange rates, transportation and trade costs all need to be accounted for in the bid. These added costs make cost control (in other controllable areas of the project) vital. Without tight cost control, the company will not be able to compete with bids of domestic firms.
3. Why is cost estimation such an important component of project planning? Discuss how it links together with the Work Breakdown Structure and project schedule?
Cost estimation, if done correctly,...
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