Chapter 9: Cost Estimating and Budgeting Flashcards
(28 cards)
Cost estimates determine a project’s financial feasibility. What are the impacts of overestimation and underestimation on a project?
Overestimation can cause a loss of contracts to lower bidders.
Underestimation can lead to losses.
Describe the “buy in” practice.
The contractor reduces and initially realistic estimate just enough to win the contract, hoping to cut costs or renegotiate a higher price after the work is underway.
This is risky and unethical.
What is cost escalation?
The amount by which actual costs grow to exceed initial estimates.
What are possible causes of cost escalation? (8)
Lack of information
Changes in requirements / design
Economic and social factors
Inefficiency, poor communication, and lack of control
Ego involvement of estimator
Project contract
Information and assumptions
Bias and ambition
What is contingency fund / budget reserve, and who controls allocation of this fund?
Contingency fund is an amount added to the original estimate to allow for uncertainty in the estimate.
Project manager
What is scope creep?
Discretionary, nonessential changes made to system requirements.
What are 2 examples of project contracts that motivate / discourage escalation?
1) Fixed-price agreement: motivates contractor to control accrued costs, and, ideally, keep them below the contracted price.
2) Cost-plus contract: offers little motivation to control costs. The contractor is motivated to “allow” costs to escalate.
True or False: Change control prevents unnecessary cost increases.
True.
True or False: Strong project governance ensures financial success.
True
If a project is unique or ill-defined, cost uncertainty is high, and contracts are mostly of the … kind
When the system and project are fairly routine, the estimates are more reliable, and contractors are willing to accept … contracts
cost-plus
fixed-price / incentive-type
True or False: As the uncertainty decreases, the amount in the contingency fund is increased.
False.
The amount is reduced.
What is the difference between contingency funds and management reserves?
Contingency funds are for “known unknowns”.
Management reserves are in a “separate wallet”, and they are for “unknown unknowns”.
True or False: Estimates must be constantly revised.
False.
It can disrupt project tracking.
True or False: Rolling-Wave Planning also applies to cost estimating.
True.
A detailed cost plan should be developed for the next phase, not for the entire project upfront.
How is an estimate different from a target/goal?
Estimate: realistic assessment based on known facts and assumptions (based on scope).
Target/goal: a desired outcome.
True or False: An estimate should never be manipulated to match a target.
True
What scenario will mandate that cost estimations be periodically revised?
Escalation factors.
What is the difference between accuracy and precision in cost estimation? Which is more important?
Accuracy: the closeness of an estimated value to the actual value.
Precision: the number of decimal places in the estimate / level of detail in estimate.
Accuracy is more important.
What are the two categories of work activities?
1) off-the-shelf work: implies use of something that already exists; it is not new but an adaptation / repetition of existing or similar activities.
- cost estimation is straightforward and uses known prices or records of costs.
2) developmental tasks: implies starting from scratch, sometimes using trial and error, where the work to be done and resources needed are uncertain.
- overruns are common
What are the 2 classifications of estimated costs?
1) recurring costs: happen more than once in project.
- associated with periodically repeated activities
2) non-recurring costs: happen only once
- associated with one-time activities
WHAT ARE THE 4 COST ESTIMATION METHODS?
1) EXPERT JUDGMENT
- Based on experience, used in early phases
2) ANALOGOUS ESTIMATION
- Compares to past projects as a starting point; requires adjustments for scale and inflation.
3) PARAMETRIC ESTIMATION
- Uses statistical relationships to predict costs
4) COST ENGINEERING
- Bottom-up estimation using detailed activity breakdown (takes long to plan).
What are the three cost estimating approaches?
1) Top-Down: Quick, high-level estimate, less accurate
2) Bottom-Up: Detailed, component-level estimation, more accurate
3) Hybrid: Combination of both.
The project manager submits the final cost estimate plus forecasts showing the effects of potential escalation factors. Management or the customer compares the estimate against its own …, which is the goal or target set by management or the customer, and either accepts it or mandates a revision.
gross estimate
If the gross estimate is …, the project manager reviews the work package estimates for possible oversights or over-optimism.
If the gross estimate is …, the project manager will likely be required to find ways to reduce the submitted cost estimate.
larger
smaller
