Budget Planning

During the conceptual phase when project selection occurs, economic factors are an important consideration in choosing between competing projects. To compare the simple paybacks or internal rates of return between projects, an estimate of the cost of each project is made. The estimates must be accurate enough so that the comparisons are meaningful, but the amount of time and resources used to make the estimates should be appropriate to the size and complexity of the project. The methods used to estimate the cost of the project during the selection phase are generally faster and consume fewer resources than those used to create detailed estimates in later phases. They rely more on the expert judgment of experienced managers who can make accurate estimates with less detailed information. Estimates in the earliest stages of project selection are usually based on information from previous projects that can be adjusted – scaled – to match the size and complexity of the current project or developed using standardized formulas.

Analogous Estimate

An estimate that is based on other project estimates is an analogous estimate. If a similar project cost a certain amount, then it is reasonable to assume that the current project will cost about the same. Few projects are exactly the same size and complexity, so the estimate must be adjusted upward or downward to account for the differences. The selection of projects that are similar and the amount of adjustment needed is up to the judgment of the person who makes the estimate. Normally, this judgment is based on many years of experience estimating projects, including incorrect estimates that were learning experiences for the expert.

Less-experienced managers who are required to make analogous estimates can look through the documentation that is available from previous projects.  If projects were evaluated using the Darnall-Preston Complexity Index (DPCI), the manager can quickly identify projects that have profiles similar to the project under consideration, even if those projects were managed by other people.

The DPCI assesses project attributes, enabling better-informed decisions in creating the project profile. This index assesses the complexity level of key components of a project and produces a unique project profile. The profile indicates the project complexity level, which provides a benchmark for comparing projects and information about the characteristics of a project that can then be addressed in the project execution plan. It achieves this objective by grouping 11 attributes into four broad categories: internal, external, technological complexity, and environmental.

Comparing the original estimates with the final project costs on several previous projects with the same DPCI ratings gives a less-experienced manager the perspective that it would take many years to acquire by trial and error. It also provides references the manager can use to justify the estimate.

Example: Analogous Estimate for John's Move

John sold his apartment and purchased another one.  It is now time to plan for the move. John asked a friend for advice about the cost of his move. His friend replied, "I moved from an apartment a little smaller than yours last year and the distance was about the same. I did it with a 14-foot truck. It cost about $575 for the truck rental, pads, hand truck, rope, boxes, and gas". Because of the similarity of the projects, John's initial estimate of the cost of the move was less than $700 so he decided that the cost would be affordable and the project could go forward.

Parametric Estimate

If the project consists of activities that are common to many other projects, average costs are available per unit. For example, if you ask a construction company how much it would cost to build a standard office building, the estimator will ask for the size of the building in square feet and the city in which the building will be built. From these two factors – size and location – the company's estimator can predict the cost of the building. Factors like size and location are parameters – measurable factors that can be used in an equation to calculate a result. The estimator knows the average cost per square foot of a typical office building and adjustments for local labour costs. Other parameters such as quality of finishes are used to further refine the estimate. Estimates that are calculated by multiplying measured parameters by cost-per-unit values are parametric estimates.

Example: Parametric Estimate for John's Move

To estimate the size of the truck needed for John's move, the parameter used by a truck rental company is the number of bedrooms (Figure 12.1). The company assumes that the number of bedrooms is the important parameter in determining how big a truck is needed for a move. John has a one-bedroom apartment, so he chooses the 14-foot truck. Once the size is determined, other parameters, such as distance and days, are used to estimate the cost of the truck rental.

Figure 12.1. Parametric Cost Estimate

Bottom-Up Estimating

The most accurate and time-consuming estimating method is to identify the cost of each item in each activity of the schedule, including labour and materials. If you view the project schedule as a hierarchy where the general descriptions of tasks are at the top and the lower levels become more detailed, finding the price of each item at the lowest level and then summing them to determine the cost of higher levels is called bottom-up estimating.

Example: Bottom-Up Estimate for John's Move

Category	Description	Activity	Quantity	Unit Price	Cost
Packing Materials	Small Boxes	2.1	10	$1.70	$17.00
Packing Materials	Medium Boxes	2.1	15	$2.35	$35.25
Packing Materials	Large Boxes	2.1	7	$3.00	$21.00
Packing Materials	Extra-Large Boxes	2.1	7	$3.75	$26.25
Packing Materials	Short-Hanger Boxes	2.1	3	$7.95	$23.85
Packing Materials	Box Tape	2.1	2	$3.85	$7.70
Packing Materials	Markers	2.1	2	$1.50	$3.00
Packing Materials	Mattress/Spring Bags	2.1	2	$2.95	$5.90
Packing Materials	Life Straps per Pair	2.1	1	$24.95	$24.95
Packing Materials	Bubble Wrap	2.1	1	$19.95	$19.95
Packing Materials	Furniture Pads	2.1	4	$7.95	$31.80
Truck	Rental	2.2	–	–	$400.00
Truck	Gas at 10mpg	2.2	200	$2.25	$45.00

Table 12.1. Detailed Cost Estimate

After evaluating the bids by the moving companies, John decides the savings are worth his time if he can get the packing done with the help of his friends. He decides to prepare a detailed estimate of costs (Table 12.1) for packing materials and use of a rental truck. He looks up the prices for packing materials and truck rental costs on company websites and prepares a detailed list of items, quantities, and costs.

This type of estimate is typically more accurate than an analogous or parametric estimate. In this example, the sum of packing materials and truck expenses is estimated to be $661.25.

The estimate can be rolled up – subtotaled – to display less detail. This process is made easier using computer software. On projects with low complexity, the cost estimates can be done on spreadsheet software. On larger projects, software that manages schedules can also manage costs and display them by activity and category. For example, the subtotal feature could be used in Excel and collapsed to show the subtotals for the two categories of costs (Figure 12.2).

Figure 12.2. Sum of detailed costs by type

Activity-Based Estimates

An activity can have costs from multiple vendors in addition to internal costs for labour and materials. Detailed estimates from all sources can be reorganized so those costs associated with a particular activity can be grouped by adding the activity code to the detailed estimate (Table 12.2).

Category	Activity	Cost
Packing Materials	2.1	$216.65
Truck	2.2	$445.00

Table 12.2. Costs Associated with Activities

The detailed cost estimates can be sorted and then subtotaled by activity to determine the cost for each activity.