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Estimating the Budget and Cost (Part 2)

Estimating the Budget and Cost (Part 2). Developing an Estimate from the Top Down. Jeff Sestokas. Project Management for ARA Engineers and Scientists. Introduction. Another approach to developing a budget is to start from the “total” and allocate effort (“top down”)

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Estimating the Budget and Cost (Part 2)

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  1. Estimating the Budget and Cost (Part 2) Developing an Estimate from the Top Down Jeff Sestokas Project Management for ARA Engineers and Scientists

  2. Introduction • Another approach to developing a budget is to start from the “total” and allocate effort (“top down”) • Understanding customer budget and priority is generally critical to determining “total” • Allocation based on difficulty, duration and amount of ODCs required • Most appropriate for: • ROM estimates • Vaguely defined tasks/requirements • Effectiveness can improve with experience

  3. Desired Learning Objectives • How to construct a simplified estimate or budget • Importance of understanding customer budget and priorities to accuracy of estimate • Know when a ROM estimate is most appropriate • Importance of continuing evaluation • Requires measurable milestones • Allows early adjustment • Improves subsequent estimates

  4. Significant Considerations • Procurement Requirements • What do we have to deliver and when? • Evaluation Criteria • Customer emphasis should be basis of cost strategy • Critical Personnel, Facilities or Equipment • Customer Cost Expectations • For government contracts – government estimated level of effort • Cost is proportional to quality and (often) inversely proportional to required delivery time • Generally, specifying any two will determine the third

  5. Step 1 – Organize the Project • Define the major tasks to be accomplished • Clearly define the milestones and deliverables associated with each task (analogous to WBS and IMS steps) • Determine leader, type of personnel required, materials and ODCs for each major task (analogous to RLN step)

  6. Step 2 – Allocate Resources • Allocate a percentage of total resources to each major task • If a price objective is established (such as Government Estimate), this defines total resources • Otherwise, build to total based on effort in each major task What is missing from allocation?

  7. Don’t forget ODCs if significant Step 3 – Refine Resources • Allocate hours (or dollars) within resources assigned to each task • Check for reasonableness and adjust • Determine task milestones and percent of task effort to reach each milestone • Check for reasonableness and adjust

  8. Determine Cost • Individual Elements of cost must be appropriately loaded, then accumulated New! Add G&A on Purchase Load (+PLODC*P&S*G&A) Labor Fringe& OH Fringe • Holiday and Leave • Retirement & Bonus • Insurance OH - Sector & Division Operations • Marketing • Recruiting & Relocation • Training • Offices & Utilities • Field & Office Supplies

  9. Aligning your budget with Deltek • Understanding the Deltek database structure: • Up to 5 levels, each level has 5 alphanumeric characters • Typically only 3 levels used • Only one item at level 2 – this is the invoice level

  10. Direct Labor Labor Overhead Travel Other ODCs Purchasing & Subcontracts Building a Cost Estimate Escalation discussed on next chart Fringe Load with G&A Load with Fee See Handout Load with P&S and G&A on P&S load Taxes (If Applicable)

  11. Escalation of Current Rates • Particularly important for long duration contracts • Adjust rates to the midpoint of the contract • Accounts for inflation, salary increases and promotions • Allowable rate may be set in procurement • Otherwise, use 4% (Resc = .04) or as directed

  12. Step 4 – Continuing Evaluation • As project proceeds, evaluate budget estimation • What was expected cost at milestone? • Milestones may be set by customer or PM • Define measurable accomplishments • Should be frequent enough to allow easy adjustment • You must determine budget to reach milestone • If variance is unfavorable: • Use management reserve? • Adjust other task budgets?

  13. Summary • Top Down budget estimate is most appropriate when: • A ROM estimate is required • Tasking is vague and difficult to price • Allocate percent of total tasks, then refine to resources • Must organize project in a similar fashion to Bottoms Up approach • Generally in much less detail • Still requires “frequent” milestones for continuing assessment • Continuing assessment important for: • Manageable adjustment • Improved subsequent estimation

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