Sheet1ActivityWork (hours)Resource NameLabor RateLabor CostsMaterial CostsTravel CostsFacility CostsSubcontractor CostsTotal Costs Cost Management 235-AAH-CH Professor: Behn Nikkhah CLASS 3&4 2 3 Cost Estimation Estimating project costs are important because: • Can be used in feasibility study before starting the project. • It can facilitate decisions regarding project financing and funding. • It provides a standard against which actual costs incurred during the execution can be compared. • It gives the project manager a framework to allocate scarce resources throughout the project. 4 Cost Estimation This is a process of estimating the cost of the resources required for each scheduled activity. It is important to be certain to include all the costs required to complete the work of the project. 5 Estimate Costs Inputs • Project Management Plan (Cost management plan, Quality Management Plan, Scope baseline) • Project Documents (Lessons learned register, Project schedule, resource requirements, Risk register) • Enterprise environmental factors • Organizational process assets. 6 Estimate Costs Inputs Scope Baseline: • Project scope statement • WBS • WBS dictionary Project scope statement is a document that includes key deliverables, constraints, assumptions, etc. Constraints such as limited budget for the project can be find in this document. There might be other constraints such as delivery date that can impact the cost. Project assumptions regarding costs might include information regarding indirect costs in the estimate. 7 Estimate Costs Inputs The WBS serves as the basis for estimating costs, as it includes all deliverables and the control accounts that are typically established at the work package level. The WBS dictionary describes the deliverables, work components, and other elements of the WBS. All these information can be helpful in estimation of the costs. For example if one of the deliverables is to get licenses you need to see that as additional expenses to fulfill in the estimation. 8 Estimate Costs Inputs The Project schedule along with the resource requirements for each activity are key inputs in estimating costs of the project.t You need to be aware of the duration as it can affect costs. For example, you must account for costs such as interest charges in a financed work of the project. Another example is fluctuation in costs that can occur due to seasonal or holiday demands. 9 Estimate Costs Inputs The risk register contains the response plans, particularly for those risks with negative impacts to the project. When developing project cost estimates, you should consider the cost of implementing risk response plans. 10 Estimate Costs Inputs The enterprise environmental factors such as market conditions, exchange rates and inflation are examples to be considered in the project costs estimation. The organization process assets such as lessons.

1. Sheet1ActivityWork (hours)Resource NameLabor RateLabor
CostsMaterial CostsTravel CostsFacility CostsSubcontractor
CostsTotal Costs
Cost Management
235-AAH-CH
Professor: Behn Nikkhah
CLASS 3&4
2
3
Cost Estimation
Estimating project costs are important because:
• Can be used in feasibility study before starting the
project.
• It can facilitate decisions regarding project
financing and funding.
• It provides a standard against which actual costs
incurred during the execution can be compared.

2. • It gives the project manager a framework to
allocate scarce resources throughout the project.
4
Cost Estimation
This is a process of estimating the cost of the resources
required for each scheduled activity.
It is important to be certain to include all the costs
required to complete the work of the project.
5
Estimate Costs Inputs
• Project Management Plan (Cost management plan,
Quality Management Plan, Scope baseline)
• Project Documents (Lessons learned register, Project
schedule, resource requirements, Risk register)
• Enterprise environmental factors
• Organizational process assets.
6
Estimate Costs Inputs

3. Scope Baseline:
• Project scope statement
• WBS
• WBS dictionary
Project scope statement is a document that includes key
deliverables, constraints, assumptions, etc.
Constraints such as limited budget for the project can be
find in this document. There might be other constraints such
as delivery date that can impact the cost.
Project assumptions regarding costs might include
information regarding indirect costs in the estimate.
7
Estimate Costs Inputs
The WBS serves as the basis for estimating costs, as it includes
all
deliverables and the control accounts that are typically
established at the work package level.
The WBS dictionary describes the deliverables, work
components, and other elements of the WBS.
All these information can be helpful in estimation of the costs.
For example if one of the deliverables is to get licenses you
need
to see that as additional expenses to fulfill in the estimation.

4. 8
Estimate Costs Inputs
The Project schedule along with the resource requirements for
each activity are key inputs in estimating costs of the project.t
You need to be aware of the duration as it can affect costs.
For example, you must account for costs such as interest
charges in a financed work of the project.
Another example is fluctuation in costs that can occur due to
seasonal or holiday demands.
9
Estimate Costs Inputs
The risk register contains the response plans, particularly for
those risks with negative impacts to the project.
When developing project cost estimates, you should consider
the cost of implementing risk response plans.
10
Estimate Costs Inputs
The enterprise environmental factors such as market conditions,

5. exchange rates and inflation are examples to be considered in
the project costs estimation.
The organization process assets such as lessons learned on
previous projects of similar scope and complexity can be useful
in determining estimates for the current project.
11
Tools and Techniques to Estimate Costs
The majority of these are also tools and techniques of the
estimate activity durations process used to determine schedule
estimates:
• Expert judgement
• Analogous estimating
• Parametric estimating
• Bottom-up estimating
• Three-point estimating
• Reserve analysis
• Project management information system
• Decision making (voting)
12
Cost Estimation
The total project cost is often estimated during the initiating
phase of the project and be indicated in the project charter.
However detailed plans are not usually prepared at the initiating
phase.

6. The detailed estimation can include the following elements:
Labor costs
Material costs
Equipment costs
Facilities costs
Subcontractor costs
Travel costs
Reserve
13
Labor costs
These are the estimated costs for the various types of human
resources who are expected to work on the project
Example, painters, developers, designers, general labor.
The labor costs are based on the estimated work time (not
necessary activity duration)
Activity may have one day as its duration, but it requires 2
hours
of work.
14
Material costs
It includes the estimated costs of materials that the project team
or contractors need to purchase for the project, such as paint,
lumber, pipes, cables, paper, food, software.

7. 15
Equipment costs
A project may need a piece of equipment to be purchased.
Equipment can include items such as computers and
machinery.
For example, a project of upgrading a manufacturing facility
may include the purchase of new machinery
16
Facilities costs
Some projects may need special facilities or additional place for
the project team, for safety and security reasons, to store
materials, to assemble, or to test the project deliverables or
final
product.
For example cost of renting a place to store materials required
for the project is a facility cost.
17
Subcontractors costs

8. In a project your project team may not have expertise or
resources to do certain project tasks. In such case you may
outsource some of the work to subcontractors or consultants to
perform those activities.
For example you can have a subcontractor for a catering
activities.
18
Travel costs
If travel other than local travel is required during the project,
the
costs of airfare, lodging, and meals need to be seen under this
category.
19
Reserve
Contingencies to cover unexpected situations that may come
up during the project. It will be discussed later.
20
Cost Estimation
Now the question is “who is responsible for performing cost
estimation?”

9. It is a good practice to assign the person who will be
responsible
to do a task estimate the costs associated with it, as it can
generating commitment from the person and avoids the bias of
having one person doing all estimations.
In large projects which may take several years, it is not
practical
and possible to have each person or team estimate activity
costs.
21
Estimate Activity Costs
The estimated costs for an activity should be reasonable and
realistic.
If estimates become over conservative, the total costs for the
project is probably more than the budget of the sponsor or
customer.
In contrast, being very optimistic may cause cost overrun and
unexpected expenditure come up.
22
Estimate Activity Costs
In large project it is more practical to have contractors or
departments who are responsible for a work package to
estimate the costs of the work.
If an organization or contract has performed similar projects in

10. the past and has kept records of the actual costs, these
historical data can be used in cost estimation.
23
Determine Project Budget
Cost estimation and project budgeting are inseparably linked.
The project budget is determined by aggregating the estimated
costs for all the activities.
The project budgeting process involves two steps:
• Determine the total budgeted cost
• Develop a time-phased budget
24
Develop the total budgeted cost
The total budgeted cost is the aggregate amount of the
estimated costs of all the specific activities to perform and
complete the project (based on a WBS)
This is also referred to as budget at completion (BAC).
WBS with
work
package

11. budgets
25
26
Develop Cumulative Budgeted Cost
Once you determine the BAC, the second step is to distribute
budgeted cost for each work package over the expected time
span of its work package.
By performing that, a time-phased budget is created so that it
can be determined how much of the budget should have been
spent at any point in time (Planned value in EVM)
27
Example: Network Diagram
28
Example: distribute the budget
29
Example: Budgeted cost by period for the packaging
machine

12. 30
Develop Cumulative Budgeted Cost
Once you determine the BAC, the second step is to distribute
budgeted cost for each work package over the expected time
span of its work package.
By performing that, a time-phased budget is created so that it
can be determined how much of the budget should have been
spent at any point in time (Planned value in EVM)
31
Cumulative budgeted cost curve
With the planned value
(cumulative budget cost), PV
curve can be drawn to
illustrate budgeted
expenditure over the
duration of the project
32
The importance of project cost
management
Two of the most important documents project
managers prepare for any project are the project
schedule and project budget.

13. These two documents will be used throughout the
executing and monitoring and controlling process
33
Cost Baseline
The cumulative budgeted cost for the entire project
provide a baseline against which actual cost and work
performance can be compared during the project.
For big projects that involves lots of activities, project
management software assist the project budgeting.
34
Actual Cost
To record and keep track of actual cost on a project, it
is necessary to establish a system to collect data on
costs expended on a regular and timely basis.
In many project weekly timesheets are used to collect
actual labor hours.
Workers working on the project fill it out with the
number of the work packages on which they worked
and the amount of hours they spend on each.

14. 35
Committed Costs
Committed costs are amount of money that have
been beholden for an item that has been ordered or
purchases but not yet paid for.
Committed costs are not available to be spend
elsewhere on the project as they will be needed later.
For example you hire a contractor to fix your home
plumbing for $2,000. you have committed $2,000, even
though you may not actually pay until the work is
finished.
36
Committed Costs
Committed amount need to be set aside and be
treated in a special way.
To permit a realistic comparison of actual cost to
cumulative budgeted cost (PV), percentage of
committed costs should be assigned to actual cost
while the work is being performed (as it is like progress
payments), rather than waiting till it is finished and
convert it to actual costs.