LECTURE 9

Pricing and Estimating

Introduction
Estimating: The process of forecasting or
approximating the time and cost of
completing project deliverables.
Good estimation is critical for successful
completion of a project on time, on budget
and on the mark.
Use the WBS as the basis for creating
activity estimations.
Estimating is not an exact science.
Projects often involve a greater degree of
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uncertainty.

Introduction

Many managers regard this as an art !

Information available to one bidder is
generally available to others.
This is an essential part of the planning
process.
Forms the basis for establishing
standards for budgets, man-hours,
material costs, contingencies, etc.
Specific pricing strategies must be
developed for each situation.
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Four common Estimating Methods

Order of magnitude estimates
- Made without any detailed engineering data
- May use past experience
- Accuracy +- 35% within the scope of the project

Approximate (rule of thumb) estimates

- Made without any detailed engineering data
- May use previous similar projects -- Accuracy +- 15%

Definitive (or detailed) estimates

- Prepared from well-defined engineering data, vendor
quotes, unit prices, etc. Accuracy +- 5%

Estimating manual
- Developed over time
- Use to price out effort. Accuracy +-10%

Additional Estimating Methods

Direct Estimate
- Estimate/experienced person
- Requires judgement
Estimate by analogy
- Compare with similar activities
- Requires judgement
Factored method
- Based on historical data
- Requires equipment lists, sizes
- Starts with equipment quotes
Gross proration method
- Based on historical data
- Near duplicate information
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Additional Estimating Methods

(continued)

Detailed estimate
- Uses the WBS
- Takes the WBS down several levels
Quotation method
- Compare three quotations
- Select the best quotation
Handbook manuals
Learning curves
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Estimation Pitfalls

Underestimating main causes are:

overly optimistic team members,

underestimation of the amount of non-productive time,
incomplete recall of previous experience (pain goes away and
only glory remains), or
team mates have no experience with the activity to draw
upon.

Inflating estimates sometimes novice project

managers may want to inflate estimates in order to come in
under budget, or time.

Cost/Hour Estimates
Estimating
Method

Generic
Type

WBS
Relationship

Accuracy

Time to
Prepare

Parametric

ROM*

Top Down

-25% to +75%

Days

Analogy

Budget

Top Down

-25% to +75%

Weeks

Definitive

Bottom Up

-5% to +10%

Months

Engineering
(Grass Roots)

* Rough Order of Magnitude

Construction Cost Estimates

Fixed-Price or Lump Sum - i.e. $4,000 for the entire

project
Unit-Price - i.e. $90/hour for professional services
Cost-Plus or Time and Materials or CostReimbursable Contracts - i.e. cost of actual
materials plus 20% profit.
Project Estimate
Times
Costs

Explanation of Project Costs

Project Indirect Costs
Costs that cannot be associated with any particular
work package or project activity.
Supervision, administration, consultants, and interest

Costs that vary (increase) with time.

Reducing project time directly reduces indirect costs.

Direct Costs
Normal costs that can be assigned directly to a
specific work package or project activity.
Labor, materials, equipment, and subcontractors

Crashing activities increases direct costs.

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Classroom Activity 9a
Why is estimating not an exact science?
Why do people tend to underestimate
activities?

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Questions?

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