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COST ESTIMATION
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The project estimate and budget are built from the schedule we created above and the purchasing or procurement plan we will create later in this chapter. We can then adjust it by adding contingencies that we will add from our work in 11. The estimate is a single gure or range representing what we think the total cost will be. The budget shows how we will need to spend that money over time, including when we will need to buy each item, when we will need to pay for work done, and how much each stage of the project will cost. The total cost of a project is what we will spend on labor, plus what we will spend on purchasing. Labor cost should be calculated separately for internal sta and for external consulting services. Purchasing cost should consider both that which we buy for the process of the project, and that which we buy to include in the product or service we are delivering to the customer. The nal element is the addition of a range of possible costs. We bring this in through the use of contingencies from the risk planning process. Table 10-4 gives a procedure for creating a detailed cost estimate and budget.
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The cost per time unit items in steps 3 and 4 of the detailed cost estimate and budget preparation procedure in Table 10-4 might warrant further explanation. We need to choose a cost per hour that meets two requirements. First, it must be the same one used by accounting, so that our budget matches corporate accounting procedures. Second, in most rms, we need to maintain salary privacy for individuals. It is easy to turn an hourly cost rate into an annual salary, and many people will see the budget. In most cases, human resources or accounting will have a solution for this. Solutions include using an average salary for a department or a job title, or using a formula, such as
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PART THREE Skills and Tools
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Table 10-4 Detailed cost estimate and budget preparation procedure.
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Trigger event: In the design stage, when the project schedule, procurement plan, and risk plan are prepared. There should be agreement that these items are close to nal, or they should have received nal approval. Brief description: Combining all sources of expense, we create an estimate of total project expense and a budget, that is, a schedule for spending money. Inputs:  The detailed project schedule, complete and approved or expected to have little change.  The procurement plan, complete and approved or expected to have little change.  The risk plan, complete and approved or expected to have little change.  Cost per time unit gures for internal sta resources.  Cost per time unit or xed-price contract gures for external sta resources and consulting services.  Cost per unit for items to be procured.  The project overview, and any other documents that specify constraints. Outputs:  A detailed cost estimate presented as a range from the expected minimum to the expected maximum cost of the project.  A budget showing how that money will be spent over time.  A list of budgetary assumptions. Tools: This is most easily done with a project tracking tool, but it can be done in a spreadsheet. Veri cation (QC): A second person should review the estimate, the budget, and assumptions, checking for errors and risks. This estimate and budget should be compared to earlier estimates and issues should be resolved through gap reconciliation. At the end of the project, the estimate and budget should be compared to actual results, and the discrepancies used towards improving estimation methods.
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CHAPTER 10 Planning and Estimation
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Table 10-4 Detailed cost estimate and budget preparation procedure (Continued).
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Process: 1. Review the schedule, procurement plan, and risk plan for clarity and understanding. 2. Insert the procurement plan into the project schedule, assigning purchasing dates for all items and creating procurement tasks for all procurement, if this has not already been done. 3. Validate the cost per time unit for internal resources with accounting or human resources, or with formal corporate policies. Do this for all internal sta assigned to the project. 4. Validate the cost per time unit or xed-contract cost commitments for external sta resources and consulting services with the vendor or vendors. 5. Validate the cost per unit item to be procured with the vendor or vendors. 6. Validate all inputs against project constraints and assumptions and other relevant parts of the project overview. If necessary, change the plans and get them re-approved before proceeding. 7. Assign cost per time unit to all sta ng resources, internal and external. 8. Make any adjustment for future salary increases or rate changes. 9. Enter cost per unit gures for each procurement task in the schedule. If only one item is being purchased, then the cost per unit equals the total cost for that item. If multiple items are being purchased, then the item line cost is the per-item cost times the number of items. Consider date of purchase and possible price changes when entering cost gures, and adjust if appropriate. 10. If the project tracking tool or spreadsheet does not automatically update its gures, then trigger a recalculation. Save the le. 11. Evaluate the results, viewing each item in detail, and viewing summaries and reports. Make any adjustments. 12. Create the budgetary assumptions document. 13. Review the risk plan, and add appropriate contingencies. Most likely, these will not appear in the project tracking tool. The project tracking tool holds the schedule and budget based on work that is de nitely planned. The contingencies cover work that may need to be done to respond to risks and changing conditions, not the core plan. 14. Have someone review your work. Make any appropriate changes, recalculate, review, save the le, and print. 15. Initiate overall change management linking any change to the schedule, procurement plan, or risk plan to the project budget and detailed estimate. 16. Your nal estimated minimum cost is the cost of the core plan in the project tracking tool. Your nal estimated maximum cost is the minimum cost plus contingencies from the risk plan.
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