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ESTIMATION OF RESOURCES
INTRODUCTION
The success of the estimation and control of resources have a major impact on the overall success
of the project. The overall process by which resources are controlled is often termed budgeting. The
estimate is a model of the cost performance of the project.
Estimates do not exist in isolation and a number of factors impinge on the estimate. Time, resource
availability, materials, equipment requirements and quality all have a major impact on the estimate.
The budget serves as a baseline for measurement. Deviations of cost plans from original estimates
should be examined and analyzed.
As projects are usually funded from external sources, the importance of the budget from the client’s
point of view has become pervasive. Budgets are often used as a straight jacket that can inhibit the
investigation of opportunities that arise during a project.
Budgets should always be investigated to determine the expected resource usage at the relevant
stage of execution. This allows corrective action to be taken before the budget is exceeded.
BUDGETING METHODS
PREAMBLE
Development of a project budget is more difficult than an operating budget. The ability to use past
data is limited and the use of this data for project budgeting should be undertaken with care.
Past data can serve as a guide to the budget for the project in question. Many corporations have
extensive historical records of past projects that allow information to be transferred from project to
project.
In project budgeting inflows and outflows must be task linked. The WBS provides the account
numbers for accumulation of this information.
TOP DOWN BUDGETING
Cost estimates are determined at a senior level based on judgment and experience. These estimates
are successively broken down by lower level managers.
It is assumed that this process will prevent lower level managers from building an excessive scope
based contingency into estimates.
To maintain this contingency intense rivalry can occur between lower level managers.
This method provides some stability to the budgeting process. This method also reduces the need
for excessively detailed estimates.
BOTTOM UP BUDGETING
Elemental tasks are costed and added to form the project budget. Man-hours and materials are
costed for direct work items and accumulated to provide the project budget.
At the conclusion of this process, management will assign indirect costs, a contingency and profit
to determine the final cost for undertaking the project.
It is essential that all items are included. Budgetary games do occur including scaling and lobbying.
This method is associated with participative management and provides the possibility of greater
commitment to the budget by lower order managers.
BUDGET REQUESTS
For more routine operations, previous costs are scaled by an predetermined percentage.
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The key success factor in estimating is to undertake the estimate in a methodical and systematic
manner. The WBS can provide a solid framework for the estimate. Estimators spend a lot of time
developing unit rates for work.
Excessively accurate unit rates have no value if the total scope of the project is not covered.
MAJOR METHODS
Three major traditional methods are used for estimating;
o Subjective - relies on skill and experience of estimator
o Comparative - uses past data
o Synthetic - breaks project into small units and uses historical data.
COST CATEGORIES
There are two major classes of costs incurred when undertaking a project. The direct costs are a
reflection of the cost to physically perform the work activities. These direct costs may include the
cost of concrete for a footing, the cost of a consultant to advise on lease arrangements etc.
The second class of costs is related to undertaking the project and is termed indirect or distributable
costs. These include the hire of a site office, service personnel, project vehicles, office expenses etc.
These costs behave in different ways. Direct costs being work related are incurred as the work is
done. They are readily monitored and easily estimated. Indirect costs are usually time related and
are a function of the whole project. If the project takes longer to perform then these costs will grow.
Costs can be incurred at a number of different locations during the execution of a project. Some
costs may be incurred in the field and some in the organizations office. It is essential to have a
costing system that can capture these costs to allow effective management of this parameter.
Project companies often use a code of accounts to collect and analyze cost information. The codes
vary from company to company and often from project to project. The extent of breakdown
depends on the intended use of the information.
Most code of accounts carry the following information:
o location where cost is incurred
o cost type, labour, plant, materials, subcontract etc.
o discipline.
TYPICAL ESTIMATING PROCESS
The estimating process usually follows the following sequence shown on the following figure;
In general this process involves;
o determine the scope of the projects.
o break the scope into work packages.
o determine the quantities of various classes of work in the work packages.
o determine the unit rates for the classes of work in the work packages.
o assemble and analyze the costs for this work.
o determine what other costs will be incurred by undertaking the project.
o analyze the risks and assign a contingency to the estimate based on the risks.
o present the estimate to the owner of the project.
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UNIT RATES
Unit rate development a function of design, cost basis and schedule execution basis. The extent to
which the unit rates are developed is a function of:
o The need for the estimate.
o The total value of the project.
o The value of the item when compared to the total value of the project.
The unit rates for undertaking a class of work are specific to the type of project undertaken. These
unit rates may cover $/hour of work, tonnes of steel/building, $/floor square meter, hours/interview
etc. During the execution of the project it is worth monitoring the costs for undertaking the work
and verifying that these unit rates are correct. This will allow the data to be updated to allow the
next project to be correctly priced and also assist in highlighting changes in scope.
Process Costing Methods
Methods commonly used in process industries are;
o Cost capacity curves
o Capacity ratios raised to an exponent
o Plant cost per unit of production
o Equipment factored estimates
Cost - Capacity Curves
The basis for the information from this curve comes from completed jobs. The estimated cost is
determined by finding the required capacity on the x axis and finding the y intercept for a particular
type of machine as shown.
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Capacity ratios
This method examines the effect of economies of scale on cost. It can be applied at all levels, i.e.
equipment or even at a plant level.
( )
The cost is estimated using the following formula;
(X
C ap ac ity
o f P ro ce ssU n itA
C o sto f P ro cessU n itA = C o sto f P ro c essU n itB ×
C ap a city
o f P ro cessU n itB
x is derived from historical data using curve fitting methods. Typically x ranges from 0.55 to 0.88.
Some published exponents is shown on the following table
Process Capacity Unit Cost- Capacity Capacity
Factor Range
Acetylene 10 Tons/day 0.73 3.5 - 250
Aluminium (from alumina) 100M Metric Tons/yr 0.76 20M - 200M
Ammonia (by steam- 100 Tons/day 0.72 100-3M
methane reforming)
Butadiene 100M Tons/yr 0.65 5M - 300M
Butyl alcohol 100MM Lb/yr 0.55 8.5MM -700MM
Carbon black 1 Tons/day 0.53 1-150
Chlorine 100 Tons/day 0.62 10-800
Ethanol 10MM Gal/yr 0.60 3MM-200MM
Ethylene 100M Tons/yr 0.72 20M - 800M
Hydrogen (from refinery 100MM Cu ft/day 0.64 500MM-10MM
gas)
Methanol 10MM Gal/yr 0.83 5MM - 100MM
Nitric Acid (50-60%) 100 Tons/day 0.66 100-1M
Oxygen 100 Tons/day 0.72 1-1.5M
Power Plants coal 100 MW(elec) 0.88 100-1M
Styrene 10M Tons/yr 0.68 4M -200M
Sulphuric Acid 100 Tons/day 0.67 100 - 1M
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