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Summary PRO4801 CHAPTER 8 NOTES
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,•Cost estimates and Budgeting.
Cost estimates, budgets, WBSs, schedules, quality, and risk are interrelated.
• Ideally, cost estimates are based upon elements of the WBS and are prepared for each work
package.
• When the cost cannot be estimated because an activity is too complex, the activity is broken
down further until it can. When the work is ill defined or uncertain, the estimate is initially based
upon judgment and is later revised as information becomes available.
• Project schedules dictate the need for resources and the rate of expenditures, but the converse
is also true: constraints on resources and working capital dictate the schedules.
• Imposing practical constraints on costs is necessary to create realistic project budgets; failing to
do so results in projects being completed at exorbitant expense, or terminated prematurely due
to lack of funds.
• Cost estimating, budgeting, and control sometimes are thought to be the exclusive concerns of
cost specialists, planners, and accountants.
• Project participants who are closest to the sources of costs; engineers, scientists, systems
specialists, architects, or others should be involved in the estimating and budgeting process.
• Commonly, however these same people are disdainful of budgets and ignorant about how they
work or why they are necessary.
• The project manager, of course, must also be involved. Although she does not need to be a
financial wizard, she does need to be skilful in organizing and using cost figures.
• The project manager oversees the cost estimating and budgeting process, often with the
assistance of a staff cost accountant.
• On most technical projects the cost engineer reviews the deliverables and requirements,
assesses the project from both cost and technical points of view, and advises the project
manager
, Cost estimates.
• The cost estimate can seal the project’s financial fate.
• When project costs are overestimated, the contractor risks losing the job to a lower
bidding competitor.
• Worse is when they are underestimated.
• A R50,000 fixed price bid might win the contract, but obviously the contractor will lose
money if the project ends up costing R80,000.
• Underestimating is often accidental; the result of being overly optimistic, although
sometimes it is intentional; the result of trying too hard to beat the competition.
• In a practice called buy in, the contractor reduces an initially realistic estimate just
enough to win the contract, hoping to cut costs or renegotiate a higher price after the
work is underway.
• The practice is risky, unethical, and, sadly, relatively commonplace.
• In large capital projects the tendency is to underestimate costs so as to get the
funding needed to launch the project, but then forget the estimate soon afterward.
• But a very low bid can also signify that the contractor cut corners in the estimate,
forgot to include things, or was just sloppy.
• The consequences for both client and contractor can be disastrous, ranging from
suffering a loss to bankruptcy.
• Cost estimates are used to develop budgets.
• After the project begins actual costs are compared to estimated, budgeted costs as
one measure of the project’s performance.
• Without good estimates it is impossible to evaluate work efficiency or to determine in
advance how much the project will cost on completion.
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