Budgeting Cost and Estimation

Chapter 7

Budgeting and Cost Estimation

Copyright 2009 John Wiley & Sons, Inc.

Low Bids
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If you are bidding on a project, do you want your bid to be as low as possible and still make a profit?

Accept Low Bid
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If you are accepting bids on a project, do you want to accept the lowest bid?

Budgeting
A plan for allocating scarce resources to the various endeavors of an organization  A budget implies constraints  Thus, it implies that managers will not get everything they want or need
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Budgeting
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Continued

The budget for an activity also implies management support for that activity The higher the budget, relative to cost, the higher the managerial support The budget is also a control mechanism
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Many organizations have controls in place that prohibit exceeding the budget Comparisons are against the budget

Estimating Project Budgets
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On most projects
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Material + Labor + Equipment + Capital + Overhead + Profits = Bid Resources + Profits = Bid

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In other words
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So we are left with the task of forecasting resources

Estimating Project Budgets
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Continued

Like any forecast, this includes some uncertainty There is uncertainty regarding usage and price
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Especially true for material and labor

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The more standardized the project and components, the lower the uncertainty The more experienced the cost estimator, the lower the uncertainty

Rules of Thumb
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Some estimates are prepared by rules of thumb
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These rules of thumb may be adjusted for special conditions However, this is still easier than starting the estimate from scratch

Estimating Budgets is Difficult
1. There may not be as much historical data or none at all 2. Even with similar projects, there may be significant differences 3. Multiple people have input to the budget

Estimating Budgets is Difficult

Continued

4. Multiple people have some control over the budget 5. There is more