Monday, May 5, 2008

Estimating Costs Using Activity Durations

By establishing the forecasted time it will take to complete various tasks in the work breakdown structure for your project, you will have prepared another important input to cost estimating: activity duration estimates. Activity duration estimates are primarily an input to schedule development, but they are used in project cost estimating as well.

An activity duration estimate is a quantitative assessment of the likely number of work periods that will be required to complete an activity. An activity's duration is important when you are estimating labor costs, for example, or when estimating the costs of financing over the total project duration.

To estimate an activity's total cost, multiply the rates for the activity by the estimated duration. When you estimate activity duration for each project activity and then sum the results, you can determine a cost estimate for the entire project. Knowing the time it will take to complete all project activities makes estimating total project time and costs easier.

There are three things to remember when using activity durations to calculate cost estimates.
  • Include range of results. One is that activity duration estimates often include a range of possible results. They are, after all, just estimates.
  • Convert units for time. Sometimes you have to convert months or weeks into "working days" or "working hours" to calculate costs. Your company or industry likely has conventions for figuring out how many production hours are in a week, month, or year.
  • Allow for down time. Finally, remember to consider down time in your calculations. Remember that people do not work "24/7." Include weekends and holidays in your calculations.
Your activity duration estimates will include a range of possible results. Naturally, when activity durations have a range, your cost estimates will have a range, too. The points below illustrate the steps in estimating costs using activity duration estimates, indicating how a pharmaceutical company would estimate costs for clinical trials of a new drug.
  • Establish the activity duration estimate. The duration of the clinical trials is estimated to be six months, plus or minus two weeks, assuming that three laboratory technicians are working on the testing.
  • Check the resource rates that apply to this activity. Labor rates for this project are $18 per hour for each technician. If the company did not own the laboratory and equipment that will be used during the trials, it also would need to know the rental rates for these resources.
  • If necessary, convert units of time. One year has 52 weeks, so six months has 26 weeks. To find the working hours in six months plus or minus two weeks, assume that technicians work a 40-hour week: 26 x 40 = 1,040 hours. Then, 2 x 40 = 80 hours. You could say there are 1,040 hours plus or minus 80, or that there are 960 to 1,120 hours in this time frame.
  • Multiply the estimated duration by the rate for the activity. Multiply the labor rate ($18 per hour) by each end of the spectrum, and you get an estimated cost of between $17,280 and $20,160 per technician, or $18,720 plus or minus $1,440. Multiply again by three for each worker, and you get a total estimate of $56,160 plus or minus $4,320.
Activity duration estimates are estimates of how long it will take to complete each activity in the work breakdown structure. Without this vital information, you cannot accurately estimate project costs.

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