Revising Project Cost Estimates and Budgets

Projects need to have parameters. It only makes sense that there should be a set duration of time in which to produce what the customer has asked for, and a limited amount of money to spend doing it. But what if early measurements of cost efficiency reveal that you are going to have trouble remaining within the cost and budget boundaries?

Revising cost estimates and making updates to the overall budget through the course of the project as more information becomes available is a part of the project cost control process. Preliminary estimates that were set during the planning stages of the project may need to be revised for the following reasons.

• Real costs for certain resources have changed.
• The original estimates contained errors.
• There has been a change in the project or product scope.
• Vague estimates can now be refined.

Cost revisions are justified when it becomes apparent that cost variances to date are not due to isolated causes. A poor rating of cost performance to date may show that your total costs at completion are going to be outside the permitted range. The sooner you can bring variances into line, the better. Revising cost estimates can result in the following benefits.

• Revised cost estimates ought to be much more accurate.
• You will have more confidence in the estimated costs at completion.
• You will know better if the project will come in on budget.

Cost revisions that lead to a change to the budget must be approved as outlined in the project's cost change control system. The person making the change should indicate in the change request the reason for the proposed revisions and await final approval before making any changes.

To revise cost estimates, you simply go back to your original estimates, isolate the specific items that are causing the variance, and then update the estimates based on the more accurate information.

Not all revisions to cost estimates will necessarily lead to updates to the budget. Offsetting revisions to cost categories may not affect the overall budget for a certain time frame or task. Budget updates involve a change to the approved cost baseline and should only be done under certain circumstances.

A change to the budget is considered to be one of the "last resorts" of project cost control. Cost variances should be assessed to see if there is any other way to correct them before re-baselining the entire project.

When you have determined that revised estimates will lead to a budget update, you must follow the approval process laid out in your cost change control system. Any changes to the product or project scope must be analyzed to see how they will affect overall costs. You will want to consult the project's scope management plan and integrated change control system as well. Additional details are provided below.

• Cost management plan (CMP). If your CMP states that the project budget will have a 25 percent contingency on top of the original estimate, a 5 percent variance might be easy to accept. If there is no contingency, or the variance is more significant, you would update the budget.
• Product scope. Changes to the features and functions of the product or service you are delivering, whether imposed or optional, will likely affect costs. You need to determine if the changes in cost are great enough to warrant altering the budget.
• Project scope. Changes to the work that must be done in order to deliver the specified product or service, whether imposed or optional, may also affect costs. You need to determine if the budget should be altered to compensate for these prospective variances.

Remember, cost estimates and budgets need to be updated so that at any point in time the project plan continues to be a valid tool for predicting the future of the project. By keeping in mind the information discussed above, you'll know when and how to revise cost estimates and update budgets.

The Project Cost Management Plan

The cost management plan is an important element of project cost control. It is developed during the cost estimating process and forms one of the main inputs used during the cost control process.

The cost management plan describes how cost variances will be managed, should they occur. Project managers must review the cost management plan regularly to ensure that the guidelines it contains continue to be appropriate throughout the duration of the project.

The cost management plan can be either formal or informal, depending on the nature of the organization. The level of detail required by the project stakeholders will determine whether the plan needs to be detailed or broad.

During the planning stages, companies decide the range by which cost variances will be permitted to deviate. The permitted range may be dependent on such factors as:

• the particular phase of the project you are in
• the length of the phase
• the length of the entire project
• the nature of the task or materials being estimated
• the perceived accuracy of the estimate.

Variance management may be different from project to project. For many projects, variances are permitted to change over the project duration. For projects that involve research and development, for example, larger deviations may be allowed during the earlier phases of the project. On the other hand, for manufacturing projects, allowed variances may be fixed over the duration of the project. Since the risk for any project decreases as time goes on, so should the allowed variance.

When a variance occurs, you can deal with it in one of four ways. You can choose to ignore the variance, make functional modifications, replan the project, or redesign the product. The first issue to consider when choosing the appropriate management technique is the size of the cost variance.

• If the variance is inside the permitted range of deviation, the two best choices are to ignore it or to make functional modifications.
• If the variance is outside of the permitted range of deviation, you need to take a more drastic approach, such as replanning or redesigning the product.

The choices available to manage a cost variance vary in terms of how drastic they are, how much work they require, and how much they change the project. Ignoring the variance or making functional modifications are mild solutions. These choices require little or no work, and make minimal changes to the project, if any.

Replanning or making changes to the product scope are more drastic solutions. They require a great deal of work and make substantial changes to the project. More details about these four choices are provided below.

• Disregard. The cost variance can be ignored if it falls within the permitted range of deviation and does not appear to be a sign of future cost problems.
• Modify. If the variance is within the permitted variance range, but could potentially grow or become a problem in the future, functional modifications can be made. These are small changes to the project that can save time and money.
• Replan. Replanning occurs if the variance is outside of the permitted range. Management attempts to replan the project without changing the product scope. This means finding less expensive ways of doing things, such as using less expensive resources or contracting out.
• Redesign. This is the most drastic measure. It involves changing the product or service you will deliver. You have to find ways to make the product less expensive to produce and deliver. Redesign only if replanning is not sufficient.

Project replanning and product redesign involve major changes to the project. Both approaches require an assessment of the impact on the overall product quality and its ultimate usability by the customer. Taking either of these approaches too far could render the product sub-standard and unmarketable.

Remember, there is comfort in having a good plan for managing costs and knowing how to implement it. The cost management plan can help you effectively manage project cost variances when they occur.

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.

Estimating Activity Duration

One thing you can't afford on a project is wasted time. Time wasted on a project will affect both the budget and the schedule. Fortunately, proper planning and accurate activity duration estimates can be used to keep your project on time and within budget.

Project managers use activity attributes to select and sort the activities that comprise a project. They look at all aspects of a project before determining the project schedule knowing that a "missed" or inaccurately estimated activity can drastically alter the project schedule.

Activity lists, which describe all the activities to be performed on a project, are used in estimating the duration of project activities. Resource requirements that detail the people, equipment, and materials needed for a project are also used as inputs in this process.

Activity duration estimates are quantitative assessments of the likely number of work periods that will be required to complete an activity. Activity duration estimates give project managers a range of possible results.

Project managers can determine a timeline for a project from the range of possible results. This range can be an indication of the number of work periods or the probability that the activity will take as long or longer than expected.

Sam is a project manager for an aerospace company. He is using activity duration estimates as an input to project schedule development. Sam has estimated that assembling the wing will take at least 8 days, but no more than 12.

There is a 15 percent probability that the assembly will take more than 12 days, and an 85 percent probability that it will take less than 12 days.

Since there is a high probability that assembly will take less than 12 days, the project manager will schedule 10 days for this activity.

While activity duration estimates help project managers determine how long activities will take, activity attributes also play an important part in selecting and sorting the given project activities.

Activity attributes are important because they enable project managers to select activities and sort them into convenient groupings. Project managers use these groupings to find out information about a given project. Activities exhibit three types of attributes: responsibility, geographic area, or building, and activity type.

The responsibility attribute refers to who will perform the work. The geographic area or building attribute refers to where the work will take place.

The activity type attribute refers to whether an activity is grounded in specific details or is based on a summary of events.

Activity duration estimates help project managers determine the likely number of work periods an activity will take to complete while activity attributes are important for sorting and selecting project activities. Both inputs are essential in planning a project so that it remains on time and within budget.