Classifying Work Tasks and Costs

Classifying Work Tasks and Costs

The cost estimating process begins by breaking the project down into work phases such as

design, engineering, development, and fabrication, or into work packages from the WBS. The project

team, including members from the involved functional areas and contractors, meets to discuss the

work phases or packages, and to receive specific work assignments. The team tries to identify tasks in

the project that are similar to existing designs and standard practices and can readily be adopted.

Work is classified either as developmental or as an adaptation of existing or off-the-shelf (OTS)

designs, techniques, or procedures. Because developmental work requires effort in design, testing,

and fabrication, cost estimating is more difficult compared to OTS due to the greater uncertainty about

such as costs for quality assurance and testing. Nonrecurring costs happen once and are associated

with development, fabrication, and testing of one-of-a-kind items, or procurement of special items. In

the pure project form of organization the project manager delegates the responsibility for the

estimating effort, combines the estimated results, and presents the final figures to management. In a

matrix organization, estimating is the joint responsibility of the project and functional managers,

though the project manager coordinates the effort and accumulates the results. The estimating effort

requires close coordination and communication between the estimating groups to avoid redundancies

and omissions. Although this typifies the cost estimating process, the actual method used to estimate

cost figures will depend on the required accuracy of and the information available to make the

estimate. Cost estimates are determined using variants of four basic techniques: expert opinion,

of cost increases that could or likely will occur; they include scrap and waste, design changes, increases

in the scope, size, or function of the end-item, and delays due to weather. Later, when the project

budget is established, this amount should be included in a special budget, subdivided into work

package accounts and strictly controlled by the project manager. For the project cost estimate, the

project manager sums these activity contingencies and adds them to the total project cost, yielding

the base estimate. To the base estimate the project manager might add yet another amount, a project

contingency . This is to account for “ unknown unknowns ” —external factors that affect project costs

but cannot be pinpointed. Examples include unforeseen fluctuation in exchange rates, shortages in

resources, and changes in the market or competitive environment. The size of the contingency

depends on the perceived risk and likelihood of cost escalation due to unknowns. Computing the

allowance is controlled by a program manager or corporate managers and is ordinarily not available

to the project manager without approval.

Reducing Costs

What happens if competition or insufficient funding forces management to reduce costs?

Managers will want to retain their share of the project and none will want to see budget or staff

reduced. Nonmanagement professionals such as engineers, scientists, or systems analysts, unless

actively involved in the budgeting process, are often unaware of budget constraints and resist cuts.

Here is where communication, negotiation, and diplomacy between project managers and functional

managers and staff are necessary to convince the latter to accept a share of budget reductions. When

It also unfairly penalizes managers who tried to produce fair estimates and were honest

enough not to pad them. Such indiscriminate, acrossthe-board cuts induce everyone to pad estimates

for their own protection. Suppose you are the project manager and it is clear that management insists

on a budget that is too low to perform the work. There are only two courses of action: either undertake

the project and attempt wholeheartedly to meet the budget, or hand it over to another manager. 15

If you decide on the former, you should document your disagreement and report it to top

management; later, the client might agree to changes that would reduce costs and enable it to be

completed within budget. If the contract is cost-plus, then the risk is low because additional costs will

be reimbursed. If the contract is fixed price and the budget is so underfunded as to likely require

cutting corners or stalling the project, then you should suggest to management that they appoint