IS333: Project Management Tutorial 09 Questions and Answers 2020

IS333: Project Management

Cost Estimation and Budgeting

Tutorial 09 Questions with Possible Solutions

1. Put yourself in the position of a project customer. Would you insist on the cost adjustments
associated with learning curve effects or not? Under what circumstances would learning curve costs
be appropriately budgeted into a project?

 As a customer, I would not accept fees when the repetitive work (that accounts for the learning
curve) is a routine job for the supplier.
 The reason for this is that I would be paying for learning effects that others would reap the
benefit from.
 Also, learning effects associated with new employees would be unreasonable to include in
project billing.
 On the other hand, if the repetitive work/learning curve effects were project or customer
specific, then budgeting the costs into the project would be appropriate.

2. Why do project teams create time-phased budgets? What are their principal strengths?

 Time-phased budgets all teams to match the project schedule with the project’s budget.
 They can also identify milestones for completion of work and budget expenditures.
 This enables them to see when and where money was spent.
 This creates a better idea of where variances occurred and creates better control mechanisms.
 Moreover, time-phased budgets result in better documentation for future project planning.

3. Would you prefer the use of bottom-up or top-down budgeting for project cost control? What are
the advantages and disadvantages associated with each approach?

 Top-down budgeting would be preferred because it, more often, results in better cost control.
 It also draws on experience (historical costs) of top management for project estimates.
 However, these advantages come at a cost.
 Top-down budgeting can result in friction between top, middle, and lower level managers as
the approach results in a zero-sum game (what one manager receives another loses).
 Bottom-up budgeting has the benefit of being detailed from the very beginning.
 Costs can be directly tied to WBS and individual tasks.
 Unfortunately, this process can be time consuming and removes control from top management,
which may lead to variances from strategic goals of the project.

4. Project contingency can be applied to projects for a variety of reasons. List three of the key reasons
why a project organization should consider the application of budget contingency.

 First, changes in scope and specifications can occur creating increased costs.
 Secondly, rework and interaction fees can be difficult to predict in the initial planning stages.
 For example, project may require communication between departments or office branches.
 This may incur travel and coordination (shipping, etc) costs that are unseen prior to
implementation.
 Lastly, uncertainty (especially related to the environment or politics) is a known complication
of project work.
 Changes can occur that restrict the use or availability of resources.
 This may cause delays in production or create the need for additional accommodations.

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IS333: Project Management Tutorial 09 Questions and Answers 2020

5. Calculate the fully loaded cost of labour for a project team member using the following data:
Hourly rate: $17.50/hr
Hours needed: 200
Overhead rate: 35%

 Solution: The formula for calculating fully loaded cost of labour is:

Hourly rate Hours needed Overhead charge Total direct labour cost
($17.50) × (200) × (1.35) = $4,725.00

6. Calculate the fully loaded labour costs for members of your project team using the following data.
Who is the most expensive member of your team? What proportion of the overall fully loaded cost
of labour is taken up by this individual?

Hours Overhead Personal Fully Loaded

Name Needed Charge Time Rate Hourly Rate Labour Costs
Todd 200 1.55 1.15 $32/hr
Stan 200 1.75 -0- $15/hr
Mary 150 1.55 -0- $24.5/hr
Alice 80 1.75 1.15 $30/hr
Total Fully Loaded Labor Cost 

 The fully loaded costs are embedded in the table in the right hand column.
 The most expensive resource for this project is Todd.
 His labor costs are approximately 42% of the total fully loaded labor cost for the project.

For the Questions 7, 8 and 9, refer to the following chart of learning curve coefficients (unit and total
time multipliers).

Learning Curve Coefficients (Unit Time and Total Time Multipliers)

70% 75% 80% 85%
Unit Unit Total Unit Total Unit Total Unit Total
Rate Time Time Time Time Time Time Time Time
5 .437 3.195 .513 3.459 .596 3.738 .686 4.031
10 .306 4.932 .385 5.589 .477 6.315 .583 7.116
15 .248 6.274 .325 7.319 .418 8.511 530 9.861
20 .214 7.407 .288 8.828 .381 10.485 .495 12.402
25 .191 8.404 .263 10.191 .355 12.309 .470 14.801
30 .174 9.305 .244 11.446 .335 14.020 .450 17.091
35 .160 10.133 .229 12.618 .318 15.643 .434 19.294
40 .150 10.902 .216 13.723 .305 17.193 .421 21.425
Based on a = 1.

7. It took MegaTech, Inc., 100,000 labor-hours to produce the first of several oil-drilling rigs for
Antarctic exploration. Your company, Natural Resources, Inc., has agreed to purchase the fifth
(steady-state) oil-drilling rig from their manufacturing yard.
Assume that MegaTech experiences a learning rate of 80%.
At a labor rate of $35 per hour, what should you, as the purchasing agent expect to pay for the fifth
unit?
Remember, the simplified formula for calculating learning rate time is given as:

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IS333: Project Management Tutorial 09 Questions and Answers 2020

TN = T1C
Where TN = Time needed to produce the nth unit
T1 = Time needed to produce the first unit
C = Learning curve coefficient

 The table lists the fourth unit learning curve coefficient as .596, assuming a learning rate of
80%. Using the formula, to produce the fifth unit takes:

T5 = (100,000) (.596)

= 59,600 hours

 To find the cost, multiply the hours by the hourly rate:

= (59,600) ($35 per hour)

= $2,086,000

8. Question 7 identified how long it should take to complete the fifth oil drilling platform that Natural
Resources plans to purchase. How long should all five oil-drilling rigs take to complete?

 We can look at the total time column in the table associated with a learning rate of 80%. The
multiplier is listed as 3.738. Using this value, the total time necessary to complete the five rigs
is calculated as:

T5 = (100,000) (3.738)
= 373,800 hours to complete all five oil-drilling rigs

9. Suppose that you are assigning costs to a major project to be undertaken this year by your firm,
DynoSoft Applications. One coding process involves many labor-hours, but highly redundant work.
You anticipate a total of 200,000 labor-hours to complete the first iteration of the coding and a
learning curve rate of 70%. You are attempting to estimate the cost of the twentieth (steady state)
iteration of this coding sequence. Based on this information and a $60 per hour labor rate, what
would you expect to budget as the cost of the twentieth iteration? The fortieth iteration?

T20 = T1C
= (200,000) (.214)
= 42,800 hours

T40 = T1C
= (200,000) (.150)
= 30,000 hours

The costs for the twentieth and fortieth iterations are found as:

Twentieth iteration: (42,800 hours) ($60 per hour) = $2,568,000

Fortieth iteration: (30,000 hours) ($60 per hour) = $1,800,000

10. You work at a regional health care centre and have been asked to calculate the expected cost for a
software project in your organization. You know that historically, your programmers can handle 5
function points each person-month and that the cost per programmer in your company is $4,000 per
month. The project whose costs you are estimating is based on the following requirements:

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IS333: Project Management Tutorial 09 Questions and Answers 2020

Function Number of Screens Complexity

Input 8 Low
Output 6 Low
Interfaces 15 High
Queries 5 High
Files 25 Medium

Further, you know that the complexity weighting for these functions follows a standard internal
formula, shown as:

Complexity Weighting
Function Low Medium High Total
Number of Inputs 2× = 4× = 6× =
Number of Outputs 3× = 6× = 12 × =
Number of 6× = 12 × = 18 × =
Interfaces
Number of Queries 4× = 6× = 8× =
Number of Files 2× = 4× = 8× =

a. Calculate the total estimated number of function points for this project.
b. Calculate the total expected cost of the project.

 Because we know the estimated complexity for each of the software functions that must be
coded and the number of screens for each function, the calculation is relatively straightforward:
Multiplying, we find that the total function points for this project are estimated to be 414.

Complexity Weighting
Function Low Medium High Total
Number of Inputs 2× 8_= 16
Number of Outputs 3× 6 = 18
Number of Interfaces 18 × _15 = 270
Number of Queries 8× 5 = 40
Number of Files 4× _25 = 100

 Each resource can complete 5 function points per month, so the total number of person-months
needed to complete the project is 414/5 = 82.80.

 We multiply this value by the cost per programmer per month of $4,000 to estimate the total
cost for this project as $331,200.

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