Cost estimating methods and applications

¶ … Estimating

A common problem that many organizations will often face is cost over runs. As they have the power to negatively impact the financial viability of the business. In the case study being examined, Woody Carpenter is attempting to expand his business and take advantage of the unique opportunities that globalization is presenting. However, during the process a number of: rivalries and misunderstandings would contribute to major setbacks for the company. At the same time, an economic contraction would hurt the overall bottom line of the business. This would have a negative impact upon long-term contracts and profit margins, as the corporation's reputation of quality would be damaged. In the aftermath of these events, an analysis was conducted to determine what possible issues contributed to the events surrounding the expansion. To fully understand what occurred requires: developing a high level estimate for possible cost over runs, how this estimate should be presented, if life cycle costs were a factor in the project and what could have been done differently. Together, these elements will provide the greatest insights, as to how Woody's company could have avoided a number of difficulties.

Develop a high-level estimate by "guestimation."

Given the fact that Woody did not account for cost over runs, his estimate of $17 million was obviously too low. To effectively determine high level cost estimates, it is advisable to take 25% of the total cost and add it to Woody's number (giving you $21.25 million). This was calculated, by taking the general number of the increase in size of the project. Where, the expansion would require increasing the size of the factory by 25%. Since this was one quarter of the plant, this would be a good number for generally calculating possible cost over runs. ("Project Management Case Study," n.d.)

How should the estimate be presented?

The cost estimate should be presented from the point of concern. The reason why, is once the cost overruns began to become apparent, some kind of evasive actions must be taken. This meant, that once costs began to increase beyond the initial estimate, management should step back and begin to analyze why possible cost overruns are occurring. It is at this point that the possible issues of concern should be presented, as this could affect the financial viability of the company moving forward. ("Project Management Case Study," n.d.)

Is life-cycle costing a factor on this project?

Yes, but only to a certain extent. In this case, the equipment that is being purchased will have a limited life cycle of a few years. That being said, any kind of possible delays from cost overruns, could cause the company to lose money (as far as depreciation is concerned) in the life of the equipment. This is because, the longer the different machines are sitting idle, the larger the losses the company will entail. In this case, life cycle costing could be a major issue, due to the fact that the cost overruns would close the factory down for a certain amount of time. At which point, this would begin to become another factor affecting the project. ("Project Management Case Study," n.d.)

Cashman kept his cash flow chart a secret. Why, and what would you have done?

The reason that Cashman gave for keeping his information locked away was: because all of the expenses were accounted for on a real time basis. This meant that any kind of figures that Cashman has available are only accessible to him. In this case, the fact that he continued to keep these number secret, could help highlight how a lack of communication was apparent. As no one wanted to discuss various ways to keep costs as close to Woody's estimate as possible. This would help to establish a culture of secrecy and divisiveness. Over the course of time, this would have a negative effect upon the company, by allowing various challenges to be ignored. Once this took place, it meant that the low cost estimates would no longer be realistic. At which point, a number of different cost over runs would become increasingly common. Instead, the various facts and figures for the project should have been readily available to everyone. This includes Leadbetter and Faster who decided it was time to go on vacation during the project design stage. Where, the information they possessed would cause a delay of two weeks. In this situation, the communication issues should have been addressed immediately. The reason why is because the lack of communication and secrecy, would create confusion about the project / areas of responsibility. This would contribute directly to the cost overruns. If this kind of behavior does not stop, then individuals who continue to engage in activates that contribute to cost overruns should be fired (such as Ledbetter and Faster going on vacation for two weeks). The fact that their personal lives caused a delay shows, that they have no interest in the project or staying within the budgetary guidelines. As a result, any individual who engages in such actions in the future should face the possibility of dismissal. ("Project Management Case Study," n.d.)