CHE620

Project
Management

Chapter 7
Budgeting the
Project

BY : SITI FATMA ABD KARIM

 In this chapter, we will first examine some
different methods of budgeting and cost
estimating, as used for projects. Then we will
consider some ways to improve the cost
estimation process, including some technical
approaches such as learning curves and tracking
signals. We will also discuss some ways to misuse
the budget that are, unfortunately, common.
 BUDGETING THE PROJECT

Purpose of budget
Having finished the planning for the
technical aspects of the project,
there is one more important To obtain the resources needed to
element of planning to finish that accomplish the project ’ s
then results in the final go - ahead objectives.
from top management to initiate
the project.
A plan for allocating organizational
resources to the project activities.
The project budget is nothing more
than the project plan, based on the
It ties the project to the
WBS, expressed in monetary terms
organization’s aims and objectives
and it becomes a part of the Project
through organizational policy.
Charter.
 BUDGETING THE PROJECT – EXAMPLE
For example, NASA’s Mars Pathfinder - Rover mission embedded a new NASA policy —
to achieve a set of limited exploration opportunities at extremely limited cost.

1976 1997

• NASA’s two Viking • Pathfinder – Rover mission

– Mars Lander cost only $ 175 million to
missions cost $ 3 develop, a whopping 94
billion to develop. percent reduction.

How this happen?

The difference was the change in organizational policy from a design - to - performance
orientation to a design - to - cost orientation.

Another example?
 BUDGETING THE PROJECT – AS A TOOL
Act as a tool for upper management
Is a necessary managerial tool, but it is
To monitor and guide the project
not sufficient

Appropriate data must be collected and accurately reported in a timely manner or

the value of the budget
To identify current financial problems To anticipate upcoming ones will be lost.

This collection and reporting system must be as carefully designed as the initial
project plans because late reporting, inaccurate reporting, or reporting to the
wrong person will negate the main purpose of the budget.

In one instance, the regional managers of a large computer company were

supposed to receive quarterly results for the purpose of correcting problems in the
following quarter. The results took four months to reach them, however, completely
negating the value of the budgeting - reporting system.
Negating : to cause something to not be effective
 METHODS OF BUDGETING

what resources the project will

require
what quantities of each will be
Is the
needed
Budgeting process of
forecasting when they will be needed

how much they will cost

 METHODS OF BUDGETING
Tables 4-1 and 4-2 depict the direct costs involved in making a short documentary film.

Table 4-1 shows the cost per unit of usage (cost/hour) of seven
different personnel categories and one facility. Note that the
facility does not charge by the hour, but has a flat rate charge.
METHODS OF BUDGETING

Table 4-2 shows the

resource categories
and amounts used for
each activity required
to make the DVD. The
resource costs shown
become part of the
budget for producing
the documentary film.
 METHODS OF BUDGETING

Simple budgeting:
Cost estimation
usually based on Budgeting to build a house (is
experience calculated based on the area
– 1000ft2 X RM…..)

Hazardous budgeting:
Difficult budgeting:
Forecasting a budget for a
Development of a
multiyear project such as a
control system for a
large product line or service
new computer
development project

because the unknowns can

Project budgeters do not usually
have tradition to guide them.
Projects are, after all, unique
activities.
escalate quickly with changes
in technology, materials,
prices, and even the findings
of the project up to that
point.
 WHERE IS PM IN BUDGETING?
PM cannot expect the
accounting
department to make
special allowances for
his or her individual
project.
Every firm has its own rules about
how overhead and other indirect
costs are charged against projects.
Every firm has its ethical codes.
Most firms must comply with the
Sarbanes - Oxley Act (SOX) and the
Health Insurance Portability and
Accountability Act (HIPAA).
 WHERE IS PM IN BUDGETING?

Although accounting will charge

normal expenditures against a
PM must simply particular activity’s account number,
become completely as identified in the WBS, unexpected
familiar with the overhead charges, indirect expenses,
organization’s and usage or price variances may
accounting system, as suddenly appear when the PM least
painful as that may be. expects it, and probably at the worst
possible time.
 BUDGETING VIEW FROM THREE DIFFERENT PERSPECTIVES
(Hamburger, 1986)

The PM recognizes a cost once a commitment is made to pay someone

for resources or services, for example when a machine is ordered.
The PM is concerned with commitments made against the project
budget.

The accountant recognizes an expense when an invoice is received —

not, as most people believe, when the invoice is paid.
The accountant is concerned with costs when they are actually incurred.

The controller perceives an expense when the check for the invoice is
mailed.
The controller is concerned with managing the organization ’ s cash
flows.
 ACCOUNTANT PERSPECTIVE

Another aspect of accounting that will become important to the

unaware PM is that accountants live in a linear world. When a project
activity has an $ 8,000 charge and runs over a four - month period, the
accounting department (or worse, their software) sometimes simply
spreads the $ 8,000 evenly over the time period, resulting in a $ 2,000
allocation per month. If expenditures for this activity are planned to be
$ 5,000, $ 1,000, $ 1,000, and $ 1,000, the PM should not be surprised
when the organization ’s controller storms into the project office after
the first month screaming about the unanticipated and unacceptable
cash flow demands of the project!
 APPROACHES FOR GATHERING THE DATA FOR BUDGETING
PROJECT : TOP-DOWN BUDGETING

The top - down approach to These managers estimate the overall

budgeting is based on the
collective judgments and
experiences of top and middle
managers concerning similar
past projects.
project cost by estimating the costs of the
major tasks, which estimates are then
given to the next lower level of managers
to split up among the tasks under their
control, and so on, until all the work is
budgeted.
 ADVANTAGES : TOP-DOWN BUDGETING

Aggregate budgets Budgets are stable

can often be as a percent of total
developed quite allocation
accurately

The experience and judgment of

the executive accounts for small The statistical
but important tasks to be factored distribution is also
into the overall estimate stable, making for
high predictability

Small yet costly

tasks do not need
to be individually
identified
 APPROACHES FOR GATHERING THE DATA FOR BUDGETING
PROJECT : BOTTOM-UP BUDGETING

Different
responsible
person at
different level

In bottom - up budgeting, the WBS identifies the elemental

tasks, whose resource requirements are estimated by those
responsible for executing them.
 APPROACHES FOR GATHERING THE DATA FOR BUDGETING
PROJECT : BOTTOM-UP BUDGETING

• In this method, elemental tasks, their schedules, and their

individual budgets are constructed following the WBS or project
action plan

• The people doing the work are consulted regarding times and
budgets for the tasks to ensure the best level of accuracy

• Initially, estimates are made in terms of resources, such as labor

hours and materials

• Bottom-up budgets should be and usually are, more accurate in

the detailed tasks, but it is critical that all elements be included
 ADVANTAGES : BOTTOM-UP BUDGETING

Involvement is a good
managerial training
Individuals closer to technique, giving junior
the work are apt to managers valuable
have a more experience
accurate idea of
resource
requirements

The direct involvement of low-level managers in

budget preparation increases the likelihood that
they will accept the result with a minimum of
aversion (someone or something that arouses
strong feelings of dislike) Apt : appropriate . suitable
 ADVANTAGES - DISADVANTAGES : BOTTOM-UP BUDGETING

However, is common in It is also a

organizations with a good
participative management managerial
philosophy and leads to training
better morale, greater technique
acceptance of the resulting for aspiring
budget, and heightened project and
commitment by the project general
team. managers.
Bottom - but risk the
up budgets chance of
are usually overlooking
more some small
accurate in but costly
the tasks.
detailed
tasks
 TRUE PERSPECTIVES IN REAL ORGANIZATION

Unfortunately, true bottom -

up budgeting is rare. Upper
level managers are reluctant
to let the workers develop the
budget, fearing the natural
tendency to overstate costs,
and fearing complaints if the
budget must later be reduced
to meet organizational
resource limitations.
Moreover, the budget is upper
management’s primary tool
for control of the project, and
they are reluctant to let others
set the control limits.
Example : Bottom-up and top-down project budgeting
process flow in Project Costing.

A
Example : Bottom-up and top-down project budgeting
process flow in Project Costing.
A
 Contrast the
disadvantages of
top - down
budgeting
and bottom - up
budgeting.
 Disadvantage of bottom-up and top-down project
budgeting

The main disadvantages of top-

down budgeting are that:

• Significant errors may be made

for low-level tasks,
• A lower level of budget
acceptance is likely due to
limited participation, and The main disadvantage of
• It provides little training bottom-up budgeting is the
opportunities in budgeting for risk of overlooking (failed to
junior managers. notice) tasks.
 WHAT WE CAN CONCLUDE ABOUT PROJECT BUDGETING?

The budget is not a

Most organizations
sufficient tool for
Difficult Task use top - down
controlling a
budgeting
project
Due to the lack of Top - down
precedent and budgeting allows the
experience with budget to be
unique project controlled by people
undertakings Because better
who play little role in
acceptance and
designing and doing
commitment to
the work required by
PM need to the budget.
the project. It should
understand the be obvious that this
organization’s will cause problems
accounting system —and it does.
 WHAT WE CAN CONCLUDE ABOUT PROJECT BUDGETING?

They both have advantages, and

the use of one does not preclude
The recommend condition is the use of the other. Making a
the organizations should
employ both forms of single budget by combining the
developing budgets. two depends on setting up a
specific system to negotiate the
differences.
 COST ESTIMATING

• In this section, we look at the details of the

process of estimating costs and some dangers
of arbitrary cuts in the project budget.

• We also describe and illustrate the difference

between activity budgeting and program
budgeting.
 WORK ELEMENT COSTING

• The task of building a budget is relatively straightforward but

tedious. Each work element is evaluated for its resource
requirements, and its costs are then determined.

• For example, suppose a certain task is expected to require 16

hours of labor at $ 10 per hour, and the required materials
cost $ 235. In addition, the organization charges overhead for
the use of utilities, indirect labor, and so forth at a rate of 50
percent of direct labor. Then, the total task cost will be $ 235
[(16 hr $ 10/hr) 1.5] $ 475.

Tedious
 WORK ELEMENT COSTING

1 In some organizations, the PM

adds the overhead charges to the
Differ between budget. In others, the labor time
2
organization and materials are just sent to the
accounting department and they
run the numbers, add the
appropriate overhead, and total
the costs.

Although overhead was charged here against direct labor, more recent
accounting practices such as activity - based costing may charge portions of the
overhead against other cost drivers such as machine time, weight of raw
materials, or total time to project completion.
3
 WORK ELEMENT COSTING

Direct resource costs such as for materials and machinery needed solely for a
particular project are usually charged to the project without an overhead add -
on.

On top of this, there is often a charge for GS & A (general, sales, and
administrative) costs that includes upper management, staff functions, sales and
marketing, plus any other costs not included in the overhead charge. GS & A may
be charged as a percentage of direct costs, all direct and indirect costs, or on
other bases including total time to completion.

Fully costed (estimate the price of) task =

direct costs for labor + machinery + resources (materials) + plus overhead
charges + GS& A charges.

The full cost budget is then used by accounting to estimate the profit to be
earned by the project.
 WORK ELEMENT COSTING
– WHAT PM DO?
Construct a budget of
direct costs for his or
her own use.

This budget provides the information required

to manage the project without being
confounded with costs over which he or she
has no control.

Note that the overhead and GS & A effect

can result in a severe penalty when a
project runs late, adding significant
additional and possibly unexpected costs
to the project.
 WORK ELEMENT COSTING – WHAT PM NEED TO UNDERSTAND
ORGANIZATION’S ACCOUNTING SYSTEM?

For example, when the state of Pennsylvania contracted

for the construction of the Limerick nuclear power
generating facility in the late 1980s, they included such
an incentive fee provision in the contract.

This provision stated that any savings that resulted

from finishing the project early would be split between
the state and the contractor.

As a result, the contractor went to extra expense and

trouble to make sure the project was completed early.
The project came in 8 months ahead of its 49 - month
due date and the state and the contractor split the $
400 million savings out of the total $ 3.2 billion budget.
From the case above, why
Project Manager play an
important role?

Submit your answer in

the forum title “Role of
PM in understanding
organization’s
accounting system” by
today.

Individual opinion/
answer
 IMPROVING THE PROCESS OF COST ESTIMATION

There are two fundamentally different ways to

manage the risks associated with the chance
events that occur on every project:

– The most common is to make an allowance for

contingencies - usually 5 or 10 percent
– Another is when the forecaster selects “most likely,
optimistic, and pessimistic” estimates
 TYPES OF ESTIMATION ERROR
Bias - a systematic error where the
chance of overestimating and
underestimating are not likely to be
equal

Please give one

example of bias in cost
There are two generic types of estimation
estimation error

Random error - where overestimates

and underestimates are likely to be
equal
 THE IMPACTS OF BUDGET CUTS

During budgeting, why budget estimate is not equal to actual

requirement?

There are three reasons why this happens.

1) Jobs always look easier, faster, and cheaper to the boss than to the
person who has to do them (Gagnon and Mantel, 1987).

2) Bosses are usually optimistic and never admit that details have
been forgotten or that anything can or will go wrong.

3) Subordinates are naturally pessimistic and want to build in

protection for everything that might possibly go wrong.

Optimistic : confident
Pessimistic : having or showing a lack of hope for the future; expecting bad things to happen
 FUNDING NON-PROFITABLE PROJECTS – why?

To obtain the To be in a good

parts or position for a
service portion follow-on
of the work contract

To get the
To improve a
organization’s
competitive
“foot in the
position
door”

There are
several reasons To broaden a
To develop
that firms would product line or
knowledge of
choose to fund a a line of
a technology
project that is business
not profitable
 FUNDING NON-PROFITABLE PROJECTS – OTHER ISSUES

• Non-profits have greater limitations when it

comes to accessing lines of credit and having
Access to a positive cash flow.
• As such, their ability to establish
funds sustainability in operations is challenged as
they are susceptible to finance-related
hiccups.

Ability • Non-profits have a harder time attracting

and keeping talent.
Recruit and • This has often been linked to the
compensation scale and opportunities for
Maintain growth as compared to for-profit
Talent enterprises.
 FUNDING NON-PROFITABLE PROJECTS – OTHER ISSUES

• Many non-profits are lead by rotating boards and

Succession it is difficult to maintain consistency in approach.
• As such, we find a constantly revolving agenda of
Planning work in the hands of staff members.

• Due to the limitations on finance, many non-

profits are not able to invest in the systems
Infrastructure (automated or otherwise) needed to streamline
operations.

• Some non-profits are plagued with significant

inter-personal issues due to internal politics and
Internal these issues not only hurt relationships but also
Politics make it extremely difficult to define a unified
strategy for the organization.
 AN ITERATIVE BUDGETING PROCESS

1 3 The subordinate is encouraged by

the superior’s positive response
Usually the initial step and then surrenders some of the
toward reducing the protection of the budgetary “slop”
difference between
the superior’s and the
subordinate’s
estimates is made by
the superior

2
The superior agrees 4 This is a time consuming process,
to be “educated” by especially when the project
the subordinate in manager is negotiating with several
the realities of the subordinates
job
 CATEGORY/ ACTIVITY BUDGETING VS PROGRAM BUDGETING

• The traditional organization budget is either category oriented or

activity oriented.
• Often based upon historical data accumulated through an
accounting system.
• With the advent of project organizations, it became necessary to
organize the budget in ways that conformed more closely to the
actual pattern of fiscal responsibility.
• Two kinds of project budget exist, usually depending on where
projects report in the organization:
1) Category / Activity budget
2) Program Budget
 CATEGORY/ ACTIVITY BUDGETING VS PROGRAM BUDGETING

• Under traditional budgeting methods, the budget could

be split up among many different organizational units.

• This diffused control so widely that it was almost

nonexistent.

• This problem gave rise to program budgeting which

alters the budgeting process so that budget can be
associated with the projects that use them.
 PROGRAM BUDGETING

Definition: A budget prepared with program descriptions instead

of expense line items.

Program budgeting aggregates income and expenditures across programs (projects)

Program budgets show expenses by task and time period. Program budgets are then
aggregated by reporting unit.
 PROGRAM BUDGETING – EXAMPLE
Project Budget by Task and Month
I = Start Node
J = End Node

Monthly Budget (£)

Task I J Estimate 1 2 3 4 5 6 7 8

A 1 2 7000 5600 1400

These budgets usually
B 2 3 9000 3857 5143
take the form of a
C 2 4 10000 3750 5000 1250 spreadsheet with
D 2 5 6000 3600 2400 standard categories
E 3 7 12000 4800 4800 2400
disaggregated into
“regular operations”
F 4 7 3000 3000 and charges to the
G 5 6 9000 2571 5143 1286 various projects
H 6 7 5000 3750 1250
I 7 8 8000 2667 5333
J 8 9 6000 6000
75000 5600 12607 15114 14192 9836 6317 5333 6000

Aggregation by program
 IMPROVING COST ESTIMATE

“ Each person who has a task to do must own

the design and execution of that task and must
be held accountable for its timely achievement.
Accountability is the twin of empowerment.”
- McCarthy

If empowerment is to be trusted, it must be

accompanied by accountability.
IMPROVING COST ESTIMATE
 IMPROVING COST ESTIMATE

These improvements are not

There are numerous restricted to cost estimates,
ways to improve the but can be applied to almost
process of cost all of the areas in project
estimation ranging management that call for
from simple but estimating or forecasting any
useful forms and aspect of a project that is
procedures to measured numerically; e.g.,
special techniques task durations, the time for
such as learning which specialized personnel
curves and tracking will be required, or the
signals. losses associated with
specific types of risks should
they occur.
 IMPROVING COST ESTIMATE

Most estimates are in error

Why?
because of simpler reasons

behavioral
and
organization
al reasons,
failing to having to
Example not using such as
common allow for replace
of available informal
sense problems and workers
reasons tools incentive
contingencies midstream
systems that
reward
inaccurate
estimates.
IMPROVING COST ESTIMATES - FORMS

Can be considerable help to

the PM in obtaining accurate
estimates, not only of direct
costs, but also when the
resource is needed, how
many are needed, who
should be contacted, and if
it will be available when
needed.

The information can be

collected for each task on an
individual form and then
aggregated for the project as
a whole.
 IMPROVING COST ESTIMATES – LEARNING CURVES

• Studies have shown that human performance usually

improves when a task is repeated.
• In general, performance improves by a fixed percent each
time production doubles.
• More specifically, each time the output doubles, the worker
hours per unit decrease to a fixed percentage of their
previous value.
• That percentage is called the learning rate
• The project manager should take the learning curve into
account for any task where labor is significant
 IMPROVING COST ESTIMATES – LEARNING CURVES

• Suppose a firm wins a contract to supply 25 units of a complex electronic

device to a customer. Although the firm is competent to produce this
device, it has never produced one as complex as this.

• Based on the firm ’ s experience, it estimates that if it were to build

many such devices it would take about four hours of direct labor per unit
produced. With this estimate, and the wage and benefit rates the firm is
paying, the PM can derive an estimate of the direct labor cost to
complete the contract.

• Unfortunately, the estimate will be in considerable error because the PM

is underestimating the labor costs to produce the initial units that will
take much longer than four hours each.
 IMPROVING COST ESTIMATES – LEARNING CURVES

The reason for the error is the learning exhibited by humans when they
repeat a task.

In general, it has been found that unit performance improves by a fixed

percent each time the total production quantity doubles. More specifically,
each time the output doubles, the worker hours per unit decrease by a fixed
percentage of their previous value . This percentage is called the learning
rate, and typical values run between 70 and 95 percent.

The higher values are for more mechanical tasks, while the lower, faster -
learning values are for more mental tasks such as solving problems. A
common rate in manufacturing is 80 percent.

For example, if the device described in the earlier example required 10

hours to produce the first unit and this firm generally followed a typical 80
percent learning curve, then the second unit would require .80 x 10 = 8
hours, the fourth unit would require 6.4 hours, the eighth unit 5.12 hours,
and so on.
 IMPROVING COST ESTIMATES – TRACKING SIGNALS
People do not seem to learn by experience, no matter how much they
urge others to do so. PMs and others involved with projects spend much
time estimating — activity costs and durations, among many other things.

There are two

types of error in
those estimates.

Systematic errors
Random error – error caused by
bias
 DEFINITION OF THE ERRORS

• Random errors are errors in measurement that lead to

measurable values being inconsistent when repeated
measures of a constant attribute or quantity are taken. The
word random indicates that they are
inherently unpredictable, and have null expected value,
namely, they are scattered about the true value, and tend to
have null arithmetic mean when a measurement is repeated
several times with the same instrument.

• Systematic errors are predictable, and typically constant or

proportional to the true value. If the cause of the systematic
error can be identified, then it can usually be eliminated.
 IMPROVING COST ESTIMATES – TRACKING SIGNALS

Each business has its forecast model to provide the forecast.

However, forecasters need to monitor a forecast to determine
when it might be advantageous to change or update the
model. A tracking signal provides a method for doing this by
quantifying bias. The most frequently used tracking method is
to compute the cumulative forecast error divided by the value
of MAD at that point in time:

Tracking Signal = Σ (At-Ft)/MAD

MAD (mean absolute deviation) is a common measure of
forecast error.
IMPROVING COST ESTIMATES – TRACKING SIGNALS

Calculation of a
number called the
tracking signal
can reveal if there
is systematic
bias in cost and
other estimates
and whether the
bias is positive or
negative.
 What is the
important of cost
estimates to
project manager?

Knowing this can

then be quite helpful
to a PM in making
future estimates or
on the critically
important task of
judging the quality of
estimates made by
others.
 OTHER FACTORS

Anywhere from about 60- 85% of projects fail to meet their

time, cost, and/or specification objectives.

Common causes for Project Failure

Wildly
optimistic
Failure to
Arbitrary estimates in Changes
include an
and Scope order to in Bad
allowance
impossible creep influence the resource luck
for waste
goals project prices
and spoilage
selection
process
 CAUSES – APPROACH

Causes Approaches
1. Changes in Managerial approach to this problem is to
resource prices increase all cost estimates by some fixed
percentage.

Other approach:
A better approach, however, is to identify
each input that has a significant impact on
the costs and to estimate the rate of price
change for each one. The Bureau of Labor (or
“ deflators” ) for a wide range of commodities,
machinery, equipment, and personnel
specialties.
 CAUSES – APPROACH

Causes Approaches
2a) Overlooking the Determine the individual rates of
need to factor into the waste and spoilage for each task
estimated costs an rather than to use some fixed
adequate allowance for percentage.
waste and spoilage
2b) A similar problem is Situation:
not adding an Not only will new members go
allowance for increased through a learning period, which
personnel costs due to increases the time and cost of the
loss and replacement of relevant tasks, but professional
skilled project team salaries usually increase faster than
members. the general average.
 CAUSES – APPROACH

Causes Situation
As workers are hired, either for additional capacity or to replace
2c) Brooks ’ s “ mythical those who leave, they require training in the project environment
man - month ” effect. before they become productive. The training is, of course,
informal on - the - job training conducted by their coworkers who
must take time from their own project tasks, thus resulting in
ever more reduced capacity as more workers are hired.

Type of
training – Finally,
Hire Training informal worker
worker needed OJT by capacity
current reduced
worker
 CAUSES – APPROACH
Causes
3) Behavioral possibility -
The project cost estimator
gives a more “ optimistic ”
picture than reality
warrants.
4) Misses the profit goals
Situation
The excitement to get a project
approved, or to win a bid, or
perhaps even due to pressure from
upper management
Example :
Late on a major delivery to an
important customer and paid a huge
penalty as well as being threatened
with the loss of future business.
 CAUSES – APPROACH

Causes Situation
5) Probabilistic element in For example, projects such
most projects as writing software require that every
element work 100 percent correctly for the
final product to perform to specifications.
In programming software, if there are 1000
lines of
code and each line has a .999 probability of
being accurate, the likelihood of the final
program working is only about 37 percent!
6) Bad Luck Sometimes, there is plain bad luck. What is
indestructible, breaks. What is
impenetrable,
leaks. What is certified, guaranteed, and
warranteed, fails. The wise PM includes
allowances for “ unexpected contingencies.
”
 CAUSES – APPROACH
Causes
6) Some managers arbitrarily
to cut carefully prepared time
and cost estimates.
7) Overrun
Situation
Managers rationalize their actions by such
statements as “ I know they have
built a lot of slop in those estimates, ” or “ I
want to give them a more challenging
target
to shoot at. ” This is not effective
management. It is not even good common
sense.
1) underestimates of the initial project
scope, typical of government projects; and
(2) lack of control, particularly costs,
including conflicts of interest between the
public and private sectors.
 SUMMARY

1. The intent of a budget is to communicate

organizational policy concerning the organization’s
goals and priorities.

2. There are a number of common budgeting

methods: top-down, bottom-up, and the program
budget.

3. Firms will fund projects whose returns cover direct

but not full costs in order to achieve long-run strategic
goals of the organization.
 SUMMARY

4. If projects include repetitive tasks with significant

human input, the learning phenomenon should be taken
into consideration when preparing cost estimates.

5. The learning curve is based on the observation that the

amount of time required to produce one unit decreases a
constant percentage every time the output doubles.