MGT 474 Module 5 Cost Estimating and Budgeting Example

A $1.56 Million Estimate and a $1.85 Million Budget: Reference Class Forecasting for a River Otter Exhibit

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Business Administration Program, Aspen University

MGT 474: Project Management

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Month Day, Year

A $1.56 Million Estimate and a $1.85 Million Budget: Reference Class Forecasting for a River Otter Exhibit

Scope, work breakdown and a 106-week schedule are now in place for Meadowlark's otter habitat, the composite Kansas project this course follows. The charter set a budget of $1.85 million, a figure based on the donor's gift and early guesses. Now the zoo must show whether that budget is realistic. Last time, the lion exhibit's figure came from the board's wishes and was overrun by 40%. This paper builds a detailed estimate, sets contingency with evidence and presents the budget.

Type of Estimate

Kerzner (2017) describes estimates at different stages: order-of-magnitude estimates made early with little information, budget estimates made during planning and definitive estimates built from detailed scope, each with narrower expected accuracy. The charter's $1.85 million was an order-of-magnitude figure. With 34 work packages defined and a concept design complete, the zoo can now build a definitive estimate from the bottom up.

The Bottom-Up Estimate

Each work package was priced by the person responsible for it, using contractor quotes for construction, supplier prices for equipment and staff rates for zoo labor.

Who Estimated, and How

The project manager asked the person or firm responsible for each work package to price it, rather than estimating everything herself. The design firm priced design under its proposal. Two general contractors gave quotes for site work, the pool shell and the holding building, and the lower quote was used. The life support technician priced filtration and pumps from three suppliers. Zoo staff time for project management, animal readiness and opening was priced at loaded hourly rates. Each estimator recorded assumptions, such as the soil conditions found in the site survey, so the estimate could be checked when conditions changed.

Ranges, Not Only Points

Each estimator also gave a low and a high figure. The ranges were narrow for items with firm quotes, such as the viewing window, and wide for the pool shell and site work, where excavation could find groundwater or poor soil. Summing the high figures gives about $1.79 million, which already suggests the base estimate is optimistic. The ranges also show where uncertainty sits, guiding the risk plan in the next module.

Why Estimates Run Low

Flyvbjerg et al. (2002) examined 258 transportation infrastructure projects across 20 countries and found that costs were underestimated in 86% of them, with an average overrun of 28%. The pattern had not improved over 70 years. They concluded that technical error could not explain such consistent bias in one direction and that optimism and strategic misrepresentation, understating costs to win approval, were better explanations. A zoo exhibit is far smaller, but the same pressures exist: a donor gift sets an expected cost, and estimates drift toward it.

Reference Class Forecasting

Flyvbjerg (2006) proposed reference class forecasting as a remedy, drawing on Kahneman and Tversky's work on judgment. Instead of building the forecast only from the project's own details, the inside view, planners identify a class of similar past projects, establish the distribution of their outcomes and place the new project within it, the outside view. For the otter exhibit, the reference class is twelve exhibits with water features built at Meadowlark and three peer zoos since 2010. Their cost overruns against definitive estimates had a median of 12% and an 80th percentile of 22%.

Contingency and Reserve

Applying the reference class to the $1.56 million base gives a 50% chance of finishing under about $1.75 million and an 80% chance of finishing under about $1.90 million. The project budget will be $1.85 million, comprising the base estimate and $290,000 of contingency, about 19%, controlled by the project manager for identified risks. The board will hold a management reserve of $55,000 outside the project budget for unforeseen work, bringing total authorization to about $1.905 million, the 80th percentile.

Who Controls the Money

Contingency belongs to the project manager, who may draw on it for identified risks, such as groundwater or a supplier price increase, and must report each draw monthly with its reason. The management reserve belongs to the board and may be released only by board vote for work no one could have foreseen. Separating the two prevents contingency from being spent casually on scope additions, which the change control process from Module 3 must approve and fund separately.

Phasing and Funding

The check reveals a gap: by the end of 2025, spending reaches $1.52 million, while funding received totals $1.25 million. The zoo will bridge the gap with a short-term line of credit of up to $300,000, repaid from the final installment and campaign gifts.

Comparing With the Lion Exhibit

The lion exhibit's budget of $1.86 million was set before any site survey and included no contingency line. Its overrun of $740,000 came mostly from drainage, design changes and a contractor claim. The otter exhibit's estimate includes a funded site survey, a design frozen with keeper sign-off and a contingency sized from evidence, addressing each cause directly.

Assumptions

The estimate assumes contractor prices hold through 2025, that drainage work matches the site survey and that the city's permit fees do not change. Each assumption is linked to a risk in the risk register.

Updating the Estimate

The estimate will be updated at two points: when final design is complete in October 2024 and when construction bids are signed. Each update will compare new figures with the baseline and explain differences, so the board sees how the forecast is moving long before money is spent.

Conclusion

The bottom-up estimate shows that the otter exhibit's base cost is $1.56 million, but research on cost underestimation warns that base estimates are rarely met. Reference class forecasting sets contingency from evidence rather than hope, and the budget, reserve and funding plan together give the board an honest picture of what the exhibit is likely to cost.

References

Flyvbjerg, B. (2006). From Nobel Prize to project management: Getting risks right. Project Management Journal, 37(3), 5-15. https://doi.org/10.1177/875697280603700302

Flyvbjerg, B., Holm, M. S., & Buhl, S. (2002). Underestimating costs in public works projects: Error or lie? Journal of the American Planning Association, 68(3), 279-295. https://doi.org/10.1080/01944360208976273

Kerzner, H. (2017). Project management: A systems approach to planning, scheduling, and controlling (12th ed.). Wiley.