Cost Estimating
Project cost estimating is normally conducted during project planning stage.However, cost estimates should be continuously reviewed and updated as necessary throughout the project.
Cost estimate is an important output of project cost management.
Types of Cost Estimates
When estimating the cost for a project, product or other item or investment, there is always uncertainty as to precise content of all items in the estimate, how work will be performed, what work conditions will be like when the project is executed and so on.There are several types of cost estimates (shown in Tab 3-2), and general tools and techniques to help create them.
Tab 3-2 Types of Cost Estimates
Rough Order of Magnitude Estimate
Known as a conceptual, preliminary or feasibility estimate, this high-level estimate provides only low accuracy in the range of −25% to +75%.Therefore, if an order of magnitude estimate is$100, it suggests that the actual cost could range from $75 up to $175.This type of estimate is usually prepared without much supporting information, and it represents the type of estimate normally used for project initiation activities.It provides a “rough” indicator for decisions regarding whether or not a project opportunity should be pursued.
Budget Estimate
This mid-level estimate provides for moderate accuracy in the range of −10% to +25%.Therefore, if a budget estimate is $100, it suggests that the actual cost could range from $90 to$125.This type of estimate is prepared when more information about the project becomes available, including such items as scope of work, technical specifications, and requirements documents.It is often used to obtain internal project funding approval and to allocate resources in association with obtaining approval to proceed with the project.
Definitive Estimate
This detailed-level estimate provides significant accuracy in the range of −5% to +10%.Therefore, if a definitive estimate is $100, it suggests that the actual cost could range from $95 to$110.A definitive estimate is prepared from well-defined data and is used for establishing the project budget (cost baseline), submitting cost proposals, and managing change orders, legal claims, and government approval requests.Definitive estimates generally fit well with the bottom-up approach used to develop the project WBS.
Cost Estimating Tools and Techniques
This section includes some of the more common models and techniques that can be considered for project cost estimating.
Analogous Estimating
Known as “top-down” estimating, this model focuses on the use of actual previous similar projects as the basis for estimating the current project cost.It is created through the application of expert or professional judgment and is frequently used when there is a limited amount of information about the project.This technique requires estimators who have the ability to combine perspectives on organizational and industry history to apply the organization’s standards and utilize personal skill.While this method is less costly than other techniques, in most instances it is also less accurate.
Delphi Technique
This is used by several experts working as a team to derive independent cost estimates and then act to resolve any discrepancies to provide for estimates that can be used for the project.The results depend on the experts’ experience as well as their ability to work together as a team.This can be a cumbersome method, but when project team members are the estimators, the process will provide for a group commitment.
Parametric Modeling
This estimating method uses project characteristics (parameters) in a mathematical model to ascertain project costs.Parametric models are usually aligned with an industry or type of work effort (e.g., construction costs per square foot).The models for this estimating method are usually obtained either through internal development or through industry based organizations and vendors.They are more likely to be accurate when the historical information used to develop the model is accurate and when parameters used in the model are readily quantifiable.
Constructive Cost Model (COCOMO)
This estimating model is used in software development.There are three versions of COCOMO, which differ in detail and accuracy—basic, intermediate, and detailed models.
Bottom-up Estimating
Based on and determined for each work package in the WBS, this model produces thorough estimates and minimizes omissions.It does, however, require a comprehensive WBS, and it can yield a false sense of security by equating detail with precision.The cost and accuracy of this technique are driven by the size of the individual work package—smaller work packages increase both cost and accuracy.The project management team must balance the need for additional accuracy against the additional cost of the time needed to produce that accuracy.
Three-point Estimates
The accuracy of single-point activity cost estimates can be improved by considering estimation uncertainty and risk.Three estimates—most likely (CM), optimistic (CO) and pessimistic (CP) are used in PERT to define an approximate range for an activity’s cost.
An expected activity cost (CE) using a weighted average of these three estimates is calculated in PERT analysis:
Cost estimates based on this equation may provide more accuracy, and the three points clarify the range of uncertainty of the cost estimates.