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Cost Estimation Methods in Project Management

The problem with estimating is that some uncertainty is always involved. Some of the factors contributing to this uncertainty include:

Project Duration: The longer the project, the higher the uncertainty. Similar to the planning horizon, if a shorter project takes place, the more likely the costs are will be.

Planning Horizon: The longer the planning horizon, the higher the uncertainty. This can be the entire project or just a particular phase, so you can better calculate the costs for the periods similar to the current one.

People: The numbers and skills of people will be a major factor in their calculation of costs. You might even not know the specific people who will be on the project early. This increases the cost estimates ‘ uncertainty

Experience with Similar Projects:: The less experience you have in such projects the more uncertainty you have. You will accurately estimate the cost of the project when you run similar projects.

However, professional project managers use some tools and techniques to develop more accurate cost estimates

1-ANALOGOUS ESTIMATING

The cost estimate is based on historical data from similar projects. Known differences between the projects could be adjusted for the estimate. This type of estimation is generally used in the early project phases and is less accurate than other methods.

2-EXPERT JUDGEMENT

Uses experts ‘ experience and knowledge to estimate project costs. This technique will consider specific factors for the project but it can also be biased.

3-PARAMETRIC ESTIMATING

To develop a cost estimate uses statistical modeling. This uses historical data from key cost drivers to calculate cost/duration for various parameters. For example, in some construction projects, square footage is used.

4-BOTTOM-UP ESTIMATING

The estimation of the project’s overall cost estimate will be used by the costs of each work package which will be summarized or roll-up. In general, this form of calculation is better than other approaches since costs are considered from a more granular perspective

5-THREE-POINT ESTIMATES

Three-point estimates originated with the Program Evaluation and Review Technique (PERT). This method uses three estimates to define an approximate range for an activity cost: Most Likely (Cm), Optimistic (Co), and Pessimistic (Cp). The cost estimate is calculated using a weighted average: Cost Estimate = (Co + 4Cm + Cp)/6

6-RESERVE ANALYSIS

Reserve analysis is used to determine, if any, the extent of contingency reserve that the project should be allocated.

7-COST OF QUALITY

Cost of Quality (COQ) includes money that is expended in the course of the project to prevent losses and money that is spent during and after the project. Assumptions about the COQ can be included in the project cost estimate during cost estimation.

8-VENDOR BID ANALYSIS

Vendor analysis can be used to estimate the cost of the project by comparing bids from multiple vendors

9-PROJECT MANAGEMENT ESTIMATING SOFTWARE

Project management software includes the cost estimation of software applications, spreadsheets, applications for simulation and statistical software tools, which are particularly useful for examining alternatives to cost estimation

 

See Also
Activity-Based Costing (ABC)

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