Cost estimation is a prediction based on the information you have at that point. They are usually expressed in units of currency but other units like staff hours or staff days are used to compare to currency fluctuations. At the beginning of the project your accuracy will be less and it won't be until you go through later phases of the project you will become more accurate with the costs. (you just know more of the details then)
- Rough order of magnitude (ROM) - an estimation of the projects level of effort and cost to complete it. It will contain an estimate of a plus or minus and presented as a percent.
- example: Early in the project you will have a ROM of -25% to +10% and later in the project you will have a ROM of -5% to +10%
Lets take a look at the Inputs, Tools and Techniques, and Outputs of this process.
1) Cost Management Plan
- Defines how project costs will be managed and controlled. It also includes the method used and the level of accuracy required to estimate activity cost.
2) Human Resource Management Plan
- Provides project staffing attributes, personnel rates, and related rewards/ recognition.
3) Scope Baseline
- Includes the following to help estimate costs
- Project scope statement - product description, acceptance criteria, key deliverables, project boundaries, assumptions and constraints of the project.
- Work Breakdown Structure (WBS) - provides relationship among all the components of the project and the project deliverables
- WBS dictionary
- Other information - contractual and legal implications
4) Project Schedule
- The type and quantity of the resources you will use and the amount of time they will use to complete the work will be determining factors in estimating costs.
5) Risk Register
- Review the risks that could impact the cost of the project.
6) Enterprise Environmental Factors
- Factors that may influence this process includes:
- Market conditions - describes what products, services, and results are available in the market
- Published commercial information - cost rate information from commercial databases
7) Organizational Process Assets
- Assets that may influence this process includes:
- Cost estimating policies
- Cost estimating templates
- Historical information
- Lessons learned
8) Expert Judgement
- Experts can provide cost estimate information and suggest how to reconcile differences between methods of estimating.
9) Analogous Estimating
- Technique for estimating the duration or cost of an activity or a project using historical data from a similar activity or project. (duration, budgets, size, weather and complexity) This technique is less costly, less time consuming and less accurate. It is the most reliable when the previous activity is similar to the one in the current project.
10) Parametric Estimating
- Technique in which an algorithm is used to calculate cost or duration based on historical data and project parameters. This technique can produce higher levels of accuracy.
11) Bottom-Up Estimating
- Method of estimating a component of work at the greatest level of detail and then rolled up to the higher levels for other reporting and tracking purposes
12) Three-Point Estimating
- Technique used to estimate cost or duration by applying an average of optimistic, pessimistic, and most likely estimates when there is uncertainty with the individual activity estimates.
- It came from the program evaluation and review technique (PERT) that uses three estimates to define an approximate range for an activity's duration
- Most likely (tM) - estimate is based on
- the duration of the activity
- given the resources likely to be assigned
- resource productivity
- realistic expectations of availability for the activity
- dependencies on other participants
- interruptions
- Optimistic (tO)- based on analysis of best-case scenario for the activity
- Pessimistic (tP) - based on analysis of the worst-case scenario for the activity
- Formulas used to calculate expected duration (tE)
- Triangular Distribution
- tE = (tO + tM + tP) / 3
- expected duration = (Optimistic + Most likely + Pessimistic) divided by 3
- Beta Distribution
- tE = (tO + 4tM + tP) / 6
- expected duration = (Optimistic + 4 times Most likely + Pessimistic) divided by 6
13) Reserve Analysis
- Cost estimates may include contingency reserves (aka contingency allowances) which are buffers of cost scheduled into the project to allow for uncertainty.
- Contingency reserves - budget within the cost baseline that is allocated for identified risks, which are accepted and for which contingent or mitigating responses are developed. They are to address the unknowns of the budget.
14) Cost of Quality (COQ)
- A method of deterring the cost incurred to ensure quality. The costs included are:
- Prevention and appraisal cost - costs for quality planning
- Failure costs - cost for rework
15) Project Management Software
- Tools that help you assess cost estimating faster
16) Vendor Bid Analysis
- Analysis of what the project should cost, based on the bids from qualified vendors.
17) Group Decision Making
- Team-based approaches help improve estimate accuracy and commitment to the emerging estimates.
- Brainstorming
- Delphi - technique for gathering information and used as a way to reach a consensus of experts on a subject. Participants are anonymous through the use of a questionnaire which is then summarized and recirculated for further comment
- Nominal group techniques - technique that enhances brainstorming with a voting process used to rank the most useful ideas for further brainstorming or for prioritization
18) Activity Cost Estimates
- Quantitative assessments of the probable costs required to complete project work. It estimates all resources that are applied to the activity cost estimate
- direct labor
- materials
- equipment
- services
- facilities
- information technology
- cost of financing (interest charges)
- exchange rates
- indirect costs
19) Basis of Estimates
- Documentation of how the cost estimate was derived that may include:
- Basis of the estimate (how it was developed)
- All assumptions made
- Constraints
- Indication of the range of possible estimate (+_10%)
- Confidence level of the final estimate
20) Project Documentation Updates
- Documents that you may update:
- Risk register
Source: PMBOK 5th ed.
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