Cost Management 7.1 Estimate costs

1. Cost Management 7.1 Estimate costs

2. Cost Management 7.2 Determine Budget

3. Cost Management 7.3 Control Costs

Cost estimating involves developing an estimate of the costs of all resources needed to complete the project. The resources that need to be estimated include labor, equipment, materials, facilities, services and any special categories such as contingency or an allowance for anticipated inflation.

The accuracy of estimates tends to improve as a project moves though its life cycle. For instance, an estimate during the initiating phase (known as a ROM or rough order of magnitude) may have a range of accuracy of -50% to +50%. Other ranges of accuracy that are used in some industries and have been tested in the past include:

·         Order of magnitude estimates: “Ballpark” estimates without detailed data, for example, analogous estimates. This estimate is similar to ROM mentioned in the previous paragraph. The range of accuracy is given as -25 to +75% and would be used for initiating or project approval.

·         Budget estimates: Based on slightly better data and used to establish initial funding during the early stages of planning. The range of accuracy is given as -10 to +25%.

·         Definitive estimates: Prepared dorm well defined, detailed data. A bottom-up estimate using estimates of WBS work packages is a common example of this kind of estimate. This estimate would be done in the latter stages of planning and be used to establish a cost baseline. Range of accuracy is -5 to +10%.

Finally, cost estimating potentially includes evaluating trade-offs among alternatives such as spending more money in the design phase to save money during production or operations.

Estimate Costs
Inputs	Tools	outputs
1.       Scope baseline 2.       Project schedule 3.       Human resource plan 4.       Risk register 5.       Enterprise environmental factors 6.       Organizational process assets	1.       Expert judgment 2.       Analogous estimating 3.       Parametric estimating 4.       Bottom-up estimating 5.       Three-point estimating 6.       Reserve analysis 7.       Cost of quality 8.       Project management estimating software 9.       Vendor bid analysis	1.       Activity cost estimates 2.       Basis of estimates 3.       Project document updates

Six key inputs for estimate costs:

1.       Scope baseline: The following three items form the scope baseline and contain information that is necessary for accurate cost estimating.

·         Scope statement: contains the product description, key deliverables, constraints and assumptions. For cost estimating, a decision must be made as to whether the estimates will include only direct costs or will also include indirect costs.

·         WBS: Provides a structure to organize the cost estimates into useful categories (cost accounts or control accounts).

·         WBS dictionary: Provides the detailed information of what is needed to produce the deliverables for each work package.

2.       Project schedule: cost estimates are closely related to what resources will be used and for how long (activity durations).

3.       Human resource plan: Cost estimates may be affected by personnel rates and any associated rewards programs. The HR plan also contains the resource calendar with a staffing plan. This plan provides estimated time frames for various resources.

4.       Risk register:  The risk register should be reviewed so that projected risk mitigation costs may be included in the cost estimates.

5.       Enterprise environment factors: For cost estimating purposes, environmental factors would include marketplace for any conditions (what products are actually available in the marketplace for any portions of the project that may be outsourced) and any commercial databases that contain cost estimating.

6.       Organizational process assets: The following organizational processes, policies, procedures and knowledge bases may affect cost estimating:

·         Cost estimating policies and templates.

·         Historical information about similar products that may help define cost estimates.

·         Lessons learned: This would include cost information from similar projects.

Nine key tools for estimate costs: 

1.       Expert judgment: Expert judgment, guided by historical information on similar project, is used to improve the accuracy of available estimating data. Expert judgment may also assist in choosing the most appropriate estimating method.

2.       Analogous estimating: Previously described as one of the tools for duration estimating, the technique is also used for estimating costs. Key points are:

·         Uses the actual costs from a similar project and adjusts the estimate according to whether the current project is expected to be harder or easier than the previous one.

·         Also called top-down estimating.

·         Done early in the project life cycle in most cases.

·         It is a form of expert judgment.

·         Less costly than other techniques but also less accurate.

·         Most reliable when:

o   The previous projects were similar in fact and not just in appearance.

o   The estimators have the needed expertise.

3.       Parametric estimating: mathematical modeling for the purpose of predicting project costs the models seek factors that are highly correlated, for example, dollars per square foot of living space in residential construction. Parametric models are most reliable when:

·         The historical information used to develop the information was accurate.

·         The parameters in the model are readily quantifiable.

·         The model is scalable (works well for small as well as large projects).

4.       Bottom-up estimating: Estimating the cost of individual work items and then “rolling up” or summarizing the estimates to get a project total. The most widely accepted technique uses the work packages as the “individual items”. As the items estimated get smaller, the estimates usually become more accurate but also more costly to develop.

5.       Three-point estimates: Used exactly in the same way that it was for duration estimates. Three-point or PERT estimates are useful when there is underlying uncertainty in the work. As before, optimistic, most likely and pessimistic estimates are used to calculate an average cost that considers the range of uncertainty in the estimates. The formulas are the same except that the estimates are for costs rather than durations.

6.       Reserve analysis: Cost estimates must consider potential risks in the estimates for individual activities. Extra money can be incorporated into the pan in several ways:

·         Place the money into the budget for an individual work package that is considered risky. This approach is for handling “known unknown,” is referred to as contingency reserve and the money is already in the cost baseline.

·         Place the money in a zero duration (fictitious) activity that is placed at the end of a path for a group of activities. Such activities can be placed at multiple points in the schedule as the planners feel is prudent.

·         Finally, the money may be a separately planned quantity that is not associated with specific work package. This approach is for handling “unknown unknowns,” i.g., situations that are difficult to predict. This amount of money id known as management reserve, is often a percentage of the estimated cost and is not the currently approved cost baseline.

The use of either type of reserve is intended to reduce the chance of a cost overrun and the topic is discussed further in the chapter on risk management.

7.       Cost of quantity: the cost of quality includes activities such as training and audits that are done as part of quality management (which will be covered in more detail in the chapter on quality).

8.       Project management estimates software: Facilitates rapid consideration of the cost estimates for various project scenarios.

9.       Vendor bid analysis: Applies to outsourced work using procurement management processes.

 

Two key outputs for estimate costs:

1.       Activity cost estimates: Quantitative assessments (usually expressed in units of currency) of the like costs of the resource needed to complete the project. Cost estimates may be improved though refinements during the project life cycle. Cost estimates should consider risks and should address the following areas: labor, materials, supplies and services, facilities, information technology and special categories such as inflation and cost reserve.

2.       Basic of estimates: Should include the following information:

·         Description of the work (usually WBS)

·         Basis of the estimate (how it was developed)

·         Assumptions and constraints

·         A range of possible results

·         Confident level (related to the range, i.e., a wide range indicates less confidence in the probability of a given outcome)

3.       Project document updates: documents that may be updated as a result of cost estimating include the risk register.