7.2 Estimate Costs

"The process of developing an approximation of the monetary resources needed to complete project activities."

The definition shown above in italics is taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Fifth Edition, Project Management Institute Inc., 2013

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Fifth Edition, Project Management Institute Inc., 2013 Figure 7-4 Page 200

The process of developing an understanding of what resources are needed for the project activities identified.
Usually expressed in monetary terms, other units such as person hours or staff days can often be used.
Project resources include labor, materials, equipment, meeting rooms, facility fees and services

Tools and Techniques

Analogous Estimating

Uses historical information, expert judgment.
Think “analogy” – something similar
Relatively quick and low cost to produce

Used when:

Only limited information available.
Similar project information available
Estimators have right experience.

Bottom Up Estimating

Estimates the cost for each work package.
Estimates are then rolled up (aggregated).
Same technique as used for resource estimating

Parametric Estimating

Used to predict total project costs by using project's characteristics in a mathematical model.
Cost/m2, number of bricks/wall, plumbers/2 storey building.
Degree of accuracy depends on the integrity of the information used

Other Tools and Techniques in your Toolkit

Three Point Estimating

Triangular Distribution = (O + M + P) / 3
Beta Distribution = (O + 4M + P) / 6

Reserve Analysis:

A cost contingency reserve may be used to account for cost associated risks

Cost of Quality (COQ) PM

Estimating Software

Simplify cost estimations and allow for rapid review of estimate alternatives

Vendor Bid Analysis

Responses from bidders will indicate what a project or deliverables should cost

Group Decision Making Techniques

'Soft' Estimating – Analogous Approach

Examples breakdown of a project's stage effort (in a software project):

Stage	% of Total
Preliminary Survey	1
Feasibility Study	6
Systems Analysis	14
System Design	16
Programming	27
Systems Testing	13
Acceptance Testing	11
Implementation	12

Uncertainty in Cost Estimates

Rough Order of Magnitude (ROM) Estimate

Usually made during Initiation
-25% to +75%

Budget Estimate

Usually made during the Planning
-10% to +25%

Definitive Estimate

Identified when rolling up the WBS
-5% to +10%

Need to engage team members using group decision making techniques to improve accuracy of estimates

How to Estimate Project Costs

Some simple steps to take:

Involve work package owners
Gather relevant information
Determine which technique to use.
Identify alternative costing options.
Determine which measurement units will be used
Consider possible risks impacting on costs
Assign all cost estimates to their account
Add project overheads – 5% for meetings; 15% for management time; contingency (10 – 12%)
Adding in company overheads (margin for profit, etc…) will be done later

Basis of Estimates

Providing clear details on how we arrived at the costs estimated:

How we developed it – the method used
Assumptions made
Constraints applied and why
Range of estimates used and the degree of confidence in using them
Degree of confidence in the final estimate

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