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
- Uses historical information, expert judgment.
- Think “analogy” – something similar
- Relatively quick and low cost to produce
- 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
- 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
- A cost contingency reserve may be used to account for cost associated risks
Cost of Quality (COQ) PM
- 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):
% of Total
Uncertainty in Cost Estimates
Rough Order of Magnitude (ROM) Estimate
- Usually made during Initiation
- -25% to +75%
- Usually made during the Planning
- -10% to +25%
- 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