Cost Estimating

Test Your Knowledge

Cost Estimating Quiz:

Instructions: Choose the best answer for each question.

1. What is the primary purpose of cost estimating? a) To determine the profitability of a project. b) To predict the financial resources needed for a project. c) To allocate resources to different project phases. d) To identify potential risks and mitigate them.

2. Which of the following is NOT a benefit of accurate cost estimating? a) Informed decision making. b) Improved project scheduling. c) Reduced risk of cost overruns. d) Increased project complexity.

3. Which cost estimating technique relies on historical data from similar projects? a) Bottom-up estimating. b) Analogous estimating. c) Parametric estimating. d) Expert judgement.

4. What is the role of contingency planning in cost estimating? a) To allocate funds for unexpected events and risks. b) To determine the project's overall budget. c) To identify potential cost overruns. d) To ensure the project stays on schedule.

5. What is the primary focus of cost control in project management? a) Minimizing project expenses. b) Ensuring that the project stays within the allocated budget. c) Identifying potential cost overruns. d) Allocating resources effectively.

Cost Estimating Exercise:

Scenario: You are tasked with estimating the cost of a website development project. The project scope includes:

• Website design and development (including 5 web pages)
• Content writing for all pages
• Hosting and domain registration
• Search engine optimization (SEO)

Task:

1. Create a simple Work Breakdown Structure (WBS) for this project, breaking it down into manageable tasks.
2. Using any cost estimating technique you prefer, estimate the cost of each task.
3. Calculate the total project cost, including a 10% contingency for unforeseen expenses.

Note: You can use hypothetical costs for this exercise. Focus on applying the cost estimating process and creating a realistic budget.

Techniques

Chapter 1: Techniques

Cost Estimating Techniques: A Toolkit for Accurate Project Forecasting

Cost estimating techniques are the tools used to translate project requirements into concrete financial figures. Each technique offers unique strengths, catering to different project complexities and data availability. Understanding these techniques is crucial for project managers to choose the most suitable approach and ensure accurate cost projections.

1. Analogous Estimating: Drawing from Past Experiences

Analogous estimating leverages historical data from similar projects. This technique is ideal for early-stage estimations when detailed information is limited.

• How it works: Identify a comparable past project with known costs. Adjust those costs based on the differences in scope, complexity, and other factors.
• Advantages: Simple and quick, requiring minimal data. Useful for preliminary budget estimations.
• Disadvantages: Relies heavily on the similarity of projects. Prone to inaccuracies if the chosen past project isn't truly analogous.

2. Parametric Estimating: Using Statistical Relationships

Parametric estimating utilizes historical data and statistical relationships to calculate cost estimations. This technique is often employed for projects with well-defined components and predictable cost drivers.

• How it works: Identify relevant cost drivers (e.g., square footage, labor hours) and establish their relationship with cost. Apply these relationships to estimate the cost of the current project.
• Advantages: Provides a more objective and statistically-driven estimation. Useful for projects with a high degree of historical data.
• Disadvantages: Requires accurate data on historical projects and cost drivers. Can be less accurate for unique or complex projects.

3. Bottom-up Estimating: Building from Individual Tasks

Bottom-up estimating is a detailed and precise technique where costs are estimated for each individual task within the project. It involves breaking down the project into its smallest components and estimating the cost of each element.

• How it works: Develop a comprehensive work breakdown structure (WBS) and estimate the cost of each task, including labor, materials, and other expenses. Aggregate these costs to arrive at the total project cost.
• Advantages: Highly accurate and transparent. Provides a detailed breakdown of costs for better understanding and control.
• Disadvantages: Time-consuming and resource-intensive. Requires detailed information and expertise on individual tasks.

4. Expert Judgement: Leveraging Knowledge and Experience

Expert judgment relies on the experience and insights of experts in the relevant field. This technique is particularly valuable for projects with unique or complex requirements where historical data is limited.

• How it works: Gather input from experts with proven knowledge and experience in similar projects. Consolidate their assessments to derive a cost estimate.
• Advantages: Provides valuable insights and perspectives from experienced professionals. Useful for projects with unique or emerging technologies.
• Disadvantages: Can be subjective and dependent on individual expert bias. Requires careful selection and validation of experts.

5. Activity-Based Costing (ABC): Aligning Costs with Activities

Activity-based costing (ABC) focuses on allocating costs based on the activities involved in the project. This technique is especially helpful for projects with diverse activities and varying levels of resource consumption.

• How it works: Identify the activities needed for the project and determine the cost drivers for each activity. Allocate costs based on the time spent and resources consumed for each activity.
• Advantages: Provides a more accurate understanding of cost drivers and resource usage. Facilitates better cost control by identifying activities with high costs.
• Disadvantages: Can be complex to implement, requiring detailed activity tracking and analysis.

Choosing the Right Technique: A Balanced Approach

The choice of cost estimating technique should be informed by project characteristics, available data, and project phase. Combining multiple techniques can often yield more accurate and reliable results.

• Early-stage estimation: Analogous or parametric techniques may suffice.
• Detailed estimation: Bottom-up estimating is ideal for detailed cost breakdowns.
• Complex or unique projects: Expert judgment and ABC methods can provide valuable insights.

By understanding and appropriately applying cost estimating techniques, project managers can establish realistic budgets, manage project risks effectively, and ultimately drive project success.