Cost Estimation & Control

Estimate

The Art and Science of Estimation: Understanding Estimates in Cost Estimation & Control

In the world of project management, cost estimation and control are crucial for ensuring success. At the heart of this process lies the "estimate" - a prediction of likely outcomes, primarily for project costs and durations. Estimates are not just guesses; they are informed assessments built upon experience, data analysis, and industry knowledge.

The Essence of an Estimate:

An estimate is essentially a quantitative assessment, predicting a likely outcome. It's important to note that estimates are not absolutes. They are inherently uncertain, carrying a degree of inherent risk. Therefore, a key aspect of any estimate is the inclusion of an accuracy range or confidence level. This is often expressed as a percentage, for example, "the estimated cost is $100,000 +/- 15%."

Types of Estimates:

Estimates are often categorized by their level of detail and accuracy. Common types include:

  • Preliminary Estimate: These are rough, high-level estimates used early in the project lifecycle. They provide a broad sense of cost and duration and are often used for feasibility studies or initial budgeting. Accuracy is typically low, with ranges of + or - 30% or more.
  • Conceptual Estimate: More detailed than preliminary estimates, conceptual estimates factor in more specific project requirements. They are used for early design phases and have an accuracy range of roughly + or - 20%.
  • Feasibility Estimate: Used for feasibility analysis, these estimates explore the viability of a project. Accuracy is generally + or - 15%.
  • Definitive Estimate: The most detailed and accurate type of estimate, often used for bidding purposes or final budgeting. These estimates are based on detailed drawings, specifications, and vendor quotes, with accuracy levels typically within + or - 10%.
  • Order of Magnitude Estimate: Often used in the early stages of a project, these are rough estimations, providing a general idea of the expected cost. They typically have an accuracy range of + or - 50% or more.
  • Budget Estimate: Developed after initial planning and design, these estimates provide a more accurate projection of costs used for budget allocation. Accuracy is usually within + or - 15%.

Specific Modifiers in Application Areas:

Certain industries and applications use specific modifiers that imply predetermined accuracy ranges. For instance, in construction, we find:

  • Order of Magnitude Estimate (ROM): This estimate is based on limited information and has an accuracy range of + or - 30% to + or - 50%.
  • Budget Estimate (BE): Based on more detailed information, it has an accuracy of + or - 15% to + or - 20%.
  • Definitive Estimate (DE): This estimate is the most accurate and based on detailed specifications and drawings. It has an accuracy of + or - 10% or less.

The Importance of Accuracy:

The accuracy level of an estimate is crucial. An overly optimistic estimate can lead to project overruns, while an overly conservative estimate can hinder progress by underestimating the true potential of the project.

Conclusion:

Estimates are essential tools in cost estimation and control, providing a foundation for effective planning, budgeting, and decision-making. By understanding the different types of estimates, their inherent accuracy levels, and specific modifiers used in various fields, project managers can make more informed decisions and navigate the uncertainties of project execution with greater confidence.


Test Your Knowledge

Quiz: The Art and Science of Estimation

Instructions: Choose the best answer for each question.

1. What is the primary purpose of an estimate in project management?

a) To guarantee the exact cost and duration of a project. b) To provide a rough guess of project costs. c) To predict likely outcomes, primarily for project costs and durations. d) To determine the feasibility of a project based on available resources.

Answer

c) To predict likely outcomes, primarily for project costs and durations.

2. Which type of estimate is typically used for feasibility studies and has the lowest accuracy?

a) Definitive Estimate b) Feasibility Estimate c) Conceptual Estimate d) Preliminary Estimate

Answer

d) Preliminary Estimate

3. What does a "+/- 15%" accuracy range indicate?

a) The estimated cost is guaranteed to be within 15% of the actual cost. b) There is a 15% chance that the actual cost will be higher or lower than the estimate. c) The estimated cost is likely to be within 15% of the actual cost, but there is some uncertainty. d) The estimated cost is likely to be exactly 15% higher than the actual cost.

Answer

c) The estimated cost is likely to be within 15% of the actual cost, but there is some uncertainty.

4. Which of the following modifiers is typically associated with a construction project, indicating a high level of accuracy and detail?

a) ROM b) BE c) DE d) None of the above

Answer

c) DE

5. Why is it important to consider the accuracy level of an estimate?

a) To ensure that the project is completed on time and within budget. b) To prevent project overruns and underestimations. c) To make informed decisions about project feasibility and resource allocation. d) All of the above.

Answer

d) All of the above.

Exercise: Building a Budget Estimate

Scenario: You are tasked with estimating the cost of a new website development project for a small business.

Instructions:

  1. Identify the key components of the website development project: This could include website design, development, content creation, hosting, domain registration, etc.
  2. Research typical costs for each component: Use online resources, industry benchmarks, or consult with web development professionals.
  3. Create a preliminary budget estimate: Include a range of potential costs for each component and a total project cost.
  4. Calculate an accuracy range for your estimate: Consider the level of detail you have and the potential for changes or unexpected costs.

Example:

| Component | Estimated Cost | Accuracy Range | |---|---|---| | Website Design | $3,000 - $5,000 | +/- 20% | | Development | $5,000 - $8,000 | +/- 15% | | Content Creation | $1,000 - $2,000 | +/- 30% | | Hosting | $500 - $1,000 | +/- 10% | | Domain Registration | $10 - $100 | +/- 50% | | Total Project Cost: | $9,510 - $16,100 | +/- 15% |

Exercice Correction

The example provided demonstrates a basic approach to building a budget estimate. The accuracy ranges reflect the level of detail and uncertainty associated with each component. Remember, the specific costs and accuracy ranges will vary depending on the project scope, complexity, and the market conditions.


Books

  • Project Management Institute (PMI). (2017). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) (7th ed.). Project Management Institute.: A comprehensive guide to project management, including cost estimation and control.
  • Kerzner, H. (2017). Project Management: A Systems Approach to Planning, Scheduling, and Controlling (11th ed.). John Wiley & Sons.: Covers cost estimation and control in detail, with a focus on different estimation techniques and accuracy levels.
  • Cleland, D. I., & Gareis, R. (2015). Project Management: Strategic Design and Implementation (6th ed.). McGraw-Hill Education.: Provides a broad perspective on project management, including a chapter dedicated to cost estimation and control.

Articles

  • "The Art and Science of Estimation: A Guide to Accuracy and Best Practices" by [Author name]: This is the article you provided, which serves as a great introduction to the topic.
  • "Cost Estimation in Construction Projects: A Review" by [Author name]: This article explores cost estimation methods and their application in construction projects.
  • "Estimating Accuracy: A Comparative Analysis of Different Techniques" by [Author name]: This article delves into the accuracy of different estimation techniques and their impact on project success.

Online Resources

  • Project Management Institute (PMI): https://www.pmi.org/ - Offers valuable resources on cost estimation and control, including best practices, standards, and certification programs.
  • The Project Management Institute's PMBOK Guide (Online Version): https://www.pmi.org/learning/library/pmbok-guide-6070 - Provides a detailed overview of cost estimation and control, including relevant concepts, techniques, and tools.
  • Construction Management Association of America (CMAA): https://www.cmaa.org/ - Provides resources on cost estimation and control specific to construction projects.

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