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Glossary of Technical Terms Used in Project Planning & Scheduling: Basis of Estimate

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Basis of Estimate

Unpacking the "Basis of Estimate" in a Hold: A Detailed Guide

In the world of project management and financial analysis, the "Basis of Estimate" holds a crucial position, particularly when dealing with holds on projects. It's more than just a simple cost figure; it's a comprehensive documentation of the reasoning behind that estimate. This article delves into the significance of the Basis of Estimate within a hold, exploring its key components and how it contributes to informed decision-making.

What is a Hold and Why is the Basis of Estimate Important?

A "hold" in project management refers to a temporary pause in project activities. This can occur due to various reasons, such as budget constraints, unresolved technical issues, or pending approvals. A hold necessitates a thorough evaluation of the project's financial implications, which is where the Basis of Estimate takes center stage.

The Basis of Estimate acts as the foundation for understanding the financial impact of the hold. It provides transparency and clarity regarding the cost estimations involved, allowing stakeholders to:

  • Assess the financial implications of the hold: By understanding the cost estimates, project managers and decision-makers can evaluate the potential financial losses or savings associated with the hold.
  • Make informed decisions: The detailed rationale behind the estimates helps in making informed decisions about the duration of the hold, potential project adjustments, and resource allocation.
  • Negotiate effectively: The Basis of Estimate serves as a solid basis for negotiations with stakeholders, ensuring all parties are aligned on the financial considerations.
  • Track and manage costs effectively: By establishing a clear framework for cost estimation, the Basis of Estimate facilitates effective cost tracking and management throughout the duration of the hold.

Key Components of a Basis of Estimate in a Hold:

A robust Basis of Estimate for a project hold should encompass the following elements:

  • Scope Definition: Clearly define the scope of the project and the specific activities or deliverables affected by the hold. This includes defining what is being put on hold and what is still active.
  • Estimating Methods: Describe the methods used to arrive at the cost estimates. This could involve bottom-up estimation, analogy-based estimation, or parametric estimation.
  • Assumptions: Explicitly state all assumptions made during the cost estimation process. For example, assumptions about labor rates, material costs, or potential delays.
  • Pricing Information: Provide a breakdown of the pricing information used, including labor rates, material costs, and any relevant market data.
  • Cost Breakdown Structure (CBS): Present a detailed breakdown of the project costs, categorized into different cost elements like labor, materials, equipment, and overhead.
  • Contingency Plans: Outline contingency plans for potential risks or unforeseen circumstances that could impact project costs.
  • Justification for Changes: If the hold necessitates changes in the project scope or schedule, provide clear justifications for these modifications.
  • Impact Assessment: Analyze the potential impact of the hold on project timelines, resource availability, and overall project success.
  • Timeline for Hold: Specify the expected duration of the hold, along with any potential factors that could influence its duration.
  • Recovery Plan: Detail the plan for resuming project activities after the hold, including any necessary adjustments or modifications.

Example of a Basis of Estimate:

Project: Website Development for a New Product

Hold Reason: Technical issues with the chosen platform.

Basis of Estimate:

  • Scope: The hold affects the development of the website's e-commerce functionality.
  • Estimating Method: Bottom-up estimation, using historical data for similar projects.
  • Assumptions: Labor costs are based on current rates for experienced developers.
  • Pricing: Developer hourly rates: $100/hour.
  • CBS:
    • Labor Costs: $10,000 (100 hours of development time).
    • Platform licensing fees: $5,000.
  • Contingency: An additional 10% for unexpected delays or changes.
  • Timeline: The hold is expected to last for 2 weeks.

Conclusion:

The Basis of Estimate is an essential element for managing project holds effectively. By providing a clear and detailed rationale for cost estimations, it fosters transparency, informed decision-making, and facilitates successful project recovery. By carefully documenting this crucial information, project stakeholders can navigate project holds with greater confidence and minimize the financial impact on their projects.

Test Your Knowledge

Quiz: Unpacking the "Basis of Estimate" in a Hold

Instructions: Choose the best answer for each question.

1. What is the primary purpose of the Basis of Estimate in a project hold?

a) To determine the exact cost of the hold. b) To provide a clear justification for the hold. c) To estimate the potential financial impact of the hold. d) To track project expenses during the hold.

Answer

c) To estimate the potential financial impact of the hold.

2. Which of the following is NOT a key component of a Basis of Estimate for a project hold?

a) Scope Definition b) Estimating Methods c) Risk Assessment d) Timeline for Hold

Answer

c) Risk Assessment

3. What does the Cost Breakdown Structure (CBS) in a Basis of Estimate represent?

a) A list of all project risks. b) A detailed breakdown of project costs by category. c) A plan for recovering from the hold. d) The timeline for resuming project activities.

Answer

b) A detailed breakdown of project costs by category.

4. Why is it important to include assumptions in the Basis of Estimate?

a) To ensure accuracy in cost estimations. b) To identify potential risks to the project. c) To provide transparency and accountability in the estimation process. d) To track progress during the hold.

Answer

c) To provide transparency and accountability in the estimation process.

5. What is the main benefit of having a detailed recovery plan in the Basis of Estimate?

a) To ensure a smooth transition back to active project work. b) To identify potential delays in resuming project activities. c) To negotiate a fair price for the hold. d) To avoid future project holds.

Answer

a) To ensure a smooth transition back to active project work.

Exercise: Creating a Basis of Estimate

Scenario:

A software development project is put on hold due to a delay in obtaining necessary regulatory approvals. The project team estimates the hold will last for 4 weeks.

Task:

Create a basic Basis of Estimate for this project hold, including the following components:

  • Scope Definition
  • Estimating Method
  • Assumptions
  • Pricing Information
  • Cost Breakdown Structure (CBS)
  • Timeline for Hold

Exercise Correction:

Exercise Correction

**Basis of Estimate**

**Project:** Software Development Project

**Hold Reason:** Delay in regulatory approvals.

  • **Scope Definition:** The hold affects all development activities related to the software's release, including coding, testing, and documentation.
  • **Estimating Method:** Bottom-up estimation using historical data from similar projects and current resource costs.
  • **Assumptions:** * Current salaries for development team remain consistent. * No additional costs incurred for regulatory approval process. * No unexpected delays beyond the estimated 4-week period.
  • **Pricing Information:** * Developer hourly rate: $80/hour. * Tester hourly rate: $60/hour. * Documentation specialist hourly rate: $50/hour.
  • **Cost Breakdown Structure (CBS):** * Development costs: $16,000 (5 developers x 40 hours x $80/hour). * Testing costs: $4,800 (2 testers x 40 hours x $60/hour). * Documentation costs: $4,000 (1 specialist x 40 hours x $50/hour). * Overhead costs (office space, utilities): $2,000.
  • **Timeline for Hold:** 4 weeks.

Books

  • Project Management Institute (PMI). (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) - Seventh Edition. Project Management Institute. (Chapter 8: Cost Management) - Provides a comprehensive framework for cost estimation and management, including the concept of a basis of estimate.**
  • Kerzner, H. (2021). Project Management: A Systems Approach to Planning, Scheduling, and Controlling. John Wiley & Sons. (Chapter 9: Cost Estimation and Control) - Covers cost estimation techniques and best practices, with relevant sections on justifying estimates and developing a strong Basis of Estimate.**
  • Cleland, D. I., & Ireland, L. R. (2016). Project Management: Strategic Design and Implementation. McGraw-Hill Education. (Chapter 7: Cost Estimation) - Offers a practical approach to cost estimation in project management, emphasizing the importance of a clear basis for estimates.**

Articles

  • "The Importance of a Basis of Estimate for Project Holds" (ProjectManagement.com). This article provides a detailed explanation of why a strong Basis of Estimate is crucial for navigating project holds effectively and making informed decisions about the project's future.
  • "How to Create a Basis of Estimate for a Project Hold" (Construction Dive). This article offers practical guidance on developing a detailed Basis of Estimate for project holds in the construction industry. It includes valuable tips on defining scope, identifying cost drivers, and incorporating contingency plans.
  • "Basis of Estimate: Key Components and Best Practices" (Project Times). This article provides a comprehensive overview of the essential components of a Basis of Estimate, highlighting best practices for creating a robust and credible document.

Online Resources

  • ProjectManagement.com - Cost Estimation Techniques: This website offers a wide range of resources on cost estimation techniques, including bottom-up estimation, analogy-based estimation, and parametric estimation.
  • Construction Knowledge (CK) - Cost Estimating: This website provides valuable information and resources on cost estimation for construction projects, including guidelines for developing a comprehensive Basis of Estimate.
  • PMI.org - Cost Management: The Project Management Institute's website offers a wealth of resources on cost management, including articles, webinars, and research papers related to cost estimation and the Basis of Estimate.

Search Tips

  • "Basis of Estimate + Project Hold": This search will return results specifically related to developing a Basis of Estimate in the context of project holds.
  • "Cost Estimation Techniques + [Your Industry]": Replace "[Your Industry]" with your specific industry (e.g., construction, software development) to find resources tailored to your field.
  • "Basis of Estimate + Examples": This search will provide examples of Basis of Estimate documents, offering insights into their structure and content.
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