What factors should you consider when estimating the cost of a project?

Answer 1

Estimating project cost means developing an estimate for the monetary resources needed to complete the project work; that is, activities. These estimates are based on the information available at a given time. The estimates in the beginning are less accurate; for example, their accuracy may be only as good as + or - 50 percent. For example, if you say the cost will be $50,000, it could be anywhere between $25,000 and $75,000. As the project moves along and more information becomes available, the cost estimates can be improved to get better estimates.

Estimating project cost means estimating the costs required to complete the project scope by executing schedule activities. Therefore, you need the scope baseline and the schedule baseline for estimating costs. Recall that the scope baseline is constituted by the scope statement, the WBS, and the WBS dictionary, and the schedule baseline is the approved project schedule. The list of items used as input to this process are:

• Human resource plan - The information in the human resource plan useful for estimating costs includes the list of roles and responsibilities, personnel rates, and recognitions and rewards.

• Project schedule - An approved project schedule will give you the information about the resources needed to complete the project work. This information is crucial to make cost estimates. As you learned in the previous chapter, activity resources are estimated by performing the Estimate Activity Resources process. Therefore, the Estimate Costs process should be closely coordinated with the Estimate Activity Resources process, which in turn depends on the Estimate Activity Durations process because activity duration is determined for the given resources.

• Scope baseline - All three components of the scope baseline; scope statement, WBS, and WBS dictionary are useful in estimating the project cost. The scope statement will provide the cost-relevant information, such as project and product acceptance criteria, assumptions and constraints, product description, key deliverables, and project boundaries around the scope.

• Risk register - Both kinds of risks-threats and opportunities have an impact on the cost in the form of risk mitigation costs and revenues or savings from the opportunities.

• Enterprise environmental factors - Enterprise environmental factors relevant to estimating costs include market conditions and published commercial information that will provide the cost of resources, including human resources, materials, and equipment. This will also provide the information related to the availability of products and services and their cost and rates. Supply and demand conditions can also influence the project cost.

• Organizational process assets - This includes the organization's policies regarding cost estimates, cost estimating templates, and information from previous projects, including lessons learned.

Tools & Techniques used in Cost Estimating

Some tools and techniques that can be used in cost estimating and budgeting are:

Analogous estimation - Analogous cost estimation is a technique that uses cost-related variables, such as rate, cost of a component, cost of an activity from similar tasks and activities in previous projects, or cost of a similar project from the past, to measure the same variable in the current project. This technique is useful when very limited component information is available, especially in the beginning of a project, and is usually used for estimating the gross values and not the detailed component-based values. It's generally less costly and less time consuming than other techniques, but it also is less accurate. Its accuracy and reliability improve if the person making the estimate is an expert and the components or activities being compared are actually similar.

Parametric estimation - This is a technique that uses some parameters and statistical relationships among them to make the estimate. For example, if the unit cost is known, say from historical data, the cost of the whole package containing a number of units can be calculated. This technique can generate quite accurate results depending on the accuracy of the quantity of resources and other data that goes into the estimation.

Bottom-up estimation - This technique involves estimating the cost of the parts of a component and then aggregating the cost of those parts to calculate the cost of the whole component. This technique can generate accurate results when you can generally make a better estimate of a part than the whole, which is usually the case when enough information is available.

Contingency reserve analysis - The following two problems are associated with the estimates:

• Estimates are approximations, and approximations imply uncertainty, which means risk.

• Some stakeholders will always push the envelope on the project scope, and each organization has some tolerance for overrunning the objectives. This will mean more cost.

You will need some funds to deal with both of these situations. What comes to your rescue here is called contingency reserve. The contingency reserve, in general, is an amount of resource (funds or time) allocated in addition to the calculated estimates to reduce the risk arising from various sources-for example, from the overruns of project objectives to a level acceptable to the performing organization. In other words, the contingency reserves are the funds reserved to deal with events that are anticipated but not certain. Contingency reserves can be used at the discretion of the project manager. The overall cost estimate should include the contingency reserves.

Vendor bid analysis - Bids from qualified vendors on parts of the project or even the whole project can help in estimating the project cost.

Cost of quality - Cost of quality, should also be considered when making cost estimates. Don't worry about Cost of quality just yet. We will cover it in one of the subsequent chapters.

Three-point estimates - Three-point estimates, discussed in the previous chapter for duration estimates, can also be applied in the same way to cost estimates.