Cost Estimation

Project estimates can be broadly classified into;

  • Rough order of magnitude estimates (Ball park estimates)

  • Preliminary estimates

  • Budgetary estimates

  • Definitive estimates

  • Final estimates

Once we know the;

  • Work Breakdown Structure (WBS)

  • WBS Dictionaries

  • Bill Of Quantities (BOQ)

  • Processes to be followed in the project

  • Key engineeriing drawings etc

then we have sufficient details to get into the definitive cost estimate of the project.

The key concepts used for project cost estimation are;

  • Expert judgment – Experts play a major role in project cost estimation

  • Analogous estimation – Estimating an activity by comparing it with a past similar activity

  • Parametric estimation – Based on averages, indexes derived from historical data. For example, Cost / Square feet derived from historical data of past projects.

  • Three-point estimation – Three estimates are developed for every work unit;

o Optimistic (In the best scenario, what will be the cost) - cO

o Pessimistic (In the worst scenario how much will be the cost) - cP

o Most likely (By and large how much will it cost?) - cM

o From these, a single point estimate is arrived at by using any one of the formulas given below;

  • Triangular distribution

      • Estimated Cost (cE) = (Optimistic + Most likely + Pessimistic) / 3

  • Beta ditribution

      • Estimated Cost (cE) = (Optimistic + 4xMost likely + Pessimistic)

  • Bottom-up estimation – Estimating at the lower level of work units and then aggregating them to higher levels. For example, activity costs can be aggregated to the work package levels. Work package costs can be aggregated to the next higher level and finally the project costs.

Alternative’s analysis – Multiple ways of achieving the same result can have varying degree

of impact on cost and schedule. Make or buy decisions is a good example.

Reserve analysis – Provision of cost buffers

Cost of Quality (COQ) – Cost of quality has two parts, Price of Conformance (POC) and Price

of Non-Conformance (PONC). The cost of all proactive actions we take to prevent problems

from happening comes under POC. The cost of all reactive actions we take to correct

problems, or anything that causes re-work, delays, penalties etc come under PONC. While

estimating costs, we must factor in these costs as well.

o COQ = POC + PONC

• Project Management Information System (PMIS) – Scheduling systems, Time accounting

systems, Lessons learned capture systems, Defect management systems, Progress

monitoring & control systems, Procurement management systems are all examples of PMIS.

There are systems which integrates all these into a single system for seamless monitoring

and control purposes.

• Voting – When people have different estimates, sometimes we use voting to decide.

• Basis of estimates – It is a best practice to document the basis for estimates like the

assumed labour costs, transportation costs, productivity etc.

The main output of project cost estimation is the cost baseline.