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Friday, November 4, 2011

Chapter 13: Project Cost Estimation


Aim: To understand the Cost Estimation and Budgeting part of Project Management. The processes we will cover in this chapter are:
• Estimate Costs &
• Determine Budget

Estimate Costs:

The estimate cost process associates an expected cost of performing work to each activity. Cost estimates can include labor, materials, equipment, and any other direct costs for project activities. Based on the activity resource and duration estimates, the cost estimates express the cost, normally in monetary amounts, of completing the work of the project. As with all project documents, the cost estimates can change through the project as conditions change. Different events can cause the cost for any activity to go up or down and require the cost estimates for the project to change. The project manager has to ensure that the cost estimates are kept up-to-date to reflect the correct figures at all times.

The table below shows the inputs, tools and techniques, and outputs for the estimate cost process.

Estimate Costs
Inputs Tools & Techniques Outputs

Scope baseline
Project schedule
Human resources plan
Risk register
Enterprise environmental factors
Organizational process assets

Expert judgment
Analogous estimating
Parametric estimating
Bottom-up estimating
Three-point estimates
Reserve analysis
Cost of quality
Project management estimating software
Vendor bid analysis

Activity cost estimates
Basis of estimates
Project document updates
Cost estimates are compiled into the project budget. You probably recognize several estimating techniques from other processes. Three of the techniques used in the estimate costs process are the same basic techniques used in the estimate activity durations process. The other technique, bottom-up estimating, is also used in the estimate activity resources process. Although they are the same techniques, they are applied to different criteria.
• Analogous estimating - This uses actual cost values from similar activities. These activities can be from the same project or another project.
• Parametric estimating - This calculates cost estimates by multiplying the quantity of work or result of work. This type of estimate works best for standardized, and often repeated, activities. Ex: Laying a floor. Cost per tile + cost per hour of the workers pay can be used to arrive at the total cost of laying the floor.
• Three-point estimates - This uses three estimate values for each activity:
o Most likely - The cost most likely to occur
o Optimistic - The cost of the activity if everything goes as planned, or better
o Pessimistic - The cost of the activity in a worst-case scenario
• Bottom-up estimating - This technique calculates cost estimates by adding the costs of each individual work package. The technique starts at the most detailed level and rolls up the costs until a total cost for the project is obtained.

After you know the costs to accomplish the work of the project, you can create the project budget. The determine budget process aggregates the activity cost estimates into a single document for the project. The resulting project budget expands on the preliminary budget from the project charter and provides far more detail.

The table below shows the inputs, tools and techniques, and outputs for the determine budget process.

Determine Budget
Inputs Tools & Techniques Outputs

Activity cost estimates
Basis of estimates
Scope baseline
Project schedule
Resource calendars
Contracts
Organizational process assets

Cost aggregation
Reserve analysis
Expert judgment
Historical relationships
Funding limit reconciliation

Cost performance baseline
Project funding requirements
Project document updates
Exam Watch:
Don’t confuse the estimate costs process with the determine budget process. The determine budget process aggregates all of the activity cost estimates to result in a budget baseline against which your project costs will be measured.

You can learn more about the Estimate Cost & Determine Budgets processes by Clicking Here

Prev: Chapter 12

Next: Chapter 14

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