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Friday, April 26, 2013

Estimation Techniques and Cost Benefit Analysis

Though Estimation Techniques and Cost Benefit Analysis are not explicitly listed down as tools and techniques for this process, we need to be aware of them to apply the other actual tools and techniques for the process. That is the reason why we have this chapter here amidst all the tools and techniques for this monitor and control risks process.

Estimation Techniques:

As part of examining project performance information and monitoring & controlling risks, we will be using/evaluating many estimating techniques and we need to know them at least at a high level in order to assess the project performance as well as to assess the status of the risks. The following are some of the major estimation techniques that we may use in our projects:

1. Analogous Estimating – This is a technique where we estimate the cost of the current project by applying our expert judgment on the actual costs from previous projects. This is a fast and cheap estimation technique but is not very accurate because the parameters considered while estimating the old project may or may not be applicable for our current project and so the estimates may not be accurate. This technique is typically used when resources to do the estimation are low and we are only looking for a high-level or ball-park kind of estimate.
2. Bottom-Up Estimating – This is a technique where we estimate the individual work packages (From the Work Breakdown Structure) and then the individual numbers are rolled up to the project level for the overall estimate. This kind of estimation is time consuming is much more accurate when compared to the Analogous technique. This technique is typically used when we have abundant budget and time to take up estimation at a detailed level.
3. Parametric Estimating – This is the third technique where we use historic data along with other information to arrive at the estimates for our project. For ex: If one person can build a wall in 10 days alone, how long would it take for 3 people to do? This technique is typically used for repetitive activity where the parameters affecting the work and estimate are well known.

Cost Benefit Analysis

Cost benefit analysis is a common technique that we apply at various stages in the lifecycle of our project. It compares the cost of producing a service, product or result to the benefits that the organization (doing/creating it) receives as a result of it.

For ex: If I were to own a supermarket. If the cost of buying a product is X and the cost of keeping it in my store, taking care of it etc. is Y then, the price at which I sell it to you must be greater than X+Y otherwise there will be no benefit (profit) in selling that product.

Cost benefit analysis must also consider initial costs, marketing and advertising expenses, maintenance and support of the product/service for cost benefit analysis. If I were to consider only the purchase and selling price to do cost benefit analysis of my items and ignore my store rent, electricity bill, worker wages etc., then even if I sell my products at a price greater than the cost I bought it, I might end up losing money.

In real life cost benefit analysis is used in various places. For ex: if the project is facing an issue and we are to implement a fix, we need to understand the cost of the fix, the benefits we gain out of implementing the fix before we go ahead. If the benefits I gain are more than the cost I incur then the fix is beneficial and it makes sense in going ahead with the fix.

Prev: Variance & Trend Analysis

Next: Technical Performance Measurement & Status Meetings

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