Part 2: Cost Estimation & Budgeting

Why is cost estimation important in projects?

It ensures feasibility, builds stakeholder confidence, aligns budget with scope and timeline, and supports decision-making and funding approvals.

What is top-down estimation?

Macro-level technique using historical data, expert judgment, or analogous projects to estimate total cost.

What is bottom-up estimation?

Estimating cost at the work package/activity level, then aggregating to get the total project cost.

What is analogous estimating?

Uses past similar projects; formula = past project cost × adjustment factor.

What is parametric estimating?

Uses cost-per-unit × quantity (e.g., $50 per square foot × 1,000 sq ft).

What is expert judgment?

Cost estimation based on experience and intuition from experts.

What is three-point estimating?

Uses Optimistic (O), Most Likely (M), and Pessimistic (P) to calculate expected cost: Formula: (O + 4M + P) / 6.

Where do cost estimates begin in a project?

at the lowest level of the WBS—work packages.

How are cost estimates rolled up?

From work packages ➝ activities ➝ deliverables ➝ total project cost.

What are direct costs?

Costs directly tied to specific project activities.

What are indirect costs?

Shared overhead costs that support multiple projects or departments.

What are fixed costs?

Costs that remain constant regardless of activity volume.Costs that remain constant regardless of activity volume.

What are variable costs?

Costs that fluctuate based on usage or output.

What are recurring vs. one-time costs?

Recurring = ongoing expenses; One-time = upfront investments.

What is a contingency reserve?

Budget set aside for known risks (identified uncertainties).

What is a management reserve?

Money set aside for unknown risks (unexpected events/unknown unknowns).

What is a time-phased budget?

Spreads project costs over the timeline, often shown as an S-curve.

What is a cost baseline?

Approved time-phased budget used to track performance and support Earned Value Management (EVM).

Difference between estimate and budget?

Estimate = predicted cost; Budget = authorized funds available for use.

What are common mistakes in cost estimation?

Ignoring indirect or recurring costs, guessing without documentation, skipping reserves, and not tying estimates to the WBS.