111- Estimate Cost

Overview of Cost Management Plan

• Purpose: Create a cost management plan that guides the estimation of costs for project activities.

• Relation to Other Management Areas: The cost management plan is interconnected with schedule management and activity identification.

Estimating Costs

• Definition: Estimating costs involves developing an approximation of the costs of resources needed for activities (e.g., painting a wall).

• Accuracy: Cost estimates tend to improve as the project progresses, known as progressive elaboration.

• Components of Cost: Cost estimates should account for various aspects including:

  • Labor

  • Materials

  • Equipment

  • Services

  • Facilities

  • Inflation

  • Financing costs

• Illustration of Cost Statement: A cost of $500 must be comprehensive, encompassing all resource costs involved in the activity.

Types of Cost Estimates

• Rough Order of Magnitude (ROM) Estimate:

  • Range: -25% to +75% (least accurate)

  • Example: An estimated cost of $10 could range from $7.50 to $17.50.

• Budgeted Estimate:

  • Range: -10% to +25% (better than ROM)

  • Example: For an estimated cost of $10, it can fall between $7.50 and $12.50.

• Definitive Estimate:

  • Range: -5% to +10% (best estimate)

  • Example: An estimated cost of $10 can range from $9.50 to $11.

Estimation Techniques

• Common Techniques:

  • Expert Judgment: Consulting with specialists to get accurate estimates.

  • Analogous Estimation: Utilizing past similar projects to estimate costs quickly (top-down approach).

  • Bottom-Up Estimation: Detailed breakdown of every aspect of the project for estimating (more accurate but time-consuming).

  • Parametric Estimating: Using historical data to create equations for estimating costs based on variables.

  • Three-Point Estimate (PERT):

  • A method to estimate costs that involves optimistic, pessimistic, and most likely scenarios.

  • Reserve Analysis: Allocating extra funds to cover unforeseen events (generally 10% of total estimated costs).

Cost of Quality

• Importance of Quality: Spending money on proper training and equipment ensures higher quality outcomes in projects.

• Potential Costs of Poor Quality:

  • Defective products may require scrapping or reworking, which incurs additional expenses.

  • Warranty costs can also arise from having to redo deficient work.

Outputs of Cost Estimation

• Individual Costs: Calculate the costs associated with each specific activity, including all components (labor, materials, etc.).

• Basis of Estimates:

  • Provide details about the range and confidence level of the estimates (e.g., notable sources, methodology used).

  • Importance of having a well-documented basis to understand any discrepancies in costs between estimates.

Budget Formation

• After determining individual activity costs, the next step is to consolidate all estimated costs into a comprehensive project budget.

Summary

• Understanding cost estimation is crucial for project management as it influences the overall budgeting process and resource allocation.