4 Tools to Estimate Costs in the Project Management

estimate-costs

In the Estimate Costs process, the cost of each project activity is estimated. An interesting thing about this process is that it also uses the same three tools used in the Estimate Activity Duration process. In the estimate activity duration process, you were determining the time taken by each activity and now, in estimating costs process, you have to calculate the total cost of the project.

Since I have written a blog post explaining three common tools between these two processes, I thought it would make more sense if I write a separate blog post for estimating costs process because of the similarities between these two processes.

In this process, the cost of each activity is determined, which includes the cost of human hours, the cost of equipment, and the cost of materials used. It also includes the contingency cost that is the cost to cover the identified risks.

In this blog post, we are going to discuss 4 tools to estimate costs in project management:

  • Analogous Estimating
  • Parametric Estimating
  • Bottom up Estimating
  • Three point Estimating

Analogous Estimating

This technique is used to estimate the project cost when very little detail about the project is available. Therefore, this technique does not provide a very reliable estimation. The primary benefits of this technique are: it is very fast, less costly, and provides a quick result.

In Analogous Estimation, the cost of the project is guessed by comparing it with any similar project previously completed by your organization. Here you will look into your organization’s historical records (i.e. in Organizational Process Assets) for previously completed projects. You will select the project which is closest to your project. Once you get it, by using your expert judgment you will determine the cost estimate of your current project.

The Analogous Estimating is also known as The Top-Down Estimating.

Parametric Estimating

This technique also uses historical information to calculate the cost estimates. However, there is a difference between this technique and the analogous estimation technique.

Parametric Estimation technique uses historical information along with statistical data. It takes variables from the similar project and applies them to the current project. For example, in the previous project, you will see that what the cost of concreting per cubic meter was. Then you will calculate the concrete requirement for your project and multiply it with the cost obtained from the previous project to get the total cost of concreting for your current project. In the same way you can calculate the cost of other parameters (men, materials, and equipment) as well.

The accuracy of this process is better than the analogous estimation.

Three-Point Estimating

This technique is used to reduce the biases and uncertainties in estimating assumptions. Instead of finding one estimate, three estimates are determined and then their average is taken to reduce the uncertainties, risks, and biases.

PERT (Program Evaluation And Review Technique) is the most commonly used method in three point estimation technique.

Three PEART estimates are as follows:

  • Most Likely Cost (Cm): This cost estimate considers everything goes as normal.
  • Pessimistic Cost (Cp): This considers the worst case and it assumes that almost everything goes wrong.
  • Optimistic Cost (Co): This estimate considers the best case and assumes that everything goes better than planned.

PERT Estimate formula is:

Ce = (C+ 4C+ Cp)/6

Where, Ce = Expected Cost

Estimates derived from this technique are better than the two techniques discussed above and provide a more accurate estimate.

Bottom-up Estimating

The Bottom-Up Estimating technique is also known as the “definitive technique”. This estimation technique is the most accurate, time-consuming, and costly technique to estimate the cost. In this technique, the cost of each single activity is determined with the greatest level of detail at the bottom level and then rolls up to calculate the total project cost.

In other words:

Here, the total project work is broken down into the smallest work components.  Its cost is estimated and then finally, it is aggregated to get the cost estimate of the project.

Summary

Analogous Estimation

  • It is the fastest technique to estimate cost but less accurate.
  • This technique can be used with limited information available about the project.

Parametric Estimation

  • This technique uses the statistical relationship between historical data and variables; e.g. cost of painting of wall per square foot.
  • It is more accurate than the analogous estimation.

Three-point Estimation

  • This technique uses three estimates to calculate the average estimate. The three estimates are the most likely cost, the pessimistic cost and the optimistic cost.
  • It reduces the biases, risks, and uncertainties from the estimation.
  • It is more accurate than the Analogous and Parametric estimating techniques.

Bottom-up Estimation

  • This technique is the most accurate technique of all the techniques discussed above.
  • This technique can only be used when every detail about the project is available.
  • This is very time-consuming and costly technique, but gives reliable and most accurate result.

Here, this blog-post about the 4 tools to estimate cost comes to a close. I hope that this article is useful to you. Feel free to post your suggestions in the comments section.

image credit =>FreeDigitalPhotos.net 

Comments

  1. Jacobia O. says

    I concur, you have helped me tremendously in better understanding these techniques.

    I would love to see cost estimating examples of each one of these methodes applied. It would really help me to grow my understanding on how to properly apply them. Plese email me with any information pertaining to such.

    Thank you.

  2. SAMUEL AGARA says

    What is level 4 cost estimate for a project. How can we estimate for a workover and or Drill and completing a new well.

    • Fahad Usmani says

      Although I can not tell you specifics of it, basics are same. Divide the work into work packages, and then activity, assign resources to activities and calculate the cost.

  3. Nadine says

    Thank you very much Fahad. I am blessed to have come across your blog some days before my exam and I am using your notes to revise everything. Your explanation is so simple and plain. Thanks for the good work!!!!

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