In the Estimate Costs process, the cost of each project activity is estimated. An interesting point about this process is that it 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. Now, in estimate costs process, you will calculate the total cost of the project.
In estimate cost process, the cost of each activity is determined, including the cost of human hours, the cost of equipment, and the cost of materials used as well as the contingency cost (i.e. 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
- Three Point Estimating
- Bottom up Estimating
These three estimation methods represent a hierarchical structure where Analogous Estimating represents the least accurate method, and Bottom-up Estimating represents the most accurate method.
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 its lower cost and quick results.
In Analogous Estimation, the cost of the project is estimated by comparing it with similar projects 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 and use your expert judgment to determine the cost estimate of your current project.
The Analogous Estimating is also known as The Top-Down Estimating.
Like Analogous Estimating, Parametric Estimation uses historical data to calculate cost estimates, however, it also utilizes statistical data. It takes variables from similar projects and applies them to the current project.
For example, in a previous project, we take the cost of concrete per cubic meter, then calculate the concrete requirement for the current project and multiply it with the cost obtained from the previous project. This will provide the total cost of concrete for your current project.
In the same way you can calculate the cost of other parameters (men, materials, and equipment).
The accuracy of this process is better than the analogous estimation because it employs more than one data set.
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 PERT estimates are as follows:
- Most Likely Cost (Cm): Considers a normal case and everything goes as usual.
- Pessimistic Cost (Cp): Considers the worst case and assumes that almost everything goes wrong.
- Optimistic Cost (Co): Considers the best case and assumes that everything goes better than planned.
PERT Estimate formula is:
Ce = (Co + 4Cm + Cp)/6
Where, Ce = Expected Cost
Estimates derived from this technique are better than the two techniques presented earlier because it reduces the biased view from the data and provides a more accurate estimate.
The Bottom-up Estimating technique is also known as the “definitive technique”. This estimation technique is the most accurate, time-consuming, and costly technique for estimating 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.
Here, the total project work is broken down into the smallest work components. Each component cost is estimated and then, finally, it is aggregated to get the project’s cost estimate.
- It is the fastest technique to estimate cost but least accurate.
- This technique can be used with limited information available about the project.
- This technique uses the statistical relationship between historical data and variables; e.g. cost of painting a wall per square foot.
- It is more accurate than the analogous 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 bias, risk, and uncertainty from the estimation.
- It is more accurate than the Analogous and Parametric estimating techniques.
- This technique is the most accurate technique of all the techniques presented.
- This technique can only be used when every detail about the project is available.
- This is a time-consuming and costly technique, but gives the most reliable and accurate result.
It is important to note that the more accurate a method, the costlier and time consuming it becomes. For this reason, it’s not always advisable to use Bottom-up Estimating when you are short on time or resources, even though it might be the most accurate.
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.