Estimate CostsEstimate costs process in PMBOK

The WBS defines the scope of the project and hence what costs are needed for each deliverable.  The schedule shows when the costs will be incurred, and the human resources shows the direct and indirect labour rates, the chosen risk responses will also incurred costs.As you might imagine, the costs of a project is derived from various process sources and these include:

  • Create WBS
  • Develop schedule
  • Plan human resources
  • Identifying risks

 

Of course, these are not the only sources of cost, other examples include:

  • Labor costs
  • equipment costs
  • Costs of supplies
  • Costs of materials
  • Travel costs
  • Training costs
  • Overhead costs
  • Contingency reserve costs

The estimate costs process is often combined with the determine budget process for smaller projects.

For medium to large projects, you may need a cost management plan (sometimes called a budget plan), that describes how the costs of tasks will be estimated, budgeted and controlled.  It describes the various cost methods and techniques to be used within a particular project.

The cost management plan will prescribe how and when task information is to be collected.  It contains valuable measure scope and budgeted performance.  Another aspect to be covered is when procured item costs are to be recorded in the plan.

It will include planning information metrics such as currency, which estimate costs are to be included contracts on the project, and any links to cost tracking systems within the organisation

At the start, when the project is first initiated, you would not have much cost details, but this will be better understood as the project progresses into the planning group

So what is an estimate?  It is defined as a quantitative assessment of the likely amount or outcome.  An cost estimate to should always include some indication of accuracy, such as the actual figures, plus or minus x per cent.

Inputs to the Estimate Costs process.

The accuracy of cost estimates depends on the details and accuracy of the project scope, which is the scope baseline.  The scope will also advise of any constraints, for example budget, dates or resources.

The WBS defines the project deliverables, but importantly, the WBS dictionary contains technical details and the resources required for those deliverables.  It will also contain information on any non-human costs such as tools and licences.

The project schedule contains all the information derived from the Estimate Activity Resources, and Estimate Activity Duration’s processes.  The project schedule as well as the human resource plan provides staffing information such as hourly rates.

The risk register

The risk register will provide information on two types of costs:

  • The costs associated with risk responses actions in order to mitigate a risk
  • Contingency costs which are used to provide money for contingent actions should they be required

Estimate costs outputs.

It is important to include not just to estimate costs but also to capture  the assumptions and basis of estimates.

As a result of estimating cost, other documentation may need to be updated such as modifying the project scope and for updating the risk register.

It is likely that you will want to categorize the various cost types, and I would suggest using the same list as above:

  • Labor cost
  • equipment cost
  • Cost of supplies
  • Cost of materials
  • Travel cost
  • Training cost
  • Overhead cost
  • Contingency reserve cost

Tools and techniques for the Estimate Costs process.

As part of carrying out the estimate costs process, you will be wanting to look at alternative project approaches such as outsourcing to determine the most efficient and effective resource in for project.

I have already mentioned the fact that estimating gets more accurate as the project progresses, and although there is no defined statement of accuracy, industry standards tend to suggest the following:

Rough order of magnitude (ROM) –  minus 25% to plus 75%

Budgetary – minus 10% to plus 25%

Definitive – minus 5% to 10%

An important technique for estimating is the use of expert judgment based on an individual expert’s knowledge and skills and experience.

Also a useful tools such as Microsoft project or spread sheets such as Microsoft excel can help pulls together the often complex sets of costs arising from both non-human and non-human expenditure.

Direct costs.  As the name suggests these are directly attributable to your project and includes labour, material handbook cost.

Indirect costs.  Such cost includes and management salaries for example.

There are seven basic estimate costs tools and techniques:

Analogous estimating.

This uses expert judgement and historical information to develop costs estimates.  These are derived from previous projects or similar phases and apply factors such as size, weight, and complexity.

Typical analogous estimating approaches might be the cost of laying a pipeline from a previous project.  Let us assume that it cost $100,000 per mile in length.  If your current project also involves laying a pipeline but over very rough terrain, you could use the previous actual costs figure, add 20% for the terrain difficulty factor, and apply it to the length of the pipeline in your current project.

Parametric estimating.

This applies a statistical relationship based on past data to calculate an estimate.  Supposed that building costs were based on $1000/square foot, then determining the square feet of the building in your current project, you could then estimate cost.

Bottom up estimating.

This is the most accurate form of estimating, but can only be used accurately once you have detailed information about the scope for project.  It can be quite time-consuming.

Using the WBS, you start by estimating the cost for each resource needs to create be deliverables, sum up all of the deliverables, include a contingency reserve if you have one, and backward eight months into a bottom up estimate.

Three-point estimating (also known as PERT estimating).

Sometimes it does not make sense to ask for a single figure for an estimate, possibly because there are too many unknowns involved.  The solution is the use three estimates:

Best Case (optimistic).  This assumes there will be no delays or risk events.

Most likely.  As the name suggests, this is based on real world experience.

Worst case (pessimistic).  This assumes delays, expensive resources, and rework.

Since the most likely estimate has a greater chance of occurring it is common to multiply it by four, then add to optimistic and pessimistic estimates (and because there are six variables), divide the answer by six.

Reserve analysis for estimate costs

If you have a large, complex and risky project it is better to determine an extra cost amount by for increased and unforeseen cost. This works in a similar way to risk contingency, where the reserve is only used if needed.

Cost of Quality.

This takes into consideration sunk costs needed to comply with quality requirements such as prevention and appraisal costs.  Also includes the tasks associated with noncompliance such as performing re-work or scraping used materials.

Vendor Bid analysis.

This covers the procurement costs such as analyzing vendor bids.

Want more information? CLICK HERE For My PMP Primer!

I hope you found my article on the Estimate Costs process informative and useful!