8 Tools And Techniques For Cost Estimation
In my previous article, I have talked about some of the inputs that you need when you are doing cost estimation for projects. In this article, I will be looking at tools and techniques for cost estimation for any project. Follow me as we look at those tools and techniques together in this article.
#1 Expert judgment
One of the major tools that you will need in order to execute your project successfully is the opinion of experts and skilled resources about the project. You as the project manager at times might not know what to do.
You have to rely on expert opinion in order to run a successful project. Some of the expert opinions include ideas from a previous similar project, the information in the industry, discipline and application area as well as cost estimation methods that were used for the project.
#2 Analogous cost estimates
Analogous cost estimating uses values, or attributes, of a previous project that are similar to the current project values. Values and attributes of the project may include scope, cost, budget, duration, and measure of scale such as size, weight among others. Comparison of these project values, or attributes, becomes the basis for estimating the same parameter or measurement for the current project.
#3 Parametric estimating
Parametric estimating uses a statistical relationship between historical data and other variables for project estimation (e.g square footage in construction) to calculate a cost estimate for project work. This technique can produce high levels of accuracy depending on the sophistication and underlying data built into the model. Parametric cost estimates are applied to a total project or a segment of the project, in conjunction with other estimating methods.
#4 BOTTOM-UP ESTIMATING
Bottom-up estimating is a method of estimating a component of work. The cost of individual work packages or activities is estimated at the greatest level of specialized details. The detailed cost is then summarized or “rolled up” to higher levels for subsequent reporting and tracking purposes. The cost and accuracy of bottom-up cost estimating are influenced by the size or other attributes of the individual activity or work package.
#5 THREE-POINT ESTIMATING
The accuracy of single-point cost estimates may be improved by considering estimation uncertainty and risk and using three estimates to define an approximate range for an activity’s cost.
Most likely: The cost of an activity, based on realistic effort assessment for the required work and any predicted expenses.
Optimistic: The cost based on analysis of the best-case scenario of an activity.
Pessimistic: The cost based on analysis of the worst-case scenario for the activity.
Depending on the assumed distribution of values within the range of the three estimates, the projected cost can be calculated using a formula. The commonly used are triangular and beta distributions. The formulas are:
Triangular distribution: Projected Cost= (O + M + P)/3
Beta Distribution: (O + 4M + P)/6
Cost estimates based on the three points with an assumed distribution provide an expected cost and clarify the range of uncertainty around the expected cost.
#6 Data Analysis
Data Analysis techniques that can be used in estimate costs include:
An alternative analysis is a technique used to evaluate identified options in order to select which options or approaches to use to execute and perform the work of the project. An example would be evaluating the cost schedule, resource, and quality impacts of buying versus making a deliverable.
Reserve Analysis: Cost analysis may include contingency reserves (sometimes called contingency allowances) to account for cost uncertainty. Contingency reserves are the budget within the cost baseline that is allocated for identified risks. Contingency reserves can be viewed as part of the budget intended to address a known-unknowns that can affect a project.
For instance, rework for some project deliverables could be anticipated, while the amount of rework is unknown. Contingency reserves may be established to account for this unknown amount of rework.
Contingency reserve can be provided for at any level from the specific activity to the entire project. It may be a percentage of the estimated cost, a fixed number, or maybe developed by using quantitative analysis method.
Also, as more precise information about the project becomes available, the contingency reserve may be used, reduced or eliminated. It should be clearly identified in cost documentations. In addition, they are part of the cost baseline and the overall funding requirement for the project.
Cost of Quality: Assumption about the cost of quality is used to prepare the cost estimates. This includes evaluating the cost impact of additional investment in conformance versus the cost of non-conformance. It can also include looking at short-term cost reductions versus the implication of more problems later on in the project life cycle.
#7 Project Management Information System
The Project Management Information System can include spreadsheets, simulation software, and statistical analysis tools to assist with cost estimating. Such tools simplify the use of some cost estimating techniques helps in facilitating rapid consideration of cost baseline alternatives.
#8 Decision-making
The decision-making techniques can be used in the Estimate costs process include voting. Voting is the assessments process having multiple alternatives with an expected outcome in the form of future actions. These techniques are useful for engaging team members to improve estimate accuracy and commitment to the emerging estimates.
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