Understanding Cost Estimation

Understanding Cost Estimation

Sandeep Sehgal

Last updated March 10, 2017


Cost Estimate
A cost estimate is the approximation of the cost of a program, project, or operation. In project management (i.e., for engineering), accurate estimates are the basis of sound project planning or we can say that cost estimating is a well-formulated prediction of the probable delivery cost of a specific project/program. Or we can say that in a world of limited funds, as a project manager you're constantly deciding how to get the most return for your investment. The more accurate your estimate of project cost is, the better able you will be to manage your project’s budget.

Therefore, estimating a project’s costs is important for several reasons:

  • It enables you to weigh anticipated benefits against anticipated costs to see whether the project makes sense.
  • It allows you to see whether the necessary funds are available to support the project.
  • It serves as a guideline to help ensure that you have sufficient funds to complete the project.

Inputs to Estimate Project Cost

The Estimate Costs process takes the following inputs -

  • Scope baseline
  • Project schedule
  • Human resource plan
  • Risk register
  • Enterprise environmental factors
  • Organizational process assets

Estimation Techniques

The tools and techniques used for Estimate Costs are:

  • Expert judgment
  • Analogous estimating
  • Parametric estimating
  • Bottom-up estimating
  • Three-point estimates
  • Reserve analysis
  • Cost of quality
  • Project Management estimating software
  • Vendor bid analysis

Expert Judgment

Expert Judgment is an estimation technique where cost estimates from individuals who have previous experience in past similar projects can be utilized. Information from those who have experience in performing the activities becomes valuable for calculating accurate estimates.

Analogous Estimating

Analogous Estimating is an estimation technique with the following characteristics:

  • Estimates are based on past projects (historical information)
  • It is less accurate when compared to bottom-up estimation
  • It is a top-down approach
  • It takes less time when compared to bottom-up estimation
  • It is a form of an expert judgment

Parametric Modeling Estimation

In Parametric Modeling Estimation, you use a mathematical model to make an estimate. These models typically function through the input of parameters that describe the attributes of the product or project in question, and possibly physical resource requirements. The model then provides as output various resources requirements in cost and time.

Bottom-up Estimating

Bottom-up estimation is same as WBS estimation. It involves estimating each work item and adding the estimates to get the total project estimate.

Three point estimate

Three point estimate is used in this process when the project team is attempting to improve estimates and account for risk and estimate uncertainty.

Reserve Analysis

Reserve Analysis is the process where cost reserves are added. Cost contingencies are aggregated and assigned to a schedule activity.

Cost of Quality

This is the total cost to produce the product or a service of the project or program.

Vendor Bid Analysis

This involves gathering cost information from vendors and establishing the estimates.

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About the Author

Sandeep Sehgal , PMP ,Passed CISSP Exam ,IBM Certified Sr. Project Manager , has 22 years industry experience . Currently he is Head Consulting and Training at Pallas Athena. He is a passionate trainer and consultant in the field of leadership/soft skills, project management and information security. Previously he has worked for Sify ,IBM and CSC.

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