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Types of Estimates
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The cost of work (activities) should be estimated using the same tools and techniques introduced in 6, such as one-cost, analogous, parametric, and three-point estimates, with an additional type called bottom-up estimating
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Things to Know about Estimating Cost
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As project managers, we love checklists; here is a list that I find especially helpful (excerpted from Rita Mulcahy s PMP Exam Prep, Sixth Edition):
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The cost estimates should be based on the WBS to improve accuracy The cost estimates should be done by the person (or persons) doing the work (get accuracy and buy-in) Use historical information when available from similar projects A cost baseline should be set and only changed after approved changes
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7: Project Cost Management
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The budget should be managed to the cost baseline for the project Estimates are more accurate if tied to work packages rather than at higher levels Corrective action or preventive action should be recommended when cost problems occur (as with other types of problems around scope, schedule, quality, and so on) A project manager should always analyze requirements and not just accept them as delivered by management (they should be realistic and achievable) Padding is not an acceptable project management practice The project manager must meet any agreed-upon estimates (need to keep estimates realistic)[3]
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Types of Cost
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A number of different types of cost can be associated with project management This is also consistent with other real-world applications besides project management The categories are listed next It is recommended you study them and be able to differentiate one from the other for the PMP or CAPM exam:
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Variable costs Costs that change with the amount of work or production (for example, the cost of salaries, supplies, equipment, and materials) Fixed costs Fixed costs don t usually change (for example, fixed monthly fee for maintenance agreement on computers, monthly lease payments, and rent) Direct costs Costs that are directly associated with the project (for example, material, project labor, travel, cell phones, or other discretionary costs) Indirect costs Costs that are incurred across multiple projects This can include facilities, Project Management Office (PMO) costs, employee benefits, and overhead costs
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Things to Consider When Estimating Costs
Value analysis and risk are often not considered when costing a project As mentioned earlier, project managers usually do a good job at estimating direct cost; however, they often underestimate (or miss altogether) some of the key ingredients (components), such as the following:
Cost of managing the project (the PM s time, meetings, documentation, and so on) Cost of quality (cost of nonconformance; rework, scrap cost, and so on)
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Training or company-related meetings not related to the project Office expenses for space, phones, computers, raised floor, and network costs Estimated profit and ROI (return on investment), ROA (return on assets), or ROS (return on sales) Overhead (indirect costs)
Estimate Costs Tools and Techniques
The list of tools and techniques for cost estimating are similar to the Estimate Activity Durations process from 6, with just a few differences We will focus on a few of the items in the following list in greater detail in this section:
Expert judgment Analogous (top-down) estimating Parametric estimating (unit of measure) Bottom-up estimating Three-point estimating Reserve analysis Cost of quality (COQ) Project management estimating software Vendor bid analysis (covered in 12)
Bottom-up Estimating Bottom-up estimating is considered very accurate because the estimate is provided by the subject matter expert (SME) or person doing the work The estimates collected from the team are then rolled up to make the aggregate cost estimate for the project The accuracy of the cost can be influenced by the size and complexity of the individual activity or work package Parametric Estimating Parametric estimating uses a statistical relationship between historical data and other variables to calculate an estimate for activity parameters, such as cost, budget, and duration This technique usually provides a high degree of accuracy because you have historical information to draw from As always, you can use this estimating method with other methods, as needed, to reach a level of confidence in the accuracy of your cost estimate for the entire project
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