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How is cost estimating and cost management done in the real world A project manager in the real world first must ask one very important question of the project sponsor: How accurate do you want me to be The answer should be based on the time allotted, the information and resources available, and the degree of accuracy the sponsor needs to sell the project (for example, getting the funding/budget approved) Then the PM should look at the scope and deliverables to determine which estimating tools and techniques to use based on the type and complexity of the project It is also important to know if a similar project has been done before Then the PM takes all this information into consideration and usually rolls the details into a software estimating tool, if one is available
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If you are planning to take the PMP exam, not only should you know the different types of estimating tools and techniques, but you should also be able to identify the advantages and disadvantages of each Examples are provided in Tables 7-3 and 7-4
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Here are the three key outputs from the Estimate Costs process:
Activity cost estimates Quantifiable assessments of the probable cost required to complete the work of the project The cost estimates can be presented in various forms for example, at the summary level or in a bill of materials (BOM) with cost broken down into details of labor, facilities, equipment, materials, IT, travel, and so on It can be in a spreadsheet distributed over time by month, by process group, or phase of the project life cycle Analogous Estimating Disadvantages
Less accurate than bottom-up estimating Less detail based on limited information Requires higher experience to do well Difficult for projects with a lot of uncertainty Doesn t consider project differences and requires accurate history from previous projects
Analogous Estimating Advantages
Quick and easy Don t need to estimate at activity level Less costly to create Higher level of management expectation Based on historical information of similar previous projects
Table 7-3
Analogous Estimating
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Bottom-up Estimating Advantages
More accurate than most other methods
Bottom-up Estimating Disadvantages
Takes more time to create and is more expensive
Gains buy-in from the team members because There is a tendency for team members to pad the they create the estimates estimates to provide a comfort zone Developed based on detailed analysis Provides a level of detail that should be easier to monitor and control Requires the scope and activities to be clearly defined and understood by the team members Requires more time to perform the details as they relate to the WBS activities and work packages
Table 7-4
Bottom-up Estimating
Basis of estimates This is where you should show the type of estimating tools and techniques used as well as other supporting details, such as the following:
Documented basis of how the cost estimate was developed bottom-up, top-down (analogous), parametric, and so on and a clearly documented range of expected accuracy (for example, 50 percent or -10 percent to +25 percent) The list of assumptions made by you and the team to come up with the estimate The known constraints (time, cost, resources, permits, compliance, and so on) An indication of the confidence level of the final estimate (for example, high, medium, or low) and the reasons for your conclusion
Project document updates Updates to the scope statement, WBS, WBS dictionary, schedule, risk register, and communications plan based on findings during this process
Reporting Formats and Frequency of Delivery
The format and frequency used to report progress should be applicable to the type and complexity of your project The reports and when they are presented (and in what format) must meet the needs and expectations of the sponsor and other key stakeholders You should fit the report to the need For example, for executive-level reporting, keep it simple and concise I recommend using a milestone report for middle- to high-level managers and customers just to show the status and progress on major events Weekly status reports should provide adequate details for the team to understand the specifics needed and potential delays due to dependencies and so on For monthly financial reports, such as earned value measurements and other sponsorlevel interests, keep the format focused on dollars and cents and show accurate forecasts if possible (with supporting assumptions and justification data)
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