Cost estimation in project management is the process of forecasting the cost and other resources needed to complete a project within a defined scope. Cost estimation accounts for each element required for the project and calculates a total amount that determines a project’s budget.
Estimating is generally where all the cost data is generated for the project. Based on one of AACE’s recommended practices, shown in Table 1, estimates are usually classified in 5 levels based on increasing levels of definition.
However, you should keep in mind that a good estimate includes not only the cost but also all data related to the way the project was envisioned to be carried out.
In most cases, this exercise is completed early in the project lifecycle, the approved for expenditure (AFE) funds obtained and all that data promptly filed away and forgotten.
In the early stages of the project, various methods are applied to developing estimates based on available data. This includes capacity factoring, equipment factoring and parametric estimating.
The project then moves on to its execution phase and the best path forward is chosen, neglecting in most cases the differences between that path of execution and the path envisioned while creating the budget, that is the estimate.
If a project cost management system such as a software tool is used, and it encompasses all the units of project controls, it would not be possible to ignore the execution changes after the budget is baselined from the estimate data. This is because as the data is the same, the inherent software structure forces any changes to be flushed out and be clearly differentiated from the baseline. Therefore, the cost estimate will also be updated with the changes during execution, which will keep the estimate dynamic and accurate.
4 Principles of Cost Estimation
1. Cost estimation is used to predict the quantity, cost and price of the resources required by the scope of a project. A project might be any process that is started to perform work activities and/or create assets. The accuracy of the estimate depends heavily on the level of project scope definition: as the design and conditions of the project become better defined, so do the estimated values. Think of the 5 estimate classes of AACE shared above.
2. Cost estimation is needed to provide decision-makers with the means to make investment decisions, choose between alternatives and to set up the budget during the front end of projects. For this, estimates made by vendors and contractors need to be validated by clients as well. In later phases of the project, the budget estimate is used as a baseline to assess the performance of a project.
Related to this principle, it is always challenging to collect and read the huge amount of cost data, which doesn’t help with the decision making. Analyzing and visualizing the cost data opens the doors to making the data useful and meaningful. The dashboards of a project control software system are the data-driven graphical representations of a project; dashboards can provide decision-makers with a quick overview of a project’s progress and turn the data into decision points.
3. Estimating is done by breaking down the total scope of a project in manageable parts, to which resources can be assigned and cost. There are standardised ways of breaking down a project, like the Work Breakdown Structure (WBS) and the Cost Breakdown Structure (CBS), but depending on the needs of the project team and external parties multiple structures are often implemented to align reporting and sharing of cost data.
4. A cost estimate is more than a list of costs. It also includes a detailed Basis of Estimate (BOE) report that describes the assumptions, inclusions, exclusions, accuracy and other aspects that are needed to interpret the total project cost. Otherwise, it would be a meaningless number. The BOE is required to communicate the estimate to the various parties involved in the decision making but is also handy during closeout when the performance of the project is compared with other projects. It is the vital part often overlooked, that allows you to learn from your experience and mistakes.
Cost estimation, however, is easier said than done. An accurate estimation method can be the difference between a successful plan and a failed one. Keep these 4 principles in mind and you already have a framework to start making estimates. Make sure to set up the estimate in a structured way to allow for an easy transition into project cost estimating software, which will help you make more solid and accurate estimates in the long run.
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