Project Cost Management: Estimating Costs

 

Last time I looked at the process of cost management planning. Today I’m going to look at the next process in the cost management area, that of estimating. Let’s look at the inputs, tools and techniques and outputs for this process as defined by the PMBOK Guide® – Fifth Edition.

The point of this process is to estimate how much your project will cost overall, with as much science as possible. This involves looking at all the options and discounting those that aren’t appropriate, as well as polishing up estimates that will form your final budget.

Inputs

Cost management and human resource plans

Take the cost management plan that you created in the last process as this talks about how costs will be managed and controlled. The most important part of it for this process is the section that defines how you are going to estimate and what level of accuracy you need to find.

The human resource plan will help you establish who is going to be working on the project and you can estimate the people costs based on that. Don’t overlook the reward and recognition elements – it isn’t just base salary that the project has to fund.

Scope baseline

The scope baseline includes:

• The scope statement. This explains what your project is going to do and the constraints. All of these will have an impact on cost as you need to know what you are estimating for.
• The work breakdown structure. This gives the relationship between deliverables. It’s a good way of cross-referencing the project and making sure you have estimated for all the deliverables.
• The WBS dictionary. Use this to work out the exact requirements for each element on the WBS. There is useful information in here which will determine how much something costs.

Project schedule

As you would expect, the project schedule has a bearing on your estimates. If you have to do things faster, you’ll need to put more people and more resources on the project. Take a look at who is doing the work and where it is being carried out and estimate accordingly.

Risk register

How risky is your project? Take the risks into account when estimating the work. The higher the level of novelty or difficulty, the more you should put into your budget. If your risks have firm, costed mitigation plans then these should be taken into account too.

Enterprise environmental factors and organisational process assets

Yes, these turn up again. You’re looking for things that affect how you will estimate such as:

• The market conditions – you may have to pay more for experts in certain countries, for example.
• Published cost data, such as figures about resource rates or information from quotes.
• Estimating policies
• Templates
• Lessons learned
• Historical information.

Tools and techniques

Expert judgement

Wheel out your experts again – you are going to need them to help you estimate. Draw on their expertise and previous experience to help you establish how much things are going to cost. They can also advise on the best way to estimate certain activities.

Estimating

There are several types of estimating that you can use on projects.

Check out these videos on:

Bottom up estimating

Parametric estimating

Analogous estimating

You can also use three-point estimating.

Reserve analysis

This is where you set the levels for the management and contingency reserves.

A contingency reserve is there to account for cost uncertainty, so for example rework when a project deliverable isn’t up to scratch.

Management reserves are for unforeseen work that is added to the scope of the project. You’ll have to set an estimate for both of these reserve types and work out how and when you will call on them, and what the approval process will be.

Cost of quality

This is the place to document any assumptions about the cost of quality.

Vendor bid analysis

This involves looking at bids from vendors and assessing the responses. You might have to add up several quotes from different suppliers, add in contingency and include human resource costs. And, of course, tax, which most quotes will leave off.

Project management software and decision making techniques

You’ve got these tools available to you throughout the project. Your project management software will most likely be capable of managing project budgets – even if you only use a simple spreadsheet. I doubt anyone manages their project budget on paper any longer, but it is worth looking at the different tools available and finding one that you find easy to use.

As for decision making techniques, when it comes to finalising those budget estimates, you’ll need the input from the team so it helps to have some tools available to manage the discussion. Group facilitation techniques and those that help you come to agreement are key and include brainstorming and the Delphi technique.

Outputs

Activity cost estimates

These are your understanding of how much each project activity will cost. You can do them as a summary or in lots of detail, as long as they cover the estimate cost for everything to do with that project task.

Basis of estimates

You’ll have to document how you have come up with your estimates. This is really useful, even if it seems like a headache, because at some point in the future someone is going to ask why you decided that X would cost Y and you can pull out your document and explain.

Project documents updates

Update all your project documentation to date with your cost estimate information. Let’s keep our records tidy now – it will save time in the long term.

Next time we pick up this series I’ll be looking at the process to determine your budget – what to do with your estimates now you have them.