As per project management lifecycle, cost estimation happens under Planning process group. But I have seen that in real life the cost is agreed much earlier at the time of awarding contract based on business case. Project Management Plans are finalized at much later stage. I have handled some projects (FPP) where costs are already agreed upon before I am asked to plan, execute and manage a project. Can someone help me understand this? Saving Changes...
Vipin- remember that process groups aren't project phased and processes in the Planning group might be executed at any time in a project's lifetime.
Kiron
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1 reply by Vipin Verma
Sep 09, 2021 10:37 PM
Vipin Verma
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Sorry if I sound Nieve, but I think I have learnt something today. To discuss further, the project management lifecycle has 5 phases - I,P,E,M&C, C. I see that the (accurate) cost estimates can be prepared even before the Project Charter is signed or the project management plans are develop, i.e. before project Initiation and at the time of preparing a business case. Does it mean that in this scenario a project manager only has to manage and control cost and he/she do not require to prepare a cost management plan ? or the cost management plan will be limited to a scope of manage and control cost only(unless a change is required in cost estimates)?
Another question in my mind is about WBS/work packages/Activities that will be definite later after the project is initiated. In bottom up estimation, these are looked at to get a cost estimate. So in above scenario, costs will be estimated based on parametric or analogous estimates by business analyst and project manager?
The more I deep dive, the more complex it is. Thank you for you reply.
Saving Changes...
Sergio Luis ConteHelping to create solutions for everyone| Worldwide based OrganizationsBuenos Aires, Argentina
First of all, take into account what @Kiron stated above. Two key roles are the main actors: business analyst and project manager. The estimation of a project starts before a project formally exists because time and costs must to be included in the business case or the name you call to the document that will be the basement for accept or not accept to invest time and effort into the initiative. At this time a person who knows about project management must be included not matter she/he will not be assigned to the project if it is approved. After that, estimation happend along all the project life cycle. I had the opportunity to be part of the PMI´s Practice Standard for Project Estimating and I think is a good point to take as a reference. On the other hand, my recommendation is going to Barry Bohem´s work mainly the Cone of Uncertainty if you are searching for something that will help a lot in the real life. Bohem´s work was created for software but it was taken for lot of other disciplines. Saving Changes...
Vipin- remember that process groups aren't project phased and processes in the Planning group might be executed at any time in a project's lifetime.
Kiron
Sorry if I sound Nieve, but I think I have learnt something today. To discuss further, the project management lifecycle has 5 phases - I,P,E,M&C, C. I see that the (accurate) cost estimates can be prepared even before the Project Charter is signed or the project management plans are develop, i.e. before project Initiation and at the time of preparing a business case. Does it mean that in this scenario a project manager only has to manage and control cost and he/she do not require to prepare a cost management plan ? or the cost management plan will be limited to a scope of manage and control cost only(unless a change is required in cost estimates)?
Another question in my mind is about WBS/work packages/Activities that will be definite later after the project is initiated. In bottom up estimation, these are looked at to get a cost estimate. So in above scenario, costs will be estimated based on parametric or analogous estimates by business analyst and project manager?
The more I deep dive, the more complex it is. Thank you for you reply.
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1 reply by Kiron Bondale
Sep 10, 2021 7:41 AM
Kiron Bondale
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Vipin -
The only situation here accurate cost estimates would be developed before a charter is signed would be if it is a fixed cost project (i.e. a maximum of $X is available). Otherwise, cost estimates are usually ROMs prior to charter preparation at best.
Regardless, the PM should plan how to manage costs - estimation would still be done, at least to validate the original estimate and to identify cash flow/funding requirements.
And yes, in the case where cost estimates are defined pre-project, that would be done using either an analogous estimate OR a pure guess :-)
Sorry if I sound Nieve, but I think I have learnt something today. To discuss further, the project management lifecycle has 5 phases - I,P,E,M&C, C. I see that the (accurate) cost estimates can be prepared even before the Project Charter is signed or the project management plans are develop, i.e. before project Initiation and at the time of preparing a business case. Does it mean that in this scenario a project manager only has to manage and control cost and he/she do not require to prepare a cost management plan ? or the cost management plan will be limited to a scope of manage and control cost only(unless a change is required in cost estimates)?
Another question in my mind is about WBS/work packages/Activities that will be definite later after the project is initiated. In bottom up estimation, these are looked at to get a cost estimate. So in above scenario, costs will be estimated based on parametric or analogous estimates by business analyst and project manager?
The more I deep dive, the more complex it is. Thank you for you reply.
Vipin -
The only situation here accurate cost estimates would be developed before a charter is signed would be if it is a fixed cost project (i.e. a maximum of $X is available). Otherwise, cost estimates are usually ROMs prior to charter preparation at best.
Regardless, the PM should plan how to manage costs - estimation would still be done, at least to validate the original estimate and to identify cash flow/funding requirements.
And yes, in the case where cost estimates are defined pre-project, that would be done using either an analogous estimate OR a pure guess :-)
It seems confusing because there are many possible ways cost estimating may be done. The "best" way depends on the problem itself.
A high level analogous or parametric may be used prior to signing a contract if the stakeholders believe the risk level is acceptable. Developing the plan and the resulting cost estimate costs money too, so doing a detailed estimate on a project that may never be delivered wastes valuable resources. Having the contract in place prior to the design work leading to better estimates may be desirable such as in a time and materials contract, but can also results in cost overruns that cannot be charged to the customer. Customers may also provide change requests throughout the project which still require estimation prior to changing the contract. That is an example of planning and initiating anywhere in the project lifecycle, not just an early phase.
As the work statement develops and the WBS grows in layers, additional estimates are developed based on the increased knowledge. In expensive projects, gates may be added at critical points where a "Go/No-Go" decision is made to prevent excess losses if later developments show the original business case is not valid. Additional costs may or may not be charged to the customer, and may be used to adjust budgets of the performing teams.
Cost management plans also vary significantly. On some projects, we may need to offset cost increases with cost reductions incrementally over time. Some contracts may be signed when we know a major cost reduction is required in the detailed planning stage to make a viable business case. In some cases, I have had to revise the entire business model due to cost overruns such as taking a loss on one customer, to open markets for future sales.
Since the differences in projects make some estimating and control methods better suited to the specific case than others, this is one are where PMs require business acumen and are not just project admins. We must tailor the solution to the specific problem. Saving Changes...
Peter RapinSubject Matter Expect; Project Delivery| Independent ConsultantOntario, Canada
In my mind the early cost estimate usually prepared during business case analysis is to determine if the project can be delivered within the anticipated project value - that is, what is the project worth to the owner. As an example, an owner has an opportunity to double sales and with doubling sales his bottom line (profit) will/must improve. Otherwise why do it? To double sales he has to invest in infrastructure/manufacturing capacity.However the cost of increasing capacity has a direct impact on the bottom line thus a cost estimate is required. This cost estimate essentially sets the "value" of the project, typically called 'indicative' or rough cost projections. Some times referred to as Class E or D. The business case basically determines if the project is worth pursuing at a cost established by the indicative cost estimate with significant contingencies.
Once the project is initiated and details are provided we go to a 'substantive' cost estimate typically based on estimated effort to deliver the project, sometimes referred to as Class C, B and finally A. The contingencies should be reduced as details are advanced. However, the substantive cost estimates should always be comparable to, and within, the initial indicative estimate - if not the project is no longer viable from a cost perspective.
It is understood that sometimes cost estimates are manipulated - artificially lowered indicative estimates to try and apply cost saving pressure on the project team; artificial high substantive estimates to try and manage client wish lists, etc. This should be avoided as it tends to muddy the waters and make effective project delivery more of a challenge then it needs to be. Saving Changes...
Thomas WalentaGlobal Project Economy ExpertHackenheim, Germany
Vipin,
a root cause for your confusion might be that you think there is a project management life cycle (there is not such a thing) and it has 5 phases (PM has no phases). If you talk about a lifecycle you mostly mean the project lifecycle, and it has phases. The word management is missing! The project lifecycle is determined by the product you create (software, car, bridge). But you can manage this (each) lifecycle by a set of processes and (almost) use each of these PM process (grouped as you mentioned) at any time during a project lifecycle, and as it seems fit.
Hence your problem about estimating vanishes once you understand that you estimate cost (or time, or risk impacts) at multiple points of the project lifeycle. Estimating means predicting the future and that is what project managers do all the time.
For example, before starting the project you estimate a high level, top-down cost, which should not serve as the final estimate but maybe as the budget limit set in the charter.
Then, when you do the initial planning after initiating, you should spend more effort e.g. to create a more detailed budget. Yes, it should be below the budget limit…
This detailed budget, bottom up, requires a WBS and risk assessment. Once you (and the sponsor) agrees to budget, it should be baselined and used to be compared against actual cost.
And guess what, this budget baseline may be updated based on the knowledge you gain during the project. Previous estimates become real cost and you will estimate the remainder of the project based on this new wisdom. If necessary, you have to issue a change request and establish a changed baseline.
One last thing: your detailed budget is NOT a number. It is the amount of estimated cost distributed along the project lifecycle and defined control intervals (like each week, month or so). Your budget limit in the charter might be a single number though.
PMchallenge is a great way to hone your PM knowledge and skills.
Project Scope Management includes the processes required to ensure that the project includes all the work required to complete the project successfully.
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1 reply by Peter Rapin
Sep 16, 2021 10:19 AM
Peter Rapin
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Scope management also includes the elimination of scope that is not necessary or required to deliver the the project as initially defined
Saving Changes...
Peter RapinSubject Matter Expect; Project Delivery| Independent ConsultantOntario, Canada
Sep 16, 2021 7:30 AM
Replying to Dilson Antonio
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PMchallenge is a great way to hone your PM knowledge and skills.
Project Scope Management includes the processes required to ensure that the project includes all the work required to complete the project successfully.
Scope management also includes the elimination of scope that is not necessary or required to deliver the the project as initially defined Saving Changes...
