Anticlue

Cost Estimating

As previously mentioned, cost estimating is the process of developing an estimated cost for the resources needed to complete project activities. Cost Estimating normally occurs in the planning process group and is dependent on several of the outputs from the Initiating and Planning Process groups.
The inputs to cost estimating are:

• The Project Scope Statement - This is a narrative description of the project scope, including major deliverables, scope objectives, scope assumptions, scope constraints, and a Statement of Work. The deliverables, acceptance criteria, and the project's products and services are be taken into account in the project scope statement.
• Work Breakdown Structure – The WBS is a hierarchical decomposition of the anticipated work that is required to complete the project objectives and create the necessary deliverables.
• The WBS dictionary – The WBS dictionary details each component in the wbs with an estimated cost, a brief definition of the scope of work, defined deliverable, a list of activities, and a list of milestones.
• The Project Management Plan – The Project Management Plan is is the key document that contains the overall planning, monitoring, and implementing activities to be done in a project. Several subsidiary plans are used in cost estimating. They are:
  1. The Schedule Management Plan – The schedule management plan details the project activity list, activity list attributes, estimated activity resources, and activity duration estimates. The document illustrates the type and quantity of resources and when they are needed to completed the project work.
  2. The Staffing Management Plan – The staffing management plan describes how and when resource requirements will be achieved. It also explains how resources can be removed from or added to a project.
  3. The Risk Register – The risk register contains the results of the risk analyses, risk prioritization and planned risk responses. It details all of the identified risks, including the description, category, cause, probability of occurrence, effect on objectives, proposed responses, owner, and current status.
  
  
• Enterprise environmental factors – Enterprise environmental factors are the external and internal influences and constraints that may affect a project’s success. This includes organizational culture and structure, infrastructure, existing resources, commercial databases, market conditions, and PMIS.
• Organizational Process Assets – Organizational Process Assets are all formal and informal plans, policies, procedures, and guidelines. All of the process documents that can be used to influence a project’s success.

These inputs are very useful in helping to ascertain estimated costs; there are also a number of tools and techniques that can be used to help identify estimated costs. These tools and techniques are:

• Analogous cost estimating – Analogous cost estimating is the process of comparing historical information to forecast the cost of the current project. This approach is common when there is little information about the project.
• Determining resources cost rates – Determining resource cost rates details the resource rate as a unit rate for each resource. One way to do this is to collect quotes from suppliers.
• Bottom-up estimating – Bottom-up estimating identifies and estimates each activity and then summarizes the results to product a project estimate. A bottom up estimate usually involves three steps.
  1. Estimate the cost of each activity that composes the work package. Estimate the cost of each task by adding the labor and material costs; then add the estimated costs of each task, including contingency and cost of quality, to get an activity cost estimate.
  2. Roll up those estimates by totaling the estimates at each level of the WBS. You may use exact figures or rounded numbers, according to the rules of your organization.
  3. Calculate an overall project estimate. This estimate is the cost rolled up to the top level, or the sum of all the items at the level below it.
• Parametric estimating – Parametric estimating bases a parameter into calculate cost commonly used with historical data and other factors. For example, if last time it cost $500 to install 10 network jacks, this time we have 5 network jacks, so it should cost $250.
• Project management software – PMIS is the software used for managing the project. Several PMIS tools have modules for estimating cost as well as simulating alternative mechanisms.
• Vendor bid analysis – In a competitive bid process, you can apply vendor bid analysis to determine how much a project should cost. Comparing bids can help you determine the most likely cost for each deliverable, which will allow for a more accurate project cost estimate.
• Reserve analysis – Reserve Analysis is an analytical technique to determine the essential features and relationships of components in the Project Management Plan to establish a reserve for the schedule duration, budget, estimated cost, or funds for a project.
• Cost of quality – Cost of quality are the prevention costs, appraisal costs, internal failure costs, and external failure costs that come with quality planning, control, and assurance.

Remember estimating begets funding, so it is necessary that you estimating cost as exactly as possible with a contingency reserve. When you have completed the cost estimating process you should have the following outputs:

• Activity cost estimates – The activity cost estimates comprise the quantitative valuation of the probable costs of the resources necessary for carrying out project activities. This should be presented against the Work Breakdown Structure components, or summarized in terms of totals by project phases or major deliverables. Activity cost estimates include the labor costs, material costs, services, equipment, and special categories.
• Activity cost estimate supporting detail – The supporting detail represents a logical and comprehensive explanation for how the cost estimates were derived. Very useful to have when explaining costs to business cases.
• Requested changes - These changes are likely to have an effect on the cost components of the Project Management Plan.
• Cost Management Plan update – Approved changes from the Cost Estimating process will cause an update to the Cost Management Plan reflecting the changes with an effect on the management of costs.