There is a distinct difference between cost estimating and pricing. A cost estimateis the cost of the resources required to complete the project work. Pricing, however,includes a profit margin. In other words, a company performing projects for otherorganizations may do a cost estimate to see how much the project is going to cost tocomplete. Then, with this cost information, they’ll factor a profit into the projectwork, as shown next:
P r o j e c t c o s t
Profit marginActualProject duration
More and more companies are requiring that the project manager calculate the project costs and then factor the ROI, and other benefit models, into the project product. The goal is to see the value of the project once its deliverables are inoperations.
Considering the Cost Estimating Inputs
Cost estimating relies on several project components from the initiation and planningprocess groups. This process also relies on enterprise environmental factors, theprocesses and procedures unique to your organization, and the organizational processassets, such as historical information and forms and templates.
Using the Work Breakdown Structure
Of course, the WBS is included—it’s an input to five major planning processes:cost estimating, cost budgeting, resource planning, risk management planning, andactivity definition.
Relying on the Resource Requirements
The only output of resource planning serves as a key input to cost estimating. Theproject will have some requirement for resources—the skills of the labor, the abilityof materials, or the function of equipment must all be accounted for.
Calculating Resource Rates
The estimator has to know how much each resource costs. The cost should be in someunit of time or measure—such as cost per hour, cost per metric ton, or cost per use.