METHOD FOR THE COSTS PLANNING

Doc. Inese Ratanova

 Techniques in project management for
estimating the costs or duration of
projects
Bottom-up
 Top-Down
 Parametric Estimating
 Bottom-up

Bottom-up estimating is a technique in project

management for estimating the costs or duration of
projects and parts of a project (PMBOK).
The term bottom-up estimating gives a hint about the
underlying concept:
 costs,
 durations or resource requirements are estimated at a
very granular level.
This means that the estimation is done for work packages (some might suggest
activities though) which are the lowest and most detailed level of a work
breakdown structure (WBS).
 It is often referred to as one of the most accurate ways of
estimating.
Bottom-up. Estimating cost, duration or
resource requirements of a project
Top-down estimating
 Top-down estimating

Analogous estimating is an estimation technique is

also referred to as top-down estimating.
It involves leveraging the estimators’ experience or
historical data from previous projects by adopting
observed cost, duration or resource needs to a current
project or portions of a project.
Analogous estimating does not require data
manipulation or statistical adjustments.
 Top-down estimating
This technique is useful if you need to produce
estimates without having plenty of information
available.
This may be the case during project selection or
initiation phases, when overseeing a bunch of projects
at the portfolio-level (source: PMI Practice Standard
for Project Estimating), or in the early stages of a
project.
Estimations can relate to a whole project or parts of a
project, such as work packages or activities.
 Parametric estimating
Parametric estimating is a statistics-based technique
to calculate the expected amount of financial
resources or time that is required to perform and
complete a project, an activity or a portion of a
project.
It is an established method in several project
management frameworks such as the Project
Management Institute’s PMI Project Management
Body of Knowledge (PMBOK) where it is listed under
the tools and techniques of the ‘estimate cost’
and ‘estimate activity duration’ processes.
 Parametric estimating
The determination of an estimate is based on a
statistical (or assumed) correlation between a
parameter and a cost or time value. This observed
correlation is then scaled to the size of the current
project (source: PMI Practice Standard for Project
Estimating).
To calculate the cost or duration per parameter, a set
of historical data is required. This could be obtained
from previous projects (companies in construction,
consulting, IT and other industries sometimes store
such data centrally) publicly available market data or
agencies that provide statistics for benchmarking.
 Parametric estimating
Some projects build complex statistical models and
perform a comprehensive regression analysis for
various parameters. They might also develop
algorithms and assign a significant number of
resources for deploying and (back)testing such
models. This is an approach applicable to large
projects or so-called ‘mega projects’ where even small
shortcomings in the accuracy of estimates could cause
a material impact.
 Use Parametric Estimating
The selection criteria are mainly:
 Required level of accuracy, i.e. for a rough estimate, you might
be able to estimate the whole project at once (e.g. building cost
per square foot) but for definitive estimates, you will need to go
into a more granular level.
 Correlation of parameters and values, i.e. you can only estimate
work or resources using this technique if you know or assume
that there is a correlation between a parameter and the
duration and/or cost (subject to testing).
 Availability of data for parametric estimation.
 The work breakdown structure (WBS) can be a good starting
point to select the scope of parametric estimation.
 Importance of Estimating Time and Cost

To support good decisions

 To schedule work to be done
 To determine how long the project should take
To determine the project’s cost
To determine whether the project is worth doing
To develop cash flow needs
To determine how well the project is progressing
 To develop time-phased budgets and establish the
project baseline
 Factors Influencing the Quality of
Estimates
Past experience is a good starting point for developing
time and cost estimates but these must be further
refined for the current project. The following factors
will have a strong influence on the accuracy of
estimates:
 Planning horizon. This refers to the accuracy of time
and cost estimates. They should improve as the
project moves from the conceptual phase to the point
where individual work packages are defined
 Factors Influencing the Quality of
Estimates
 Project duration. Long-duration projects increase the
uncertainty in estimates. The price of technology may
decrease over time, however labor, equipment, and
operations are likely to increase over this same period;
but at what rate? How can these be accurately
estimated?
People. The “people” factor can introduce challenges
in the estimating process. A close match of skills to the
task will influence productivity and learning time and,
conversely, the opposite is also true. Staff turnover
and whether people have worked on projects together
in the past also influences accurate estimating.
 Factors Influencing the Quality of
Estimates
 Project Structure and Organization. Project structure
refers to matrix, functional, and projectized. The
“speed” advantage of a focused dedicated team
comes at a higher cost than a matrix team; however
the matrix team will not deliver as quickly due to
competing demands and divided focus.
 Padding Estimates. When asked to estimate, most are
inclined to “pad” estimates in order to increase the
probability of being on budget and reducing the risk of
being late. Padding, however, defeats the chance of
truly arriving at realistic estimates, which is greatly
needed in order to be competitive.
 Factors Influencing the Quality of
Estimates
 Organization culture. Some organizations tolerate
padding, others encourage it, still others oppose it. It
takes time to properly prepare estimates. It is the
bedrock of effective project management.
 Other (Non-project) factors. Equipment downtime,
holidays, vacations, staff reduction, strikes, and legal
limits influence project estimates.
 Estimating Guidelines for Time, Cost, and
Resources
 Responsibility: Those who are the most familiar with
the tasks should make the estimates. If others are
consulted instead, it will be difficult to hold those
doing the work responsible for not achieving the
estimated time.
 Use several people to participate. Estimates have a
better chance of being reasonable and realistic when
several people with relevant experience and
knowledge of the task are used.
 Normal conditions: Base estimates on normal
conditions, efficient methods and processes, and a
normal level of resources.
 Estimating Guidelines for Time, Cost, and
Resources
 Time Units: Use consistent time units (hours, days,
weeks, etc.) whenever possible when estimating task
time.
 Independence: Treat each task independently. Do not
aggregate time or cost upward. Each task is to have its
own values.
 Contingencies: Work package estimates should not
include allowances for contingencies. Remember, the
estimate should assume normal conditions but expect
that not all work packages will materialize as planned.
The PMI Practice
Standard for Project
Estimating provides
detailed guidance to
project cost estimation.