COST ESTIMATION IN PROJECT

MANAGEMENT...

SUBMITTED TO : PROF
NARINDER SINGH
SUBMITTED BY : ANKITA
SHARMA(4713)
WHAT IS PROJECT COST
ESTIMATION?
1. Cost estimation in project management is the process of forecasting the
financial and other resources needed to complete a project within a defined
scope.
2. It is the process of predicting the
 Quantity
 Cost
 Quality
of the resources required by the scope of a project.
3. Cost estimating utilizes many techniques that translate the project scope
into deliverables and develop an approximation of costs of the resources
needed to complete project activities.
IMPORTANCE OF COST ESTIMATION

For ascertaining the

For delivering a solid For assessing fund
economic viability of
project plan requirements
the project

For ensuring that Cost can be the driving

project is completed force or an impeding
within approved factor in determining
budget the future of a project
Factors on which cost estimation
depends
 The accuracy of the cost estimation depends on the accuracy and
details of the project scope, which is the scope baseline. The scope
will also define any constraints like date, resources or budget.
 To estimate the cost of project you have to categorize various cost
types into categories like
a) Labour cost
b) Equipment cost
c) Cost of supplies
d) Travel cost
e) Training cost
f) Overhead cost, etc
 TYPES OF ESTIMATES
ORDER OF MAGNITUDE ESTIMATE

STUDY ESTIMATE

PRELIMINARY ESTIMATE

DEFINITIVE ESTIMATE

DETAILED ESTIMATE
ORDER OF MAGNITUDE ESTIMATES

 Order of Magnitude (OOM) Estimates are rough guesses made at

the very beginning of the project. At best such an estimate can
have an accuracy of ± 60%.
 Order of magnitude estimates use historical project data
with analogous mathematics. There are five variants of this method
used to provide a fast estimate.
 INVESTMENT PER ANNUAL TONNE CAPACITY: If installed cost
of plant P1 of annual capacity C1 tonne is rupees R1 then installed
cost R2 of plant P2 having annual capacity can be C1 estimated as
R2= (R1*C2)/C1
 TURN-OVER RATIO AND CAPITAL RATIO: The ratio between annual sales and
investment expressed in rupees is known as turn-over ratio and opposite of it is
known as capital ratio. Estimated cost of new plant R2 is
R2=C*V1*P1
Where C = capital ratio of plant
V1= projected annual sales volume
P1=price per unit of sales volume
 SIX-TENTH FACTOR: This is the modification of the investment per annual tonne
capacity method. Estimated cost of new plant R2 is
R2=R1*(C2/C1)^0.6
Where R1 and C1 are cost and capacity of a previously completed plant and C2 is
the capacity of the proposed plant.
 INFLATION INDEX: This index can be used to work out an estimate if the capacity
for the new unit remains the same as that of one for which installed cost data are
available.
INSTALLED COST(now)=INSTALLED COST(past)*(Cost index(new)/Cost
index(past))
 LOCATION INDEX: Knowing a plant cost in one country, the cost of a similar plant
in other country can be estimated on the basis of productivity of countries
involved. This type of data should be readily available with project management
companies having international operations.

PRELIMINARY ESTIMATES
 Created when a project’s deliverables are about halfway defined, a preliminary
estimate uses somewhat detailed scope information to incorporate unit costs.
Preliminary estimates are accurate enough to be used as a basis for project
financing. Some project budgets are authorized based on the preliminary
estimate.
• It is at this stage that the budget
allocation is frozen and a basis of
control is established.
• The accuracy even at this stage is
about +-20%. This means that
even if a project is managed well
cost can be over run by 20%.
• The fig. given depicts the
successive estimates and the
associated errors.
 The preliminary estimate is based on the final technology
package. The following information is important at this stage:
 Final process and instrumentation diagram
 Overall plot plan
 Preliminary equipment
 Final equipment process specifications
 Preliminary single line diagram
 Preliminary motor list
 Preliminary piping MTO
 Final instrument list and spec
DEFINITIVE COST ESTIMATE:

 This estimate is prepared after the zero date when the detailed engineering of a
project is in an advanced stage.
 The following additional information adds to the accuracy of the estimate:
 Equipment purchase specification
 Schedule of items for work tenders
 Reasonably accurate material take offs based on general arrangement
drawings
 House general arrangement drawings
DETAILED ESTIMATE:

 This estimate is made on completion of engineering, ordering of equipment and

machinery and award of major field contracts.
 The following additional information adds to the accuracy of the estimate:
 Ordered value of plan equipment and machinery
 Awarded cost of all major contracts
 Final material take offs
 Ninety per cent construction drawings
 The estimate at this stage have an accuracy of +-5%. It cannot be more
accurate as it cannot cover the construction phase.
What Makes a Good Cost Estimate?
 There are several characteristics for judging cost estimate quality. These
include:
1. Accuracy: A cost estimate is only as useful as it is accurate.
2. Confidence level: Since even the best estimates contain some degree
of uncertainty, it is important to communicate the amount of potential
variability in any estimate to stakeholders.
3. Precision: To reduce the variation in cost estimates due to techniques
used, estimators should compare and corroborate estimates.
4. Reliability: Reliability is a concept based on the extent to which
historical cost estimates for a certain type of project have been
accurate. For new projects that are similar to successfully-completed
past projects, analogous estimating techniques will allow reliable
estimates.
5. Verification: Cost verification is the act of checking that mathematical
operations used in an estimate were performed correctly. Cost
verification is much easier if estimates are properly documented.
The Most Likely Causes of Inaccurate
Project Cost Estimates:
 Lack of experience with similar projects
 Length of the planning horizon and of the project
 Human resources
 Expecting that resources will work at maximum productivity
 Failing to identify risks and to prepare adequate contingency plans and
reserves
 Creating hasty, inaccurate estimates because of stakeholder pressure
 Stating estimates as fixed sums, rather than ranges
 Dividing tasks between multiple resources
THANK YOU !!!