Estimating Project Costs

What we need to estimate project costs

• Cost Management Plan

• Quality Management Plan

• Scope Baseline

• Resources Requirement

• Project Schedule

• Project Risk Register

• Enterprise Environmental Factors

• Organizational Process Assets

• Lesson Learned register

Cost and Quality Management Plans
Cost Management Plan
The cost management plan describes estimating
methods that can be used and the level of precision
and accuracy required for the cost estimate

Quality Management Plan

The quality management plan describes the activities

and resources necessary for the project management
team to achieve the quality objectives set for the
project
 Scope baseline
Project scope statement reflects funding constraints
by period for the expenditure of project funds or other
financial assumptions and constraints.

Work breakdown structure provides the relationships

among all the project deliverables and their various
components.

WBS dictionary related detailed statements of work

provide an identification of the deliverables and a
description of the work in each WBS component
required to produce each deliverable.
Project Schedule
• Defines the type and quantity of
resources as well as the amount of
time required to complete the project

• Determines the availability of staff,

staff hours required, and quantities of
material and equipment needed to
perform activities

• Affects where resources are applied

per unit of time for the duration of the
activity (time-sensitive costs)
Resource Requirements
Resource requirements identify the types and
quantities of resources required for each work package
or activity.
Risk register
• Risk response (mitigation) costs

• Risks can be threats or opportunities

• Negative risk event can generally

cause the project cost to increase and
project schedule to delay

• Positive risk event can benefit the

business by reducing project cost or
by accelerating the schedule
How to Estimate project costs
• Expert Judgment
• Analogous Estimating
• Parametric Estimating
• Bottom-up Estimating
• Three point Estimating
• Reserve Analysis
• Cost of Quality
• Project Management Software
• Vendor Bid Analysis
• Group Decision making techniques
Analogous estimating
• Relies on the actual cost of previous, similar
projects as the basis for estimating the cost
of the current project

• Most reliable when there is limited

information about the project or in the
early phases of a project

• It is cheap and less time consuming than

other techniques, but it is also less accurate
Parametric estimating
• Statistical relationship between relevant
historical data and other variables (e.g.,
square footage in construction) to calculate
a cost estimate for project work

• Most reliable when there is limited

information about the project or in the
early phases of a project

• Cheap, less time consuming and higher

accuracy depending upon the complexity of
data used for estimating
Bottom-up estimating
• Estimating each component of work,
individual work packages or activities to
the greatest level of specified detail

• The detailed cost is then summarized or

“rolled up” to higher levels for subsequent
reporting and tracking purposes

• It is time consuming and expensive but

highly accurate compared to other
techniques for cost estimation
Three-point estimating
• Single-point activity cost estimate using
three estimates to define an approximate
range for an activity’s cost:

 Realistic (r)
 Optimistic (o)
 Pessimistic (p)

• Two commonly used formulas are:

 Triangular Distribution
(o + r + p)/3
 Beta Distribution
(PERT analysis) = (o + 4r + p)/6
Three-point estimating (Example)
Moon Travels are planning on implementing a travel booking system. The project
manager is confident that the implementation will be completed in 6 weeks, with a most
optimistic estimate being 4 weeks, and the worst case scenario might take it to 11 weeks.
What must be the three point estimate for this travel booking system implementation?

A: 4 weeks
B: 6 weeks
C: 11 weeks
D: None of the Above

You are the project manager of Libra Travels SSS Project. You have decided to use the 3
point estimation technique for his project. For the “Test Corporate Bookings” activity, the
following estimates are available. O=4, P=9, R=5. What is the result of this estimate?

A: 5.5 weeks
B: Eighteen weeks
C: 33.33 Days
D: None of the Above
Reserve Analysis
• Contingency reserves are allocated for identified risks for
which mitigating responses are developed.

 Reserves for “known-unknowns”

 Mostly percentage of the estimated cost
 Part of the cost baseline and the overall funding requirements for the
project

• Management reserves are withheld for management and are

reserved for unforeseen work of the project.

 Reserves for “unknown unknowns”

 Not included in the cost baseline but is part of the overall project
budget and funding requirements.
 When used, are added to the cost baseline, thus requiring an approved
change to the cost baseline
Cost of quality
Cost of conformance Cost of Non-Conformance

• Prevention costs Internal failure costs

 Training  Rework
 Equipment  Scrap
 Documentation

External failure costs

• Appraisal costs

 Testing  Liability
 Warranty
 Inspections
 Credibility
Project Management estimating software

• Project management software

• Spread sheets

• Simulation software

• Computerized Statistical tools

Vendor Bid Analysis

• Estimate based on responsive

bids from qualified vendors for
deliverables or work packages

• Additional cost may incur to

examine the price of individual
deliverables/WPs and to finalize
total project cost
Group decision making techniques

• Team-based approaches like

brainstorming or Delphi techniques,
engaging team members to improve
estimate accuracy

• By involving people close to the

technical execution of work more
accurate estimates are obtained

• When people are involved in the

estimation process, their
commitment towards meeting the
resulting estimates increases
What we get from estimating project costs

• Activity cost estimates

• Basis of estimates

• Project document updates

Activity cost estimates

• Activity cost estimates are quantitative

assessments of the probable costs required to
complete project work

• This includes direct costs in form of labor,

materials, equipment, services, facilities,
information technology, interest on financing,
inflation, exchange rates and contingency reserve

• Indirect costs, if they are included in the project

estimate, can be included at the activity level or at
higher levels
Basis of estimates

Detail for activity cost estimates may include:

• Documentation of the basis of the estimate

• Documentation of all assumptions made
• Documentation of any known constraints
• Indication of the range of possible estimates
• Indication of the confidence level of the final estimate