Chapter II : Cost estimation

Project Cost Management processes

• Plan Cost Management—The process that establishes the
policies, procedures, and documentation for planning,
managing, expending, and controlling project costs.
• Estimate Costs—The process of developing an approximation
of the monetary resources needed to complete project activities.
• Determine Budget—The process of aggregating the estimated
costs of individual activities or work packages to establish an
authorized cost baseline.
• Control Costs—The process of monitoring the status of the
project to update the project costs and managing changes to the
cost baseline.
 Cont …

Project underestimation of resources and costs is one of the most

common contributors to project failure.
cost estimation is the iterative process of developing an approximation of
the monetary resources needed to complete project activities. Project
teams should estimate costs for all resources that will be charged to the
project. This includes but is not limited to:
• Labor
• Materials
• Equipment
• Services
• Software
• Hardware
• Facilities
• Contingency Costs
 Cont …

• The following list includes common techniques used in project

cost estimation:
• Expert Judgment – use of knowledge gained from past project
management experience. Expert judgment, in conjunction with
objective estimation techniques, provides valuable information
about the organizational environment and information from prior
comparable projects.
• Analogous Estimating – use of the metrics from a previous,
similar project as the basis of estimation for the current project.
Analogous estimating takes the actual cost of previous, similar
projects as a baseline and then adjusts for known differences
(such as size, complexity, scope, duration, etc.).
 Cont …

• Parametric Estimating – use of a statistical relationship between

historical data and other variables (for example, lines of code in
software development) to calculate an estimate for activity
parameters, such as scope, cost, budget, and duration. Used
correctly, this technique can produce high levels of accuracy.
• Bottom-Up Estimating – estimating all individual work
packages/activities with the greatest level of detail, summarizing
higher-level estimates with the combination of the individual
estimates. The accuracy of bottom-up estimating is optimized
when individual work packages/activities are defined in detail.
 Cont …

• Reserve Analysis – determination of contingency reserves to

account for cost uncertainty.
• Project Management Estimating Software – use of project
management cost estimating software applications, computerized
spread sheets, simulation, and statistical tools. Such tools can
allow for rapid consideration of multiple cost estimate
alternatives.
• Vendor Bid Analysis – determination of what the project should
cost based on a review of vendor bids/proposals. This technique
may be used in conjunction with other cost estimation techniques
to ensure that cost estimates are comprehensive.
 The need for estimation of project cost
1. Financial plan – cost estimates are used to obtain and allocate
funding for projects.
2. Public trust – relies in large part on our ability to deliver
transportation projects in a timely manner and within budget. Public
declaration of project cost estimate ranges need to be thoughtfully
provided using a well-documented, quality estimate.
3. Project controls – rely on cost estimates to help keep projects
within the appropriate fiscal boundaries. The baseline project cost
estimate helps keep the project from growing and expanding beyond
spending limits.
4. Project resilience – as projects encounter problems, estimates are
scrutinized. The quality of the estimate and the documentation
provide critical support to project success.
 Cont…
• They provide a standard against which actual expenditures
incurred during the course of a project can be compared, and
serve as the basis for cost control.
• They are the chief means for assessing project feasibility. A
comparison of the cost estimates with the estimates of
revenues will enable the project organization to determine if
the project is worthwhile to undertake.
• They provide the mechanism for managing cash flow during
the course of the project.
• They give the project manager a framework for allocating
scarce resources as the project progresses.
• They provide the mechanism for revising project activity
duration.
 Problems Of Cost Estimation

• Most project managers would agree that cost overruns are the
causes of more frustration than almost any other factor.
• Unfortunately, industry data suggest that overruns are the norm, rather than
the exception. The most significant reasons for this are
• Low initial cost estimates
• Unanticipated technical difficulties
• Lack of or poor scope definition
• Specification changes
• External factors
 Cont …
• External factors such as inflation, interest rates,
environmental issues, and currency exchange rate fluctuations
can also escalate actual project costs, particularly in the case
of projects where technical problems and other difficulties
lead to an increase in project duration. In the case of
multinational public sector projects, delays due to politics
among the nations involved can result in significant increases
in actual project costs incurred.
Project based cost classification
Cont …
 Cost Estimation Process
• Both initial and detailed cost estimates should be prepared with
diligence.
• Even though insufficient information is available when initial
estimates are prepared, it is imperative that these estimates are
developed carefully, for several reasons. First, they serve as the
basis for future release of funds to the project. Second, they
become standards against which future estimates are compared.
Third, they are used to determine likely overall project costs and
return on investment.
 Cont …
• Many project planning software packages can generate a time-
phased cost schedule from the cost structure, project plan, and
work breakdown structure (WBS). This cost schedule can be used
as a task budget against which actual cost performance can be
measured. From the perspective of project control, the most
important advantage of computerized systems is their ability to
generate a cost plan that is linked to the project work plan.
Cont …
Example
 2.2.Cost estimation Method and Tools
• Parametric Estimating Method
• The parametric method produces a high-level estimate using
various factors (parameters) developed from past projects,
historical databases, engineering practices, and technologies,
such as:
• cost per lane-kilometre of roadway
• cost per interchange
• cost per square metre of a bridge structure
• cost per intersection.
 Cont…
• These methods involve techniques that use historical data to
define the cost using measurements that are easily determined,
such as cost per lane mile, cost per interchange, cost per
square foot, and cost per intersection. Two techniques are
commonly used in parametric estimating: (1) analogous
(similar) projects and (2) historical percentages.
 Earned Value Management

• The PMBOK focuses on Earned Value Management for

measuring and controlling a project’s costs. Earned Value
Management is a broad and powerful tool; as such, we
recommend that all project managers take some formal courses in
Earned Value Management.
• four Earned Value measurements; Schedule Variance (SV), Cost
Variance (CV), Schedule Performance Index (SPI) and Cost
Performance Index (CPI). For most typical projects these four
measurements can provide enough insight for effective
management without overburdening the Project Manager with
Earned Value calculations and measurements.
 Cont …
• Schedule Variance (SV) is a measurement of the schedule
performance for a project. It’s calculated by taking the Earned
Value (EV) and subtracting the Planned Value (PV). Since EV
is the actual value earned in the project and the PV is the value
our project plan says we should have earned at this point, when
we subtract what we planned from the actual we have a good
measurement which tells us if we are ahead or behind the
baseline schedule according to our project plan. If SV is zero,
then the project is perfectly on schedule. If SV is greater than
zero, the project is earning more value than planned thus it’s
ahead of schedule. If SV is less than zero, the project is earning
less value than planned thus it’s behind schedule.
 Cont …
• Cost Variance (CV) is a measurement of the budget
performance for a project. CV is calculated by subtracting
Actual Costs (AC) from Earned Value (EV). As we already
know, EV is the actual value earned in the project. AC is the
actual costs incurred to date, thus when we subtract what our
actual costs from the EV we have a good measurement which
tells us if we are above or below budget. If CV is zero, then
the project is perfectly on budget. If CV is greater than zero,
the project is earning more value than planned thus it’s under
budget. If CV is less than zero, the project is earning less
value than planned thus it’s over budget.
 Cont …
• Schedule Performance Index (SPI) measures the progress
achieved against that which was planned. SPI is calculated as
EV/PV. If EV is equal to PV the value of the SPI is 1. If EV is
less than the PV then the value is less than 1, which means
the project is behind schedule. If EV is greater than the PV
the value of the SPI is greater than one, which means the
project is ahead of schedule. A well performing project
should have its SPI as close to 1 as possible, or maybe even a
little under 1.
 
 Cont…
• Cost Performance Index (CPI) measures the value of the work
completed compared to the actual cost of the work completed.
CPI is calculated as EV/AC. If CPI is equal to 1 the project is
perfectly on budget. If the CPI is greater than 1 the project is
under budget, if it’s less than 1 the project is over budget.
• Performance of the project will be measured using Earned
Value Management. The following four Earned Value metrics
will be used to measure to projects cost performance:
 Schedule Variance (SV)
 Cost Variance (CV)
 Schedule Performance Index (SPI)
 Cost Performance Index (CPI)
 Cont …

Performance Measure Yellow Red

Schedule Performance Index (SPI) Between 0.9 and 0.8 or Between 1.1 Less Than 0.8 or Greater than 1.2
and 1.2

Cost Performance Index (CPI) Between 0.9 and 0.8 or Between 1.1 Less Than 0.8 or Greater than 1.2
and 1.2
 Example
• At the end of a week, you measure the progress of task X and
find that it’s 25% complete. Now, how do you assess if you are
on track to meet the task budget? First, a project manager
calculates the planned value for this task (at the planning
stage). Let’s say, Task X has a budget of $4000 and is expected
to be 50% complete by the week.
• Planned value (PV) of task X by the week = $4000 * .5 =
$2000
• Earned value (EV) of task X by the week = $4000 * .25 =
$1000
• Now, you also determine the actual cost (AC) of the work,
which involves other variables such as equipment and material
costs (say, $800).
 Cont …
• Schedule variance = EV – PV = $1000 – $2000 = -$1000.
• Cost variance = EV – AC = $1000 – $800 = $200.
• The negative schedule variance indicates that the task is
falling behind, but the positive cost variance indicates that it’s
under budget. While dealing with hundreds of tasks in huge
projects, cost control can provide the level of transparency that
decision makers require to respond quickly to the situation.
 Cont …
• The schedule performance index (SPI) is a measure of the
conformance of actual progress (earned value) to the planned
progress: SPI = EV / PV. ... When CPI or SPI are greater than
1.0, this indicates better-than-planned project performance, while
CPI or SPI less than 1.0 indicates poorer-than-planned project
performance.
• In the privious example ;SPI= 1000/2000=.5
 Project Cost estimation techniques in Practice
A. Expert Judgement techniques
• Expert Judgment is a technique in which judgment is provided based upon a specific
set of criteria and/or expertise that has been acquired in a specific knowledge area,
application area, or product area, a particular discipline, an industry, etc. Such expertise
may be provided by any group or person with specialized education, knowledge, skill,
experience, or training. However, typically expert judgment requires an expertise that is
not present within the project team and, as such, it is common for an external group or
person with a specific relevant skill set or knowledge base to be brought in for a
consultation, Such expertise can be provided by any group or individual with
specialized knowledge or training and is available from many sources, including:
• Units within the organization;
• Consultants;
• Stakeholders, including customers or sponsors;
• Professional and technical associations;
• Industry groups;
• Subject matter experts (SME);
• Project management office (PMO);
• Suppliers.
 Cont …
• The delphi technique is the most used tool in securing Expert Judgment. Under this
method the group's estimates are returned to the individual experts for review and a
second round of forecasts is received from the experts. With each round the degree of
consensus improves. The use of the delphi technique helps to reduce biased decisions
Other tools can be used, as:
• Interviews. This tool is best used when knowledgeable, experienced people are
available at an affordable cost and specific information is needed. Interview can be on
a one-to-one or a many-to-one basis wherein conducted by asking a series of questions
that will increase your knowledge of the project or a particular project activity.
• Brainstorming. It’s the kind of expert judgment tool is usually best use when input
from multiple experts is needed or when experienced people aren't available.
Brainstorming works by getting a group to focus on a problem and then coming up
with as many solutions as possible. Once the session has resulted in a number of
solutions, the results can be analyzed.
• Historical data. Is best used when records are accurate and both projects are similar.
Since a variety of documentations in project management matters most, so, it is very
nice to have historical record data in every expert judgment to ensure that you are in
line with what really it should be. Historical data uses the knowledge gained on a
similar past project.
 Cont …
• Expert judgment can be applied to both bottom-up and top-down
estimating. Its accuracy depends greatly on the number and
experience of the experts involved, the clarity of the planned activities
and steps as well as the type of the project.
• Two examples of expert judgment are:
• Estimating the rough order of magnitude at the beginning of a project.
At that time, estimates are often performed top-down due to a lack of
team members. more accurate estimation techniques (such as
parametric estimating) may also not be available due to a lack of data.
• (Re-)estimating the efforts needed to generate the deliverables of a
work breakdown structure (WBS) by asking those responsible for
work packages and activities to estimate their resource requirements.
This type of expert judgment can lead to comparatively accurate
results.
 Analogous estimating 

• Analogous estimating refers to the use of observed cost figures

and related values in previous projects (or portions of a
project). In order to be accurate, the type and nature of these
reference activities must be comparable with the current
project. "Analogous estimating, also called top-down
estimating, is a form of expert judgment.”
• In general, analogous estimates are used if a project has access
to historical data on similar types of work while the details and
resources for more accurate estimates in the current project,
such as parametric or bottom-up estimating, are not available.
 Parametric estimating
• Parametric estimating is a statistical approach to determine the
expected resource requirements. It is based on the assumed or
proven relationship of parameters and values. Simple examples
are the building cost per square foot in construction projects or
the implementation cost per data field in IT projects.
• Parametric and bottom-up estimates are usually the techniques
that provide the most accurate cost projections. They are
commonly used if the budget needs to be revisited and replaced
with a new estimate at completion.
 Assignment I (30%)
• Take any project in idea and prepare PROJECT
COST MANAGEMENT PLAN

• SUBMISSION DATE :15/08/2021