Cost Estimation Methods in Project Management
Estimate costs process in project management is the practice of estimation of the monetary resources required to complete tasks and project activities. This process uses almost the same tools as expert judgment, analogous estimating, three-point estimating as in the estimate activity duration process. However, in the estimate costs process, you make forecasts for the costs of each activity. In this article, we will discuss 5 cost estimation methods in project management.
Estimate Costs is the process of determining costs of each activity including material costs, equipment costs, labor costs, overhead costs as well as indirect costs.
Project managers must be experienced in project cost management tools and techniques in order to manage costs variances. Underestimation of costs and resources makes a contribution to project failure. Cost estimation is a repetitious process of establishing an approximation of the monetary resources required to complete project activities.
There are several tools and techniques recommended by the Project Management Institute (PMI) in the estimate cost process of the Project Cost Management expertise area.
Now we’ll analyze 5 tools to estimate costs in project management.
What are the Cost Estimation Methods?
• Analogous Estimating
• Bottom-up Estimating
• Expert Judgment
• Parametric Estimating
• Three Point Estimating
Now let’s discuss project cost estimation methods in detail.
Analogous estimating analyzes a similar project completed in the past and makes a rough estimation for the current project by the use of this past project’s data. This technique does not provide a certain estimation because it is used when there is little information regarding the current project and is limited to the project manager’s and cost engineer’s experience.
Analogous Estimation Technique which is also known as the top-down estimating technique can be considered as a consolidation of historical information and expert judgment.
Simply put, the analogous estimation provides quick results. However, it does not provide a definite estimation.
Bottom-up estimating is the process of estimating every single activity and rolling them up into an overall project estimate. As a result of estimating from a single activity level, the overall project estimate can be realistic and accurate.
In this technique, all the project scope is divided into smaller work packages and the cost of each work package is estimated. Project’s total cost is the sum of all work packages and components.
Although it is a time consuming and costly technique, it provides the most accurate estimation. Therefore it is one of the most common project cost estimation methods.
Expert Judgment is a widely used cost estimation technique because of its simplicity. It is based on historical records.
Expert Judgment can be provided by a member or multiple members of the project management team. Also, stakeholders, customers, technical organizations and professionals can provide their knowledge.
Like expert judgment and analogous estimation technique, parametric estimation also uses historical records to estimate project costs. It analyzes similar projects and uses their historical data for the new project.
For instance, you will estimate the cost of a formwork activity in a construction project. In order to make a parametric estimation, you will analyze a past project and get the man-hours for each unit. Then you will estimate the total man-hour for the new project’s formwork activity by using the past project’s performance and multiply it by the unit price.
Parametric Estimation Technique can be considered as a consolidation of historical information and statical data. It is a definite technique to identify both cost and time for a current project using data from past projects with duplicate parameters.
Three Point Estimating
Three Point Estimating Technique is a useful technique which helps to increase the accuracy of cost and time estimates. There are three parts of this technique which provide three different estimates.
• Most Likely Estimate: Assuming a normal case in which everything goes as usual.
• Pessimistic Estimate: Assuming everything goes wrong.
• Optimistic Estimate: Assuming everything goes as planned.
PERT Method (Program Evaluation and Review Technique) uses the three-point estimation technique to determine the activity durations within a project.
As it is mentioned in the second paragraph there are several methods and technics for cost estimation and it is important to determine which method is suitable for your cost estimation purpose.
- Although Analogous Estimation and Expert Judgement are the fastest techniques, they provide less accurate results. Therefore they can be used when there is little information regarding the project.
- Parametric Estimation uses both historical records and statistical records to estimate costs. It provides more accurate results than the analogous estimation and expert judgment.
- The three-point estimation uses three estimates which are optimistic, pessimistic and most likely to calculate the average costs. It provides more accurate results than the analogous estimation, expert judgment, and parametric estimation.
- Bottom-up estimation analyzes each work package from the lowest level to the uppermost level. Although it is time-consuming, it provides the most accurate estimation.
Estimate costs is one of the most important processes in project management. Expert judgment, analogous estimation, three-point estimation, parametric estimation, and bottom-up estimation are the techniques used in this process. Choosing the most suitable technique depends on the availability of project information. For example, you can use analogous estimation when there is little information for the project. On the other hand, you can use the bottom-up estimation if the project information is adequate. In this article, we discuss the methods and their key aspects of cost estimation in project management. We hope that it will be useful for candidates who are seeking to make a carrier in the field of project management.