Project Cost Estimation

What is Project Cost Estimation?

Project Cost Estimation is defined as the process of approximating the total expenditure of the project. The accuracy of the cost estimation and budgeting in project management 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. The risk register will help to calculate estimate types of costs, the expenses made behind the contingent action and the expenses made to cope with risks.

To estimate the cost of project you have to categorize various cost types into categories like:

• Labor cost
• Equipment cost
• Cost of supplies
• Travel cost
• Training cost
• Overhead cost, etc.

Four Project Cost Estimation Techniques

How exactly project managers completing a cost estimate depends upon a number of factors. Some organizations, for example, require all projects to be budgeted for according to very specific policies; others may defer to the expertise of the project manager. Similarly, many organizations might work off of rough estimates in the earliest stages of project planning compared to later stages where more exact estimates are required.

Below, we explore four of the most common cost estimation techniques that you can leverage.

 

1. Analogous Estimating

Through analogous estimating, a project manager calculates the expected costs of a project-based upon the known costs associated with a similar project that was completed in the past. This method of estimation relies upon a combination of historical data and expert judgment of the project manager. 

Because no two projects are exactly the same, analogous estimating does have its limitations. As such, it is often leveraged in the earliest stages of project planning, when a rough estimate can suffice. Analogous estimating can also be used when there is relatively little information about the current project available.

 

2. Parametric Estimating

In parametric estimating, historical data and statistical modeling are used to assign a dollar value to certain project costs. This approach determines the underlying unit cost for a particular component of a project and then sales that unit cost as appropriate. It is much more accurate than analogous estimating but requires more initial data to accurately assess costs.

Parametric estimating is often used in construction. For example, an experienced construction manager might understand that the typical new home will cost a certain number of dollars per square foot (assuming a particular margin of error). If this average cost, the margin of error, and the square footage of a new project are known, then parametric estimating will allow them to identify a budget that should accurately fall within this range. Other examples might include estimating the cost per unit to print and bind a book or to build an electronic device.

 

3. Bottom-Up Estimating

In bottom-up estimating, a larger project is broken down into a number of smaller components. The project manager then estimates costs specifically for each of these smaller work packages. For example, if a project includes work that will be split between multiple departments within an organization, costs might be split out by department. Once all costs have been estimated, they are tallied into a single larger cost estimate for the project as a whole.

Because bottom-up estimating allows a project manager to take a more granular look at individual tasks within a project, this technique allows for a very accurate estimation process. 

 

4. Three-Point Estimating

In three-point estimating, a project manager identifies three separate estimates for the costs associated with a project. The first point represents an “optimistic” estimate, where work is done and funds spent most efficiently; the second point represents the “pessimistic” estimate, where work is done and funds spent in the least efficient manner; and the third point represents the “most likely” scenario, which typically falls somewhere in the middle. 

Three-point estimating relies on a number of weighted formulas and originates from the Program Analysis and Review Technique (PERT).