[Step 2]- Estimate Costs

The process of developing an approximation of the monetary resources needed to complete project activities. It determines the amount of cost required to complete the project work. We need at arrive at optimal cost estimates by considering below cost trade-offs.

v  Make Vs Buy

v  Buy Vs Lease

v  Sharing of Resources

The accuracy of the project estimate will increase as the project progresses through the project life cycle. For example,

v  During initiation Project phase, we may have ROM (Rough Order Of Magnitude) + /-  50%

v  Later as more information is known, we may reach the accuracy range of +/- 10%

Costs are estimated for all the resources that will be charged to the project. It includes

v  Direct Costs - Costs of resources that are directly traced and utilized completely for the project purposes – Eg. Labour, Materials, Equipment, Services and Facilities, Training

v  Indirect Costs - Costs that are shared across multiple projects or programs- Eg. Inflation allowance, cost of financing, Contingency costs.

Cost Estimates may be presented at the activity level or in Summary form.


1.       Quantitative assessment of the probable costs required to complete project work. It includes

v  Direct Costs - Labor, Material, Equipment, Services, IT

v  Indirect Costs - Inflation, Exchange Rates, Contingency Reserves.

Indirect costs can be included either at the activity level or at the project level.

2.       Basis of Estimates: Documentation on

v  Basis of Estimates

v  Assumptions

v  Constraints

v  Confidence level of the final Estimates

3.       Project Document Updates: includes updates to Project Management Plan, Risk Register etc.

Tools & Techniques:

A. Expert Judgement – Guided by historical information, Expert Judgement can provide duration estimate information from prior similar projects.

B. Analogous Estimating - Analogous in English Language means Similar, Equivalent, and Comparable. Thus,  we take similar projects executed in the past and adjust current differential requirement sizing through expert Judgement – Similarity can be complexity, weight, size, budget and duration - Thus it is Top Down Approach based on historical similar previous project experience - - Adjusted for current project complexity. Less Accurate -Less Time taking - best suited for ball park estimates where less info is available. Most reliable when previous projects are similar in fact not just in appearance. When limited information is available, Analogous estimating is best adopted approach. It is less costly and less time consuming and less accurate.  It is more reliable only when the previous projects we take are similar in the fact not just in the appearance.

C.  Parametric Estimation: An algorithmic model is built based on parameters and historical info. An algorithm is used to calculate cost, duration based on historical data and project parameters. Example, Per Square Foot cost in construction, Function Points, use case points.  Lines of Code etc. Once parameter is arrived, then it is aggregated to Duration and Cost based on historical info available.  It can produce higher levels of accuracy depending on the underlying model accuracy. This can be applied either to total project or particular phases of project.

D. Three Point Estimation:  Considers Estimation uncertainty and involved risks. It can be done in two ways

Triangular Estimation
Beta/PERT Estimation
Duration = {Most Likely + Optimistic (best case scenario)+ Pessimistic [Worst case Scenario]}/3
Duration =  (Most Likely + 4*Optimistic + Pessimistic)/6
Equal probability for Most likely, Optimistic and Pessimistic estimates exists (i.e. 33.33%)
Un Equal Probability for Most likely, Optimistic and Pessimistic estimates exists.  Most likely is probable by 67% and rest of the estimates are probable by 16.5%

 F. Reserve Analysis: Contingency Reserves are approved for Known and Risks (i.e. Known unknowns) where risk response strategy is approved by steering committee - It is included as part of cost baseline -

Cost Baseline = Activity Costs + Contingency reserve costs

Management Reserve - For Unknown Unknowns (i.e. For Unknown Risks) (eg. Calamity, Earth Quake) - Not included as part of Cost baseline

Project Efforts = Cost Baseline Efforts + Management Reserve Efforts

Management reserve efforts are taken trough Change control procedure

G. Project Management Software: Like Microsoft Project Plan to help plan, organize and manage resource pools and develop resource estimates- Resource Break down structures, Resource availability-Resource Rates and various resource calendars to assist in optimizing resource utilization.

H. Cost of Quality (COQ) = Cost of Quality Assurance + Cost of Quality Control

I. Vendor Bid Analysis: Analyse what the project should cost from qualified Vendor response bids- If the project is awarded to vendors, ensure overall project cost is within the cost budgeted

J. Group Decision making techniques: Brainstorming - Delphi techniques for engaging team members to improve estimate accuracy and commitment to the emerging estimates.


Cost Management Plan - Describes level of detail necessary to carry out Cost management plan

HR Management Plan - Provides project staffing attributes, resource rates and related rewards/recognition costs

Scope Baseline - WBS, deliverables, Constraints and Assumptions. Additional Info like contractual and legal implications such as health, safety, security, performance, environmental, insurance, Intellectual property rights, licenses and permits.

Project Schedule - Activities with Start/Finish Days, Durations and Resources loaded

Risk Register - To Estimate Risk Response Costs - Risks which can be either Threats or Opportunities have an impact on both activity and overall project

Enterprise Environmental Factors

v  Market Conditions - What Products, services or results are available in the market by whom, under what terms and conditions? Geographic Supply and Demand conditions greatly influences resource costs.

v  Productivity Metrics, Duration Estimation Data, Published commercial info, Location of team members

Organization Process Assets

v  Cost Estimating Policies and Templates

v  Historical information

v  Lessons Learnt