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.
Outputs:
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
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%
|
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.
Inputs:
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