Wednesday, August 21, 2013

Developing Accurate Cost Estimates

What is the Biggest Problem in Developing Accurate Cost Estimations? Why?

Cost Estimation Methods 

Developing the estimated cost of a project, can be the variance between completing projects on time and being able to complete the project on budget. Techniques for cost estimations are very important and particularly if you are the project manager. Estimating what processes cost and how they work to provide a finished product should be a part of the project proposal. Study the techniques that that you feel will give you the most accurate estimation method.

Types of Cost Estimation Methods
  • Analogous estimating is learning from precedents.  Read though past projects and determine how the cost estimating was based. Analogous estimating can provide a continuous basis for developing estimates based on past learning. Project parameters that can be estimated include costs, budget, scope, and duration. Use analogous estimation to determine the complexity plus the size of the entire project. Compare a current activity to that of an activity that finished in the recent past when the information about the current project is unclear or unavailable. Using expert judgment is highly reliable (Project Management Knowledge, 2010).
  • Parametric estimating is a very accurate method of determining costs. This is based on a previous cost model. Using the cost per line of code, square foot or per cubic inch is parametric estimating. Project managers use this method for construction and certain type of software development. Verified cases provide the basis for parametric estimating. When used correctly, parametric cost estimating is highly accurate. However, there are numerous challenges, in this type of cost estimating and adverse effects can be the result if the formulas and premises are not used properly. Parametric cost estimating is very popular in software development to estimate the development and product life cycle costs.
  • Program Evaluation and Review Technique (PERT) identifies three separate estimates first based on the optimist outcome and then based on the pessimistic outcome. This third point is the premise that the larger the distance between pessimistic (worst case scenario) and optimistic (best case scenario) values the less like the project will succeed. The distance is calculated: O+(4*M)+P/6.  PERT separates each section of the project into events and activities and schedules them in their proper sequence. Paths connect each event and the critical path is the connecting point duration of the critical path is how long the project is estimated to take. There are always delays factored into the paths. However, this method does not find the best way to complete a project (Mind Tools, 2012).
  • Rule of thumb cost estimating is a universally accepted estimating basis. Rule of thumb estimates are unique to every project and to each industry. Rule of thumb cost estimating looks at several completed projects and reviews them as a benchmark of measurement and cost estimating.  According to the Association for the Advancement of Cost Engineering International a cost estimate is "an evaluation of all the costs of the elements of a project or efforts as defined by an agreed-upon scope" (US Army Corp of Engineers, 2000). Rule of thumb is the total estimated cost of a project and is dependent on how well the project is actually defined or what the scope of the project is.

What is the Best Cost Estimating Method?

Every method has its own complications and inherent problems. However, when using analogous or precedent cost estimating, there is a basis and a foundation. All projects have the same elements of supplies, time, budget and finish. By following models that have been already proven, an accurate method of estimating costs can be reached.

References:
Farens, Daniel V. (1999). Parametric Estimating – Past, Present and Future. Available: http://www.pricesystems.com/white_papers/Parametric%20Estima. Last accessed: 22 March 2013.
Project Management Knowledge (2010). The Ultimate Resource for project managers: Analogous Estimating Techniques. Available: http://project-management-knowledge.com/definitions/a/analogous-estimating. Last accessed: 22 March 2013.
U.S. Army Corps of Engineers (2000). A Guide to Developing and Documenting Cost Estimates During the Feasibility Study. Available: www.eap.gov/superfund. Last accessed: 22 March 2013).



Elad Shalom,
Senior Consultant at SwiftRadius

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