Mastering Project Cost Estimation: Tips and Techniques

The project cost estimation relies heavily on the understanding of other knowledge areas within project management. Two most important knowledge areas of those are Project Scope Management and Project Schedule Management. In this article, you’ll get deep level understanding of project cost estimation.

Scope Management knowledge helps project managers to baseline scope of the project and provides a Work Breakdown Structure (WBS) project document along with WBS dictionary.

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The WBS dictionary is a document containing comprehensive information about each element within the WBS, such as work packages and control accounts. Work packages represent the smallest unit of work to which a project can be decomposed when constructing the Work Breakdown Structure (WBS).

Schedule Management describes the decomposition of work packages into smaller components or activities. Cost estimates are created at activity level for many projects. Large projects are more practical hence their estimation and control cost is managed at higher level, called a control account.

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To calculate cost of project, you need to understand “Estimate Cost” process of project management. This process involves coming up with cost estimates for all project activities and resources required to complete them. It is called as Project Cost or Cost Baseline. Cost baseline is added with one time and fixed amount of management reserve, called as Project Budget. Now, you should get high level project cost estimation technique.

Calculation of Project Cost / Project Cost Estimation

In the simple words, project cost is sum of costs of all the efforts to complete the project. It helps for project cost estimation. This includes cost directly associated with the project like labor cost, equipment cost, material cost and training cost and indirect cost incurred for the benefit of more than one project. Examples include taxes, janitorial services.

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Below are the high level components of Project cost:

1. Costs of resource efforts
2. Costs of quality efforts
3. Costs of risk efforts
4. Costs of Project Manager’s time
5. Costs of Project Management activities
6. Expenses for physical official office spaces used directly for project
7. Overhead costs, such as management salaries, supporting staff salaries and general office expenses
8. In case of procurement, amount of profits payable to sellers to purchase goods or services.

Now you are aware about the components which shall be added to come at the result of project cost. But the question is what are the inputs to Estimate Cost process which will help to identify individual cost incur.

Inputs to Estimate Cost process

1. Cost Management Plan
2. Quality Management Plan
3. Scope baseline (project scope statement, WBS, WBS dictionary)
4. Lesson learned register
5. Project schedule
6. Resource requirements (based on resource cost rates)
7. Risks register – it is a very important document to consider because the occurrence of risk can affect planned project cost. Project Manager includes some amount as Contingency Reserve in cost baseline or project cost so that risk can be managed without affecting the plan.
8. Organization Process Assets
9. Enterprise Environmental Factors
10. Project Management costs

How is Project Cost Estimation Done?

Project cost estimation can be done using some tools and techniques. Examples like

1. Analogous estimation – based on previous experiences
2. Parametric estimation – based on calculations upon analogous estimation
3. Bottom-up estimation – sum of estimation from bottom level activity to top using WBS
4. Three-points estimation – based on optimistic, pessimistic and most likely estimates
5. Reserve Analysis – analysis on reserved amount to handle risks
6. Determining resource cost rates – refers rate card of resources
7. Alternative analysis – analysis of alternate solution to reduce cost, schedule without changing scope and quality. Example: make or buy analysis.

Formula of Project Cost or Cost Baseline

COST BASELINE = PROJECT ESTIMATES + CONTINGENCY RESERVES

Where,

1. Project estimates = Sum of Control account estimates
2. Control account estimates = Sum of Work packages estimates
3. Work package estimates = Sum of Activity estimates