Cost estimation is a crucial process that ensures that the project is always under a specified budget. In the project life cycle, various costs may appear. Therefore, the project manager and the project stakeholders must develop an accurate project estimation that ensures the project’s success. Oberlender (2014) supports this by disclosing that an accurate estimation approach defines whether the project succeeds or fails. In retrospect, this reveals the necessity of accurate cost estimation within any project management. While the estimation of cost is necessary for every project, it is increasingly intricate to develop an accurate cost estimate, especially in big and multifaceted projects. It is mainly because such projects are often characterized by risks that bring about unexpected costs. In most cost estimations, various factors must be taken into account. These factors aid in calculating the budget, thereby helping the project meet the financial commitment crucial for the success of a project. The process applies every facet of the project, from bridge building to developmental processes (Westland, 2019). In retrospect, all processes and activities within a project cost money, thereby necessitating a clear amount necessary to facilitate the project’s objectives, deliverables, and scope.
Figure 7.1 Example of an Estimation Dashboard
Retrieved From: (Westland, 2019)
7.1.1 An Overview of Cost Estimation
Cost estimation denotes the summation of d=costs from different elements through the established methodology and valid data. It also assists in the estimation of future costs depending on the type of project. There are various processes or characteristics necessary for estimating the costs of a given project. They include:
Clear identification of project costs
There must be broad participation when preparing cost estimates
The availability of necessary data is crucial
There must be a standardized structure for the estimates
The project manager must provide program uncertainties
Recognition of inflation
Incorporation of excluded costs
Independent reviews of the project estimates
The revision of estimates for various program changes (Westland, 2019)
7.1.2 12-Step Process for Cost Estimation
Over the years, various scholars have defined the processes of cost estimation. However, 12 steps prove vital in the accurate estimation of costs in any given project. They include:
1. Definition of the purpose of the estimate
The project manager must determine the purpose of the course estimate. The project manager and necessary parties must also identify the level of detail the cost estimate should have. In turn, this will aid in the accurate allocation of resources throughout the project duration. Relevant factors, such as the overall scope and the recipient of the cost, are also vital.
2. Developing an estimate plan
There are various facets and processes necessary to make a clear and logical estimate plan. The following is a sequential process for developing an estimate plan.
i. The assembly of the cost-estimating team
ii. An outline of the team’s approach
iii. Development of the project timeline
iv. Determination of the team that will develop the independent cost estimates
v. Creation of the project team’s schedule
3. Definition of characteristics
The definition of characteristics necessary for creating an estimate of project costs necessitates creating purpose, system, and performance of the baseline description. It is inclusive of technology implications, schedule, approaches, and system configuration. Besides that, security, risks, deployment, and management are also necessary when defining the characteristics used to develop cost estimates.
4. Determination of the estimation approach
Determining the estimating approach for costs can be defined through the Work Breakdown Structure. It is then followed by selecting an estimation approach that best suits every element within the Work Breakdown Structure. In this stage, it is vital to cross-check various facets, such as schedule drivers and costs, thereby facilitating the creation of a checklist.
5. Identification of rules and assumptions
In this stage, it is necessary to clearly and logically define facets included and excluded from the cost estimates. It is also crucial to identify the specific assumptions made to ensure the flow of the cost estimates.
6. Obtain data
The attainment of data necessitates the creation of a data collection plan. This is then followed by attaining the necessary data and its analysis to allocate the necessary cost drives (Westland, 2019).
7. Development of point estimate
The stage requires developing a cost model through the estimation of each element within the Work Breakdown Structure.
8. Conduct a sensitivity analysis
In every project, the cost test sensitivity varies according to the input estimates, values, and key assumptions of a particular deliverable project. It is also vital to determine the necessary cost drivers to perform a sensitivity analysis accurately.
9. Risk and uncertainty analysis
The evaluation of a risk and uncertainty analysis can be achieved by determining the costs and schedule of each element within the Work Breakdown Structure. Besides that, risk and uncertainty analysis must also evaluate the technical risks since they may impact the projected cost estimates. After these processes are accomplished, it is necessary to develop a management mechanism or approach that may reduce the risks and uncertainties.
10. Documentation of the estimate
It is vital to document each stage of the estimation process. Documentation will help ensure that each project stakeholder, particularly the project team, are on the same page regarding the cost estimate.
11. Presentation of the cost estimate to the management
After the final documentation of the cost estimates, it is crucial to brief the stakeholders on the final cost estimates. Doing so would help in the approval of the cost estimates.
12. Update estimate
Today’s business environment is ever-changing. Besides that, the continuous improvement of technology implies that long-term projects need to adapt to emerging processes. Therefore, this may lead to unprecedented changes that necessitate an update of the estimated costs. As such, it is vital to perform a postmortem whenever necessary during the project duration.
7.1.3 Techniques for Project Cost Estimation
1. Various cost estimation techniques have been used over the past decades in project management. Some of the leading approaches include:
2. Analogous estimation: Helps project managers that have had experience in similar projects. Therefore, in this cost estimation technique, project managers use their historical data to estimate their current projects’ costs.
3. Statistical modeling: Statistical modeling, otherwise referred to as parametric estimation, also uses historical data of specific cost drivers. It then calculates the projected costs depending on the duration or any changed aspect within the project.
4. Bottom-up estimation: This is a granular approach that uses the estimate of individual tasks. It then adds the projected costs to reveal the final overall cost estimate of the project.
5. Three-point estimate: In this technique, the project manager evaluates three possible scenarios; the most likely range, the optimistic range, and the pessimistic range. These ranges are then evaluated using an equation to develop a cost estimate.
6. Reserve analysis: It determines the amount of contingency reserve that should be allocated. In this cost estimation technique, there is an evaluation of wrangle uncertainty.
7. Cost of quality approach: The cost of quality employs the amount of money spent during the project duration to avert failures. It also considers the money applied after the completion of the project to address any unprecedented failures. The approach can prove useful in fine-tuning the overall cost estimation of a given project. It also compares the estimate from vendors to assist in figuring accurate and logical costs.
8. Dynamic tools: Dynamic tools aids in cost estimation by employing online software that collects various project information, thereby facilitating the cost estimation process. The dynamic tools such as the project management software can also help define the project teams, goals, and the various tasks required for the successful completion of the project.