The disciplines of cost estimating and cost planning are not well understood. But as a project manager or technical expert, you need to be comfortable making cost estimates and developing cost plans. In the construction industry — a good example of project management — a cost estimate is a prediction of the costs of construction. A cost plan determines the fiscal feasibility of an initiative. In the construction industry, a cost plan is used as a way of controlling the estimated costs during the design and construction phases of a project.
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Services Contingency costs Cost estimation is done while dealing with a project whose outcome is uncertain. Cost estimation is directly linked to the different phases of the project life cycle. They are: Conceptual: How much the project will cost? How much time it will take for the project to be done? Planning: Defines the activities involved in the process of completing the project. Execution: While implementing those activities from the planning phase of the project.
Cost estimation and best practices Cost estimation is done throughout the project periodically and there are different cost estimation techniques that are applied which takes various inputs and gives different outputs. You can find detailed information on phases and techniques from the figure below. Phases of Cost estimation Tools and Techniques Expert Judgement: Expert judgment uses experience and knowledge of experts in that particular field of the project for cost estimation.
It is the cheapest, easiest and fastest technique. No resources are required for the implementation of this technique and it is used in the beginning phase when less or no data is available. For eg: Estimating the cost of a small and simple project. Disadvantages with this technique are that it is very hard to find an expert for the specific project and also that it can be easily biased.
Top-down Estimation: Top-down estimation takes historic data from earlier projects which are similar, as a basis for estimating cost. It is used in the early phase of the project when the availability of data is limited. This is one of the least expensive methods. For eg: Cost estimation for making an online platform for a company.
For this, the cost estimator can use the data generated while making the online platform for another company. The disadvantage of this technique is that the results obtained are not reliable and accurate compared to others. Parametric Estimation: Parametric estimation utilizes statistical modeling and historical data of the key drivers to develop cost estimation. It is a fast and also cheap method. It is a more accurate technique compared to Top-down and Expert judgement methods. The disadvantage of this technique is that its accuracy lies in the correctness of the data used.
This technique uses 3 estimates to define the final cost; Most likely cost Cm :- the estimated cost if everything is executed as planned. Pessimistic cost Cp :- the estimated cost in the worst case scenario, when nothing goes according to the plan and the cost is very high compared to the budget. Optimistic cost Co :- the estimated cost in the best case scenario, when everything works much better than the actual plan. In this case, the cost is very less than the budget. This technique is used to reduce the uncertainty and manage the risk.
Disadvantages with this method are, instead of one, there are three estimates to be done. It needs more work and more time.
And there are chances that everything can go wrong. Bottom-up Estimation: Bottom-up estimation takes the estimates from individual work collections and then combines them to give a final estimate. It is one of the most accurate methods of estimation since it focuses on the cost from a very deep perspective.
In this process, the project is fragmented down to smaller activities and more detailed. The more the activities are detailed, the more accurate will be the results. This is the best technique among all other cost estimation methods. The only disadvantage which this method is that it takes more time than any others which might result in spending more money.
Also, it can be difficult to use this method for complex projects. Reserve Analysis: Reserve analysis takes uncertainty into account and determines how much contingency reserves should be assigned to the project. This amount is accounted for uncertainty cost. It can be a fixed value, or a percentage of the cost estimated or can be calculated separately. This is a form of buffer cost. Cost of Quality CoQ : This includes the amount spent during the project to avoid failure that might happen and also the money spent before and after the project is done, due to the failures.
It is a methodology that helps the organization or business to estimate the extent to which their resources are utilized. This also determines the potential savings that can be gained by implementing process improvement steps. Vendor Bid Analysis: This is the last technique. Vendor bid analysis is used to calculate the cost of the project by comparing the bids quoted by the vendors.
This method is used when the product is provided by the vendor or the service is outsourced. A disadvantage with this method is that it relies completely on the capability and knowledge of the vendor. Limitations Cost estimation has a number of strengths which we have learned in the previous parts. But it also has a few weaknesses and limitations.
Flexible areas of calculation, efficiency and cost control When there are so many models to estimate cost, with different features and different ways of providing data, it is very difficult to choose the right model for the right estimation.
Subjective: It is highly subject as in most of the cases the results depend on the knowledge and capabilities of the managers or experts or the vendors. Variable factors: Even if the manager has chosen the right method of estimating still there are some external factors that affect the results the of the cost, like change in prices of products, market fluctuation, etc.
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