Common Tools for Cost Estimating in Project Management
By John Filicetti
Some of the tools the project manager can employ for cost estimating are:
- Resource rates – The individual or group preparing the estimates must know the unit rates (e.g., staff cost per hour, bulk material cost per cubic yard) for each resource in order to calculate project costs. If actual rates are not known, the rates themselves may have to be estimated.
Activity duration estimates – Activity duration estimates will affect cost estimates on any project where the project budget includes an allowance for the cost of financing (i.e., interest charges).
Historical information – Information on the cost of many categories of resources is often available from one or more of the following sources:
- Project files—one or more of the organizations involved in the project may maintain records of previous project results that are detailed enough to aid in developing cost estimates. In some application areas, individual team members may maintain such records.
- Commercial cost estimating databases—historical information is often available commercially and can be purchased to increase estimate accuracies
- Project team knowledge—the individual members of the project team may remember previous actuals or estimates. While such recollections may be useful, they are generally far less reliable than documented results.
Analogous estimating – Analogous estimating, also called top-down estimating, means using the actual cost of a previous, similar project as the basis for estimating the cost of the current project. It is frequently used to estimate total project costs when there is a limited amount of detailed information about the project (e.g., in the early phases). Analogous estimating is a form of expert judgment. Analogous estimating is generally less costly than other techniques, but it is also generally less accurate. It is most reliable when the previous projects are similar in fact and not just in appearance, and the individuals or groups preparing the estimates have the needed expertise.
Parametric modeling – Parametric modeling involves using project characteristics (parameters) in a mathematical model to predict project costs. Models may be simple (residential home construction will cost a certain amount per square foot of living space) or complex (one model of software development costs uses 13 separate adjustment factors each of which has 5-7 points on it). Both the cost and accuracy of parametric models varies widely. They are most likely to be reliable when the historical information used to develop the model was accurate, the parameters used in the model are readily quantifiable, and the model is scalable (i.e., it works as well for a very large project as for a very small one).
Bottom-up estimating – This technique involves estimating the cost of individual work items, then summarizing or rolling-up the individual estimates to get a project total. The cost and accuracy of bottom-up estimating is driven by the size of the individual work items: smaller work items increase both cost and accuracy. The project management team must weigh the additional accuracy against the additional cost.
Computerized tools – Computerized tools such as project management software and spreadsheets are widely used to assist with cost estimating. Such products can simplify the use of the tools described above and thereby facilitate rapid consideration of many costing alternatives.
Incremental Estimating – Anyone involved with estimating knows the estimates have more certainty as you approach the end of a project. Sizing and detailed estimating can be combined to produce incremental estimates – high level or rough estimates at the start of the project (or phase), and detailed, task-based estimates as the project become more clearly defined.
John F. Filicetti, PMP, MBA
John Filicetti is a Sr. Sales Engineer/PM-PMO-PPM Consultant with a great depth of experience and expertise in enterprise project management, project management methodologies, Project Portfolio Management (PPM), Project Management Offices (PMOs), Governance, process consulting, and business management. John has directed and managed project management teams, created and implemented methodologies and practices, provided project management consulting, created and directed PMOs, and created consulting and professional services in such areas as project portfolio management, Governance, business process re-engineering, network systems integration, application development, infrastructure, and complex environments. John has enjoyed many years as PMO Director for large corporations in the Seattle area and leads the PMO Roundtable discussion group and forum.