Optimal Project Estimating

Project estimating is the practice of assessing the probable values of cost, duration, and resource efforts needed to produce the required product, service, or system deliverables.

Project estimates are aligned with work elements contained in the project's work breakdown structure (WBS), normally at the work package level.

Many organizations continue to rely on the estimating skills of project managers and their teams to derive the project cost, schedule, and resource utilization estimates. In some organizations, senior managers (including business managers and project managers) are called upon to participate in project planning teams, where they bring business acumen along with industry-based estimating skill and experience to the project planning effort. In a few organizations, skilled estimators are employed and join the project planning team to provide a more accurate and reliable set of project estimates than would otherwise be provided by planners with less experience.

Project estimating is primarily a matter of knowing what to estimate and how to estimate it. To that end, this practice area prescribes some estimating concepts and techniques for:

• Project Cost Estimating



• Project Schedule Estimating



• Project Resource Utilization Estimating

The Project Work Plan is created when these estimates are appended to the project's work breakdown structure (WBS). The project work plan then becomes the primary project management tool that allows the project to begin and continue through the fulfillment of its objectives and deliverables.

Project Estimating is normally conducted during project planning (Plan Phase). However, estimates should be continuously reviewed and updated as necessary throughout the project. There are several key events or indicators that should automatically trigger follow-on reviews (and possible updates) of project estimates. These include:

• Changes in project scope or in the scope of any WBS work element



• Changes in any project risk event or the addition of any new risk event



• Project re-planning, to include changes to any project plan component



• Examination and approval of project change requests



• Failure to achieve customer quality acceptance



• Failure to achieve timeliness of customer deliverables



• Changes in project resource assignments or availability



• Conduct of management gateway reviews in the project management life cycle

The organization or project manager should note these triggers and develop any additional ones needed to prompt a review of project estimates for other specific events or at critical points in the project management life cycle.

Project Cost Estimating

Project Cost Estimating entails establishing the expected cost that will be needed for the organization to conduct the project or otherwise provide the product, service, or system deliverables. This practice presents the fundamental concepts and technique guidance for estimating project costs.

Conceptually ...

This practice enables the project manager and project planners to assign estimated values for cost to project work elements. In turn, project cost (i.e., the project budget) can be tracked and controlled against those estimates.

Project Cost Estimating is normally conducted during project planning (Plan Phase). However, cost estimates should be continuously reviewed and updated as necessary throughout the project. Please refer to the key events or indicators (listed earlier on the project estimating practice area introduction page) that should automatically trigger follow-on reviews (and possible updates) of project cost estimates.

Identify Types of Cost Estimates

Across organizations and industries, estimates are defined to indicate a range of accuracy for the estimate prepared. The range of accuracy is normally related to the extent and reliability of information that is available and is used to create the estimate; it’s also related to the experience of the individual or team preparing the estimate. The following are common types of estimates used in the project management environment. These estimate types normally refer to cost estimates but could be used in a broad sense with schedule and resource utilization estimates.

Order-of-Magnitude Estimate--This high-level estimate provides only low accuracy in the range of -20 to +80%. Therefore, if an order-of-magnitude estimate is $90, this suggests the actual cost could range from $82 up to $182. This type of estimate is usually pre pared without very much supporting information, and it represents the type of estimate normally used for project initiation activities. It provides a "rough" indicator for decisions regarding whether or not a project opportunity should be pursued. This type of estimate may also be known as a conceptual, preliminary, or feasibility estimate.

Budget Estimate--This mid-level estimate provides for moderate accuracy in the range of -9 to +27%. Therefore, if a budget estimate is $125, this suggests the actual cost could range from $95 to $135. This type of estimate is prepared when more information about the project becomes available, and includes such items as scope of work, technical specifications, and requirements documents. It’s often used to obtain internal project funding approval and to allocate resources in association with obtaining approval to proceed with the project. A budget estimate is usually the preferred level of accuracy in Business Case Development.

Definitive Estimate--This detailed-level estimate pro vides significant accuracy in the range of -5 to +10%. Therefore, if a definitive estimate is $110, it suggests that the actual cost could range from $95 to $110. A definitive estimate is prepared from well-defined data and is used for establishing the project budget (cost baseline), submitting cost proposals, and managing change orders, legal claims, and government approval requests. Definitive estimates generally fit well with the bottom-up approach used to create work packages for the project WBS.

Apply Cost Estimating Techniques

The following list includes some of the more common models and techniques that can be considered for estimating project cost:

Analogous Estimating--This model is also known as "top-down" estimating. It focuses on the use of actual costs of previous similar projects as the basis for estimating the current project cost. It’s created through the application of expert or professional judgment and is frequently used when there is a limited amount of information about the project. This technique requires estimators who have the ability to combine perspectives on organizational and industry history to apply the organization's standards and utilize personal skill.

While this method is less costly than other techniques, in most cases it’s also less accurate.

Delphi Technique--This is used by several experts working as a team to derive independent cost estimates and then act to resolve any discrepancies to provide for estimates that can be used for the project. The results depend on the experts' experience as well as their ability to work together as a team. This can be a cumbersome method, but when project team members are the estimators, the process will provide for a group commitment.

Parametric Modeling--This estimating method uses project characteristics (parameters) in a mathematical model to ascertain project costs. Parametric models are usually aligned with an industry or type of work effort (e.g., construction costs per square foot). The models for this estimating method are usually obtained either through internal development or through industry-based organizations and vendors. Both the cost and accuracy of commercially available parametric models vary. They are more likely to be accurate when the historical information used to develop the model is accurate and when parameters used in the model are readily quantifiable.

Constructive Cost Model (COCOMO)--This estimating model is used in software development. There are three versions of COCOMO, which differ in detail and accuracy-basic, intermediate, and detailed models.

Basic--Useful for quick order-of-magnitude estimates of software development cost, but has limited accuracy Intermediate-Includes personnel quality and experience, and use of modern tools and techniques as factors in terms of their aggregate impact on overall project cost.

Detailed--Accounts for the influence of the factors in the intermediate model during individual project phases.

Function Point Analysis (FPA)--The function point analysis technique is used to determine software development cost. It creates estimates based on the premise that application development time is proportional to weighted counts for the number of External inputs--External outputs--Logic master files--Interfaces to other systems--External inquiries.

A variation of the FPA technique uses feature points, rather than function points, and considers algorithms in addition to input and output files.

Bottom-up Estimating --Using this method, cost estimates are determined for each work package in the WBS. This model produces thorough estimates and minimizes omissions. It does, however, require a comprehensive WBS, and it can yield a false sense of security by equating detail with precision. The cost and accuracy of this technique are driven by the size of the individual work packages-smaller work packages increase both cost and accuracy. The project management team must balance the need for additional accuracy against the additional cost of the time needed to produce that accuracy.

Estimators should examine business and project management processes to determine which models and techniques will be used when preparing project cost estimates. Persons having responsibility for cost estimating should be familiar with the methods and techniques they use. Relevant experience with the nature of work to be performed is also a key factor in preparing project cost estimates.

Determine types of Project Costs

The project manager does not have to be a certified accountant to manage cost, but reasonable familiarity with cost elements is essential to successful cost accounting and budget management. Also, in today's world of technology-based software applications, it’s generally recommended that a good software application package be selected and used to assist the project manager (and the organization) in the management of various project costs.

The following types of project costs should be considered for inclusion in the estimates created at the work package level and ultimately presented as the budget in the Project Work Plan.

Labor Costs--Project resource utilization requirements are usually incorporated into the WBS at the work package level. Associated labor cost estimates are also entered at the work package level and then aggregated at successively higher WBS levels to provide the total project labor cost. The loaded labor rate for each resource, by person or by job code, is entered into the work package, and when using an automated application, it will then calculate the labor cost according to the number of hours allotted for the work element. If the project has a long duration, salary increases and other factors affecting future hourly rates should be considered. Note that the number of hours per resource is an estimate of time that is created and illustrates the collaboration needed between the cost and schedule estimating processes. Similarly, the number and type of resource utilization needed also has bearing on the cost, and those data are likewise considered and pre pared concurrently with cost and schedule estimates.

Labor cost estimates should be prepared for:

• Project management (project managers, project sponsors, project executives)



• Professional and technical team members



• Labor and skilled workers



• Administrative aides and assistants

Some of the resources in this list may be inadvertently excluded in project planning. Sometimes that exclusion is intentional. Unless these resources are part of a central project management office (PMO) or the organization has an "integrated" workforce structure (i.e., assigned resources already report directly to the project manager or PMO), there should be cost accountability for resources working on the project. In the absence of such accountability, data relating to total project labor costs will be inaccurate. Alternately, the cost of project management and administrative personnel may be aligned with indirect costs described in the following text.

Direct Costs--Project direct costs should be entered at the work package level for most items acquired by direct purchases. Certain cost items might be more manage able at a higher level in the WBS, but caution should be used when making such an assignment at mid-levels in the WBS to ensure that the cost is properly aggregated upward. Direct costs are accounted for by entering the unit cost for each item in the work element in which it’s used. If an item is used in association with multiple work elements, this warrants consideration for entering the cost at a higher level of the WBS. When the project has a long duration, inflation and other cost escalation factors should be factored into the cost estimates. Direct costs are those costs that will be attributed directly to the project and usually include the following types of cost items:

Materials (raw or piece materials used to create or construct the customer deliverable)

Equipment and equipment part replacements

Contract workers' (subcontractors'), vendors', and consultants' labor fees

Indirect Costs--Project indirect costs are usually not directly attributable to specific work packages. On certain larger projects, the cost associated with planning and managing the project may become an indirect cost. Therefore, it’s important to include these costs in the project budget. The following are examples of project indirect costs:

• Overhead allocation (administrative resources, facilities, office equipment, etc.)



• Computer hardware and peripherals (including LAN and connectivity items)



• Software applications



• Communications (telephone, fax, e-mail)



• Travel



• Training and education



• Administrative supplies



• Office space (facility allocation)

Contingency Funds--These funds are project costs that have been approved and set aside as a means to deal with uncertain future circumstances (e.g., labor extensions, modified requirements, or responses to project and business risk events).

Management Reserve--These funds are project costs that have been approved and set aside as a means to deal with unknown future circumstances impacting project cost, schedule, or performance objectives.

Prepare the Project Cost Estimate

Project cost estimating is the process of establishing an approximation of the total cost of the resources (human and material) and other miscellaneous expenses needed to complete the project. To that end, cost estimating should be done in conjunction with schedule estimating and resource utilization estimating. Project costs also include the expense for conducting project planning and management. Additionally, project cost estimating should include identification and consideration of various costing alternatives.

The project planning team is convened (sometimes as a component of the project team) along with others having skills and experience in estimating project costs, and they meet to conduct the estimating portion of the project planning effort. The following cost estimating steps are prescribed for this process:

Conduct the estimating team kickoff meeting. The project manager reviews the approach to cost estimating with the planning team and assigns responsibilities based on individual skills and experience.

Gather the required data. The planning team gathers all the information about the cost elements that need to be estimated and determines the type of estimating method, model, or technique to be used.

Obtain the required estimating tools. The necessary software application, parametric models, or other cost estimating tools must be made available to the estimating team.

Prepare the project cost estimate. The planning team prepares the estimate using appropriate and available tools.

For external projects-those projects performed under contract-cost estimating must be distinguished from pricing.

Pricing is a business decision about how much the organization will charge for the product or service provided. The cost estimates produced here only provide an indication of organizational cost commitments that are needed before any business return on investment is specified or realized.

Establish the Project Cost Baseline

Upon completion of project cost estimates, the results are usually forwarded to the project executive (sponsor) and perhaps other management entities (e.g., PMO) for review and approval. Otherwise, the project manager may have the authority to approve the project cost estimates (project budget) as per standard procedures within the organization or as specified in the Project Charter. In some situations, the customer may also be a reviewer of early cost estimates.

A cost baseline is established when the ultimate review authority within the organization has approved the cost estimates. The cost baseline is normally set by the project man ager, and any changes to this baseline must go through a change management process. The cost baseline is normally established in conjunction with setting the schedule and resource utilization baselines.

When using project management software, there is normally an automated feature or function available to establish and save the approved cost estimates as a part of the project baseline.