Pragmatic approaches to project costs estimation

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Pragmatic Approaches to
Project Costs Estimation
Christopher O. Akinlade, PMP
March 12, 2019

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Pragmatic Approaches to Project Cost Estimation
Highlights:
1. Introduction
2. The Need For Cost Estimation.
3. Project Management Costs
4. Approaches to Project Cost Estimation.
5. The Cost Estimation Process
6. Doing It Right.
7. The Pragmatic Approach
8. Summary
9. Feedback / Discussions
10. References & Acknowledgements
Pragmatic Approaches to Project Cost Estimation.

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Pragmatic Approaches to Project Cost Estimation
1. Introduction:
A cost estimate is the determination
of the likely future cost of a product
or service based on an analysis of
data. Estimating that future cost
involves employing
inter-disciplinary quantitative
analysis techniques. It is partly
science, art and judgment.1
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Pragmatic Approaches to Project Cost Estimation
2. The Need For Cost Estimation
 Without it resources cannot be allocated correctly.
Estimating costs enable the PM to provide order of
magnitude estimates for size, cost and dates
needed for project completion.
 Long term and strategic planning.
 Needed for budgeting activities – preparation, justify
and amending it as circumstances change..
 Provides the basis for selecting from among
alternatives. (E.g rent or buy decisions,
internal/contractor source, sole source / competitive)
 Who to blame when things go wrong.
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Pragmatic Approaches to Project Cost Estimation
2. The Need For Cost Estimation
Projects cost estimates and projections do often fail. Why?
• Estimates and projections are based on information available.
• External events beyond the PMs control to which the PM has to make
adjustments.
• You will likely face external events and circumstances different from the
ones you planned for. (“unknown unknowns”)
Unknown unknowns – risks that cannot be anticipated based on past
experience or investigations
Donald Rumsfeld
Former US Defense Secretary
Author of: Known and Unknown,
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Pragmatic Approaches to Project Cost Estimation
2. The Need For Cost Estimation
Fundamentally: Cost Estimation
focuses on the Costs and not the price.
Discuss.
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Pragmatic Approaches to Project Cost Estimation
3. Project Management Costs
The Various Types
 Recurring versus s Non Recurring
 Direct versus Indirect
 Fixed versus variable
 Overhead Costs
 Sunk Costs
 Opportunity Costs
 Life Cycles Cost
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Pragmatic Approaches to Project Cost Estimation
4. Approaches to Cost Estimation
 Parametric Estimation
Uses historical data to calculate the
estimation. Works well and saves time.
 Bottom-Up (Definitive Technique)
All the project activities are broken up to the
microscope level where the cost estimation
is done. It is the most accurate but could be
more costly and time consuming.
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Pragmatic Approaches to Project Cost Estimation
4. Approaches to Cost Estimation
 Parametric Estimation
Uses historical data to calculate the
estimation. Works well and saves time.
 Three Point or PERT (Program
Evaluation and Review Technique)
Encompasses all the possibilities,
assumptions and uncertainties in cost
estimation.
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Pragmatic Approaches to Project Cost Estimation
4. Approaches to Cost Estimation
PERT Formula
Ec = Co + 4Cm + Cp
Ec = Expected Cost
Co = Optimistic Cost - everything work better than planned.
Cm = Pessimistic Cost – Everything works against the plan
Cp = Most Likely Cost – Everything goes well
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Pragmatic Approaches to Project Cost Estimation
4. Approaches to Cost Estimation
Which approach do I use?
The PERT method is considered as the best
and most accurate method to calculate the
project cost estimation. However, as a PM, it’s
your responsibility to identify which method
would work better for your project. Sometimes
combination of all three would work well. Again
it’s at discretion of the project manager .
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Pragmatic Approaches to Project Cost Estimation
5. The Cost Estimation Process
How do I go about it? Various industries have various approaches. But broadly, the
following steps are encompassed. (This list is not exhaustive)
Definition & Planning which includes:
• The purpose of the estimate.
• Defining the system.
• Establish the ground rules and assumptions.
• The base year
• Participants including contractors
• Specific inflation indices
• Scope and possible limitations
• Determining relationship and dependencies
• Determining logistics and maintenance support concepts.
• Selecting the estimation method (already discussed)
• Data collection
• Formulation of the estimate.
• Review and documentation.
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Pragmatic Approaches to Project Cost Estimation
6. Doing It Right
How will I know if I’m doing it right?
i. Based on data from previous or similar projects.
ii. It accommodate current and future potential process
improvements.
iii. Understood by the program and business leaders.
iv. What are the cost drivers.
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6. Doing It Right
How will I know if I’m doing it right?
v. Estimation is based on sound underlying statistics
vi. Know the assumptions and rules upon which it is based.
vii. Likely risks in the project lifecycle.
viii. Have a clear understanding of what the goal is.
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6. Doing It Right
How will I know if I’m doing it right?
ix. The project is well defined along with the risks areas.
x. Can be validated by third parties or independent means
xi. Traceable and auditable
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Pragmatic Approaches to Project Cost Estimation
7. The Pragmatic Approach
Pragmatic Approaches to Project Cost Estimation.
SOURCE: Meriam Webster
Dictionary (Android version)

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Pragmatic Approaches to Project Cost Estimation
7. The Pragmatic Approach
Examples of projects with catastrophically high2 cost overruns
and lessons learnt;
I. Scottish Parliament building. (Estimated cost in 1997 =
£40m; Completed in 2004 at a cost of ~ £431m
II. Study in 2005; Worldwide railway projects costs overruns
by 45%. Passenger utilization overestimated by 106%
III. 2002 Survey; Kitchen remodeling by American
homeowners; Expected Costs $18,658; Actual Costs of
than 207% increase to $38,709 average.
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Pragmatic Approaches to Project Cost Estimation
7. The Pragmatic Approach
Lessons
1. Two distinct approaches to planning The Inside View &
the Outside View
The inside view is the approach that will
generally be spontaneously adopted to assess
the project. Plans tends to be sketchy and overly
dependent and extrapolating on presently
available information based on the assumption
that What You See Is All There Is
(WYSIATI)
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Pragmatic Approaches to Project Cost Estimation
7. The Pragmatic Approach
Lessons
1. Two distinct approaches to planning The Inside View &
the Outside View
The outside view entails directing the attention
away from what you have in house to a class of
similar projects external to the organization.
• What is the base rate of success?
• Not relying exclusively on the information
available in-house.
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Pragmatic Approaches to Project Cost Estimation
7. The Pragmatic Approach
Lessons
Comparing the outside view with the inside
view helps to avoid overly optimistic
forecasts (planning fallacy).
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Pragmatic Approaches to Project Cost Estimation
7. The Pragmatic Approach
Lessons
Planning Fallacy:
• Plans that are unrealistically close to best
case scenarios
• Plans that could be improved upon by
consulting the statistics of similar cases.
(Don’t neglect base rate).
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Pragmatic Approaches to Project Cost Estimation
7. The Pragmatic Approach
Lessons:
2. Overcoming The Planning Fallacy
• Identify an appropriate reference class (road
construction, railway projects, buildings etc)
• Obtain the statistics of the reference class (in terms
of cost per mile of road or railway or the percentage
by which expenditure exceeded budgets).
• Use specific information about the case to adjust
the baseline prediction, if there are particular
reasons to expect the optimistic bias to be more or
less pronounced in this project than in others of the
same type.
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Pragmatic Approaches to Project Cost Estimation
8. Summary
• Project Cost Estimation is needed in other for the PM to
allocate resources and make budgeting decisions towards
the successful delivery of the project.
• Executives and PMs often take on risky projects because
they are over optimistic about the odds they face –
overestimating benefits, underestimating costs and down
playing pitfalls of mistakes and miscalculations leading to
failure in delivering the project on budget.
• Employing the pragmatic approach will help PMs and
executives to arrive at more realistic cost estimates for
their projects.
Pragmatic Approaches to Project Cost Estimation.

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Pragmatic Approaches to Project Cost Estimation
9. Feedback / Discussions
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10. References & Acknowledgements
1. Cost Estimation – Methods and Tools, Gregory K. Mislick; Daniel A.
Nussbaum; John Wiley & Sons Inc, 2015
2. Thinking Fast and Slow, Daniel Kahneman; Farrar, Strauss & Giroux,
2011
3. Predicting the Unpredictable - Pragmatic Approaches to
Estimating Project Schedule or Cost, Johanna Rothman; Practical
Ink, 2015
4. Pragmatic Approaches to Estimating Project Schedule or Cost
https://www.youtube.com/watch?v=D4PRK8j-aHA cited on 10 March,
2019
5. PMBOK® Guide 5th Edition, ©Project Management Institute, 2013
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Pragmatic Approaches to Project Cost Estimation
The End
Pragmatic Approaches to Project Cost Estimation.
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