Chap 7.2 Estimate Cost

Chapter 7 –
Project Cost Management
PMP
Trainer: Anand BobadePMBOK 6th Edition, 2019, All rights reserved.
Estimate Cost
SIXTH EDITION

By: Anand Bobade (nmbobade@gmail.com)PMBOK 6edition @ All rights reserved .
Overview
Estimate Cost Definition
Estimate Cost : ITTO
Estimation techniques?
Contingency & management
reserves?
Review
7.2 Estimate Cost

Plan Cost
Management:
Estimate Cost
Determine Budget Control Cost
Project Cost Management Processes

Scope is key for
estimating cost.
Estimation can be
done at activity or
work package level.
Estimate activity
resource is linked to
cost estimation.
PM has to consider all types costs:
Resources (Human,
Equipment, Hardware,
Software)
Facilitates Direct & indirect cost
Estimate Cost->Introduction
Information is
taken from
Resource
requirements
Scope Baseline Schedule

Cost estimates are predictions that is based on
the information available at that time.
Cost trade-offs and risk should be considered
(Make or Buy decision)
It should be reviewed & refined during course of
project to reflect additional details as it become
available.
Assumptions should be continuously tested.
Estimate Cost->Introduction

The process of developing an APPROXIMATION of the monetary
resources needed to complete project activities.
It determines the amount of cost required to complete
project work.
Estimate Cost->Definition
Project Cost
Approximation
Schedule & resource Management processes

Estimate Cost -> ITTO
Expert Judgment
Analogous estimating
Parametric estimating
Bottom-up estimating
Three-point estimating
Data analysis
PMIS
Decision making
Project Management
Plan
Project documents
EEF
OPA
Cost estimates
Basis of estimates
Project doc. updates
Inputs Tools & Techniques Outputs

PMP
Project
documents
EEF OPA
Estimate Cost -> Input

Project
Management Plan
Cost Management Plan
• Define how project costs will be planned, structured, and
controlled.
• Define how each Cost Management Process is executed.
• Specify preferred method or techniques to be used.
Quality Management Plan:
• Cost of quality
Scope Baseline:
• Scope Statement: Project Scope (Inclusion & exclusions),
Assumptions and constraints.
• WBS: Activity groups in to deliverables or work packages. WBS
provide framework for cost management.
• WBS Dictionary: Control account. Deliverable details.
Estimate Cost ->Input->Project Management Plan

Project
Management Plan
Project Schedule:
•Cost is always time bound, hence its important to know when these
activities are scheduled.
Resource requirements:
•Cost estimation is linked to the estimate activity resources process.
•You can get resources assigned to activities along with it’s quantity &
duration from project schedule.
Risk Register
•Examine cost & schedule related risks.
•Reserve should be planned to mitigate & inspect Risks.
•Potential benefits from the positive risk should be considered.
Lessons learned register
Estimate Cost ->Input->Project Documents

EEF
Internal EEF:
• Internal Human resource rates.
• HR policies - Terms & conditions.
• Organizational culture &
structure.
External EEF:
• Market condition.
• Published Commercial
information databases (Rates,
inflation).
• Exchange rates.
Estimate Cost->Input->EEF

OPA
Existing cost policies, procedures, and guidelines (e.g., invoicing
process)
Financial controls procedures.
Historical information and lessons learned (e.g., past cost escalation
issues)
Financial databases (Old project finance details)
Estimate Cost->Input->OPA

Estimate Cost -> Tools & Techniques
Expert Judgment
Analogous
estimating
Parametric
estimating
Bottom-up
estimating
Three-point
estimating
Data analysis PMIS Decision making

Estimate Cost -> Tools & Techniques
Estimation Techniques: Same in Schedule management & Cost management
Analogous estimating Parametric estimating
Three-point
estimating

Analogues
Estimation
Estimate cost of the activity using historical data from a similar activity or a
project.
•Something similarThink “Analogy”:
•Cost, budget/measures (size, weight) &
complexity
Uses values:
•Actual cost of previous, similar projectsRelies on:
•Limited amount of information
available
Used when:
•For expert judgment.
Uses historical
information:
•Less costly, less time consuming, less
accurate.
Everything is less:
Estimate Cost->T&T-> Analogues estimation

Computer Lab in
School A
Computer Lab in
School B
Used when:
• Only limited information
available.
• Similar project information
available
• Experienced estimator
In this scenarios - Information
available is
• Computer configurations
• Computer installation duration -
30 min
• No of computer configured - 20
Similar
Analogues
Estimation

Door A Door B
Similar
Analogues
Estimation

Advantages
•Quick
•No need to identify activities
•Less costly to create
•Cost constraints created by
management during project
initiation gives PM data to
evaluate project feasibility
•Management can put cap on
the overall project cost.
Disadvantages
•Less accurate
•Estimation is done based on
limited information & high
level understanding of the
project
•Require considerable
experience
•Possibility of infighting to gain
biggest piece of the budget
without being able to justify
the need.
•Extremely difficult to estimate
projects with high uncertainty
Does not consider difference
between projects.
Analogues
Estimation

Parametric
estimating
Sophisticated algorithm are used to calculate Cost based on Historical data
& multiple quantifiable parameters.
•Between historical data & other
variables
Uses statistical
relationship:
•Depending upon the sophistication of
algorithm or tools.
•Underlying data built into the model.
Can produce
higher levels of
accuracy:
•A total project or segments of a project.
•In conjunction with other estimating
methods.
Can be applied
to:
Estimate Cost->T&T-> Parametric estimation

Parametric
estimating
E.g., CCS – Construction Computer Software (CANDY)
CANDY Software

Project A (completed):
• Installation of 1,000 meter Cable
• Installation type: simple
• Resource:1
• Duration taken: 40 hours
• Productivity: 25 meter’s per
hour’s
• Cost: 40*AED 100/hour = 4,000
Project B (New)
• Installation of 2,000 meter Cable
• Installation type: complex
• Resource:1
• Productivity: 20 meter’s per
hour’s (by applying complexity
factor)
• Duration Required: 100 hours
(2,000 /20)
• Cost: 100 & AED 1000/hour =
10,000
• Function Point Models
• COCOMO II (COnstructive COst MOdel ) Model
• SLOC (Source lines of code) Model
Software
Parametric Cost
Models
Most industries has their own estimation model.
Parametric
estimating

Three point
estimation
A technique used to estimate cost by applying an average of optimistic, pessimistic &
most likely estimates
Used when there is uncertainty with the individual activity estimates.
•Based on analysis of the best-case
scenario.
Optimistic
(O):
•Based on realistic effort assessment for
required work & any predicted expenses
(or ML)
Most likely
(M) :
•Based on analysis of the worst-case
scenario.
Pessimistic
(P).
Estimate Cost->T&T-> Three point estimation

• = (O + M + P) / 3Triangular Distribution
• = (O + 4M + P) / 6
Beta Distribution
(Weighted average)
• = ( P – O ) / 6Standard Deviation (SD)
• = SD ^ 2Activity variance
Activity O M P Trangular SD PERT
Activity1 6 20 30 18.67 4.00 19.333
Activity2 10 20 40 23.33 5.00 21.667
Activity3 13 20 50 27.67 6.17 23.833
This is also called as PERT techniques (Program evaluation and review technique).
PERT formulas are as below.
Estimate Cost->T&T-> Three point estimation
Three point
estimation

Bottom up
estimate
Estimating project cost by aggregating the estimates of the lower-level components
of the WBS.
When an activity cannot be estimated with confidence, the work within activity is
decomposed further.
These estimates are then aggregated into a total cost for each of the activity
(Summarised or Rolled-up to higher level)
Estimate Cost->T&T-> Bottom up estimate

Data analysis
Estimate Cost->T&T-> Data analysis
Project A
Baseline: 35 million
• Cost: 34 million
• Contingency: 1 million
Project B
Project C
Projects department get
budget of 100 million to
start the projects.
Initiates projects worth : 95 Million
Management reserve: 5 Million
Following data analysis techniques can be used:
Alternatives analysis; Reserve analysis; Cost of Quality

It is a budget within cost
baseline that is allocated for
identified & accepted risks
(known-unknowns)
Contingency Reserve:
Reserved for unforeseen risks
(unknown unknowns) related to
the work that is within scope of
the project.
Management Reserve:
Estimate Cost->T&T-> Data analysis-> Reserve Analysis
Reserve Analysis:
•Refer to analyzing contingency & management reserves to deal with risks.
Data analysis

575
25
550
50
500
250
150
50 50 50
100
25 25 50
250
100 100 50
250
Cost Budget
Management Reserve
Cost Baseline
Contingency Reserve
Project Estimates
Control Account estimate
Work Package estimate
Activity Estimate
Data analysis

Data analysis
Contingency Reserve:
It is a budget within cost baseline that is allocated for identified &
accepted risks (known-unknowns)
Allocation can be for specific activity/ Project, or both.
Allocation can be % of the estimated cost or a fixed number-
Quantitative analysis.
Contingency can be reduced, or eliminated.
Contingency should be clearly documented.
It is a part of the cost baseline & overall funding requirements.

Management Reserve:
It is project budget withheld for management control
purposes.
Reserved for unforeseen work that is within scope of the
project (unknown unknowns).
Not included in the cost baseline.
But is part of the overall project budget and funding
requirements.
When management reserve used, it is added to cost baseline,
thus requiring an approved change to cost baseline.
Data analysis

Data analysis
Cost of Quality:
• Cost of quality should be included in estimate.
• Assumptions about costs of quality is used to prepare activity cost
estimate.
Estimate Cost->T&T-> Data analysis-> Cost of Quality

PMIS
Assist , simplify, facilitate estimations & helps in rapid alternative estimations.
Plan, organize & manage the resource costs. Develop resource estimates
Estimate Cost->T&T->Project Management Information system
Can automatically aggregate cost
estimates
Can help manage & track cash flow
Can generate reports

Decision
Making
Team based estimation approach. Helps to get
commitment on emerging estimates.
Required to improve estimation accuracy.
Brainstorming & Delphi or nominal group techniques.
Estimate Cost->T&T->Decision Making

Estimate Cost -> Output
Cost estimates Basis of estimates Project doc. updates

Include quantitative assessments of the probable costs required to complete project
work, as well as contingency amounts for identified risks, management reserve for
unplanned work
Estimate Cost -> Output->Cost Estimate
Cost estimates
Direct Cost Indirect Cost
Variable
cost
Fixed Cost

Basis of
Estimates
Documentation contain:
The basis of
estimate
All assumptions
made
Any known
constraints
Estimation may be indication of :
Range of possible estimates:
• e.g., AED 1,000 (±10%)
Confidence/Accuracy level (as per PMI):
•Rough order of magnitude – ROM (–25 to
+75%) – During project initiation
•Definite (–5 to +10%) – after baseline.
Supporting documentation detailing how cost estimate was derived.
Estimate Cost -> Output-> Basis of Estimate

Rough Order of Magnitude
• Low confidence
• Early estimates
• Analogous estimate
• Unknown projects
• -25% to +75 %
Definitive estimate
• High confidence
• When scope/requirements are
clear
• Bottom up estimate
• Repetitive project
• -5% to +10 %
• Do not communicate single number estimate
• Give range of estimate mentioning type &
degree off confidence.
Communicating
estimates & setting
expectations:
Estimate Cost -> Output-> Basis of Estimate
Basis of
Estimates

Estimate Cost -> Review
Lot of information gathering need to be
done before estimation
Cost Estimation is tightly linked to time
management
Do not communicate single estimate
(communicate ROM & definitive)
Different type of estimation techniques
Contingency & management reserve
Cost of quality should be considered in
estimation

Chap 7.2 Estimate Cost

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Chap 7.2 Estimate Cost