The document discusses project cost estimation, including the different components that must be estimated such as labor, equipment, supplies, and overhead costs. It describes several techniques that can be used for cost estimation, including analogous estimating based on similar past projects, parametric estimation using statistical models, and three-point estimation providing low, most likely, and high estimates. The document also covers bottom-up and top-down approaches to cost estimation, with bottom-up estimating each task separately and top-down first estimating total costs and then breaking it down. It emphasizes the importance of accuracy in cost estimation and choosing the appropriate technique depending on the project.

1. Project Estimation

2. Where to Start ?

4. What is Project Cost Estimation?
Project Cost Estimation is defined as the process of approximating the total expenditure of the project.
The accuracy of the cost estimation and budgeting in project management depends on the accuracy and
details of the project scope, which is the scope baseline.
The scope will also define any constraints like date, resources or budget. The risk register will help to
calculate estimate types of costs, the expenses made behind the contingent action and the expenses
made to cope with risks.
● Labor cost
● Equipment cost
● Cost of supplies
● Travel cost
● Training cost
● Overhead cost, etc.

5. Estimating Costs
Costs are comprised of direct costs (largely humans, machines, and materials) and indirect
costs (mostly support functions, utilities, management, taxes, etc).
Direct costs in many industries have become a relatively small percentage of overall
product cost, while indirect costs have become much larger.
Because cost estimation is a complex activity, the following questions form a structure for
our discussion.

6. ● What cost components must be estimated?
● What approach to cost estimation will be applied?
● How accurate should the estimates be?
● What estimation techniques will be utilized?

7. Understanding
Cost Estimation

8. Analogous Estimating
This estimating technique is based on expert judgments and information based on similar previous projects. Where previously
done similar project cost is considered with plus or minus of 20% for existing project.
Parametric Estimation
Parametric estimation is used when historical data is available from previous projects related to the current project. In this case,
you can use statistical techniques such as regression or correlation analysis to determine an equation that accurately predicts
costs for similar tasks on future projects.
Three-point Estimation
Three-point estimation is another technique used for cost estimation in projects. In this method, we divide our project into three
phases: low-end, most likely, and high-end estimates for each phase separately. This approach allows us to avoid over- or under-
estimating the budget by providing us with more realistic results due to its flexibility.
Expert Judgement
This is the most common technique used by project managers. They use their knowledge and experience to arrive at an
estimate. Experts may be required to estimate elements like cost, time, and resources or other variables that can influence the
estimate.
Estimation by Analogy
This technique is based on comparing similar projects and applying the same cost factors or estimating relationships to the new
project.

9. Bottom-up Estimation
In this technique, each task is estimated separately and added up to get a total cost for the project. Still, it has limitations because
it doesn't consider risks associated with each task, which may negatively impact the overall project cost.
Top-down Estimation
This is a method where you first need to estimate the total costs for all phases of your project and then break down each phase
into smaller units.
Vendor Bid Analysis
This involves analyzing the bids received from vendors for particular goods and services required to complete a specific task or
phase of the project. It helps in determining whether these bids are in line with what was expected or not.
Reserve Analysis
Reserve Analysis is a complex method that uses historical data to forecast costs and duration for similar projects.
Cost of Quality Analysis
Cost of quality is an analysis technique used to determine if any changes should be made to achieve higher quality standards. Cost
of quality looks at two factors:
Quality costs - these are costs associated with developing high-quality products and services.
Avoidable costs - are costs associated with mistakes made by people working on projects (errors) or employees not following
procedures correctly (waste).

10. Cost Estimation
Approach
The bottom-up approach treats the required price as
an output variable and the cost estimates as input
variables.
This approach works well when competition is not
the dominant factor in pricing the product or
service.
The design-to-cost, or top-down, approach treats
the competitive price as an input variable and the
cost estimates as output variables.
This approach places greater emphasis on the
accuracy of the price estimation activity. The target
cost must be realistic, or it becomes very difficult to
make sensible, realizable cost estimates for the
various components.

11. Accuracy of
the Estimates

14. Thank you.