Cost Estimates & Techniques
During the project selection stage of the project plan, many economic factors will need to be considered when selecting between different projects. To calculate or estimate the paybacks or return rates, an estimate of the project cost must be made.
Cost estimates need to be accurate so they can be considered relevant, but the time and resources used to make the estimations should be based on size and complexity of the project. The cost estimation methods for the project are typically faster and need less resources than those used to develop more detailed estimates later in the project.
Project managers will rely on experience and expert judgment of managers who can make accurate information with little information. Early-stage estimates are typically made using past project estimates that are scaled to match the size and complexity of the project at hand. This can also be done by using standard formulas to create new cost estimates from old information and methods.
Analogous Estimate
An analogous estimate is an estimate based on estimation from other projects. If a project is comparable and costs a certain amount, then it is generally assumed that the current project will cost a similar or the same amount. Few projects are the exact same size with the same complexity level, so the estimates must be scaled based on the difference in the two projects. The selection process of projects that are similar and how much adjusting is needed is in the hands of the estimator. Usually, this judgment comes based on years of experience in project estimation, including wrong/incorrect estimates that were used as learning tools for future projects.
Managers with less experience with cost estimates, who must make analogous estimates can use documentation that is available from previous public projects. If projects are estimated using the Darnall-Preston Complexity Index (DPCI), the manager can identify projects from the same project profile to the current project, even if the other projects were managed by other project teams/project managers.
Comparing the original estimates with the final project costs on several previous projects with the same DPCI profile gives aid to the less experienced manager, and the perspective it would take many years to build via experience alone. This also creates a reference point for managers to justify their estimates.
Parametric Estimate
If the project has tasks that are similar to many other projects, standard costs are available per unit. For example, if given some general details such as size in square feet and city, most construction companies could give cost estimates on the building a standard office building. From these two factors alone (size and location), the company’s estimator can predict the cost of the building, because these two factors are considered parameters. Parameters are measurable factors that can be used in equations to calculate a specific outcome or estimation, such as building costs.
The estimators know the average cost per sq. ft of a typical building and adjustments for local labor costs and the general local environment. Other parameters, such as quality of finishes are used to further refine an estimation. Estimates that are found by multiplying parameters by cost-per-unit values are called parametric estimates.
Vendor Bid Analysis
If goods and/or services are provided by vendors for a project, the cost of those goods/services can be found by issuing a request for proposal (RFP). This request for proposal will describe the work, good or service provided by the vendor and the quality level. The request for proposal is sent to a list of potential vendors who are capable of meeting the expected standards of the project and complete the necessary tasks.
These vendors then respond with a complete proposal for completing the work defined in the RFP, with an estimation of the cost. Sometimes government organizations are required to accept the proposal from the qualified vendor with the lowest cost on the bid. Other groups are not required to take the lowest cost, but will often be required to justify the reason for not accepting the lowest offer.
The project manager and team can review the proposals of many vendors to the RFP to determine if their estimation from the project selection stage is close to the estimations from the vendors. If the vendor cost estimates are higher than anticipated and the project can’t be completed for the cost that was used in selecting the project, the selection decision may need a re-evaluation. Reviewing a project selection should factor in the economic ratings of completing the projects that were not selected, and who the project stakeholders are for the projects that would be impacted.
Some vendors may suggest an alternative approach to complete the tasks in the RPF in a more cost-effective way, that does not align with the written RFP. If the proposed method can cut costs, they may be accepted and adopted by the project team.
Bottom-Up Estimating
The most accurate, yet timely estimation method is identifying the cost of each item in each project task on the schedule, including labor and materials. In this method, project managers will look at the project schedule as a hierarchy where the general definition of tasks at the top and bottom is more descriptive. From here, finding the price of each item at the bottom/lowest level and then summing them to find the cost of the higher levels is known as bottom-up estimating.
From here, the lower-level details can be “rolled up” or subtotaled to give less detail for each project task. This process is most easily completed using software designed for bottom-up estimates, yet with low complexity projects spreadsheet tools can do the job as well.
Task-based Estimations
A project task can have cost estimates from multiple vendors plus costs for labor and materials from internal people. Detailed cost estimates from all of those sources can be reorganized so those costs associated with the task can be grouped by adding the task code to the detailed estimate. The primary advantage of this approach is the more accurate task cost for various tasks of a project, and all of the associated costs of an overall task are identified.
Budget Timelines
Because costs associated with activities and all activities have some sort of timeline, it is possible to calculate how much money should be spent each day throughout the project. The money needed to pay for a project is often transferred to a project account just before it is needed for a project task. The timing of transfers is critical to the project timeline, as the money must be available to pay for each task without causing delays in the start of a task.
If the money is sent to the project account too early in advance, the group loses the chance to use the money elsewhere, or they may have to pay interest charges if the money is through a loan or borrowed. A schedule of when transfers are due should be created, and this schedule should match the dates for when activities must be paid. Reconciliation is the process of matching the project schedule of transfers with the task schedule payments.
Cost of Tasks
The cost of a group of activities of a project can be estimated by calculating the cost of all components that make up the group. This subtotaling process is called cost aggregation. While simple on the surface level, oftentimes projects will provide different obstacles and challenges, meaning sometimes estimations will require unique approaches from the estimator. Therefore, it is smart for estimators to practice using multiple estimation techniques so they can adequately handle many challenges.
Summary
Project estimations are a vital part of success in any project, and there are many factors that go into creating accurate and reliable estimates. Most projects will begin with estimations in the planning phase of the project, as project tasks begin to surface and establish on the project schedule. Many factors will go into an estimate, such as size, complexity, and experience of the estimator. Some experienced project managers will be able to make estimations with very little detail, as they have a wide range of experience to use as reference for estimations.
Additionally, there are multiple methods for estimation, such as analogous estimating (using details from other projects), parametric estimating (using parameters or project standards to estimate specific project tasks), and bottoms-up estimating (estimating very detailed parts of the project which are subtotaled to estimate larger parts of the project.
Each of these methods is useful in different circumstances to different project managers with varying experience. A smart project manager will understand how and when to use these different methods based on the available resources and information to make accurate estimations.
Other methods are also used when creating project cost estimates, such as request for proposals and vendor bid analysis. Project managers can use the RFPs from multiple vendors to understand the standard price for a good or service, and use this information to select the vendor they wish to work with. In most cases, the vendor with the lowest price on their proposal will be awarded the project. This is the main step in the vendor bis analysis.
Overall, cost estimates should be made with as much information as possible in order to be as accurate as possible. Project managers should understand how to collect this information and make the necessary moves so their team can make estimations and plan accordingly.