Project Cost Estimation Techniques
Cost Estimation is the process of forecasting all the costs associated with completing a project within a defined scope and according to its timeline. Project managers completing a cost estimate depends upon a number of factors. Some organizations, for example, require all projects to be budgeted for according to very specific policies; others may defer to the expertise of the project manager.
Similarly, many organizations might work off of rough estimates in the earliest stages of project planning compared to later stages where more exact estimates are required. Here are four most common estimation techniques discussed below:-
1- Analogous Estimating
This method is an act of using former projects to estimate how long or how much current project will take or cost. This method of estimation relies upon a combination of historical data and expert judgment of the project manager. This means that the more data that is available, the better the estimate will be. Analogous estimating can also be used when there is relatively little information about the current project available.
2- Parametric Estimating
In parametric estimating, historical data and statistical modeling are used to assign a dollar value to certain project costs. Parametric estimates are generally considered quite accurate because the parametric value is often based on similar projects or taken from industry publications that are quite reliable.
Parametric estimating is often used in construction. For example, an experienced construction manager might understand that the typical new home will cost a certain number of dollars per square foot, assuming a particular margin of error. If this average cost, the margin of error, and the square footage of a new project are known, then parametric estimating will allow them to identify a budget that should accurately fall within this range.
3- Bottom-Up Estimating
Bottom-up estimating is a technique that involves estimations on a granular level for parts of a project. These are then aggregated to a total estimate for the entire project. It is often referred to as one of the most accurate ways of estimating. Because bottom-up estimating allows a project manager to take a more granular look at individual tasks within a project, this technique allows for a very accurate estimation process.
4- Three-Point Estimating
In three-point estimating, a project manager identifies three separate estimates for the costs associated with a project. The first point represents an “optimistic” estimate, where work is done and funds spent most efficiently; the second point represents the “pessimistic” estimate, where work is done and funds spent in the least efficient manner; and the third point represents the “most likely” scenario, which typically falls somewhere in the middle.
