The key to understanding how to develop an accurate project cost estimate makes the difference between being consistently over budget or completing on-time and on-budget projects. Each of the various cost estimating techniques offer a highly effective tool for project management, and you can use them singularly or combined, depending upon your preferences. These estimating techniques provide the processes to develop tighter project budgets to help bring your undertaking to completion in a timely manner within the confines of your outlined budget.
Analogous Estimation Technique
Analogous estimating is about learning from your past. This technique focuses on estimating cost based on the past performance of archived projects. The Analogous technique provides a continuous improvement process for developing estimates based on learning from actual performance on past projects.
Parametric estimating offers one of the most accurate methods for determining cost based on a predefined cost model. Cost per square foot, cost per line of code or cost per cubic inch are examples of parametric estimating. This method is usually used in the construction and software development industries to establish the cost for erecting a building or implementing a software application based on verified cases.
Three-Point Estimation Method
Three-point estimating, also known as Program Evaluation and Review Technique starts by identifying three separate estimates based on the optimistic, most likely and pessimistic estimates. This is a statistical and analytical process for developing what is called the mean, expected value or expected estimate and is calculated using the formula “(O+(4*M)+P)/6.” The greater the distance between the optimistic and pessimistic values, the greater the risks of the cost estimate not being realized.
Bottom-up estimating takes the initial item or process and breaks it down into smaller components to get a more accurate overall cost. For example, a construction project to add a wing to a building would use bottom-up estimating to calculate the cost and labor for all the components of the wing being built from foundation to finish work. Each component, such as foundation, plumbing or framing would include the cost of labor, materials and specialty permits to estimate each smaller component's part of the whole. After each individual component's estimate is complete, these numbers get rolled up into the overall cost for the entire project.
Expert Judgment Estimation Process
A subject matter expert can provide an estimate based on his previous experience. The expert will have a much better understanding of the risks, issues, constraints and assumptions to be faced and will provide precise estimates. But an expert estimator will only be as accurate as his most current and relevant experience.
Rule-of-Thumb Estimation Technique
According to NASA in its “Cost Estimating Handbook,” a rule of thumb is a universally acknowledge edict. A rule-of-thumb estimate is individual to different industries or organizations, as it incorporates input from both the expert judgment and the parametric estimating techniques. These estimates are usually provided by looking at several completed projects, viewed as a benchmark that becomes the measurement basis.
Gerald Leonard has been writing project management-related articles since 2007. His work has appeared in "The Project Network" newsletter and the Microsoft Project User Group e-zine. He specializes in writing articles on programs, projects, portfolio management, COBIT and ITIL v3. Leonard holds a bachelor's degree and a master's degree in music and a certification in project management and business intelligence from the University of California-Berkeley.