Cost Estimating
| This process is directly related to resource planning. One cannot be done without the other. Cost estimating involves "developing an approximation of the costs of the resources needed to complete each schedule activity" (PMBOK). Developing an approximation (estimate) is both a skill and an art. An estimate is a rough determination. It is not intended as a final usable number but rather is used to forecast, within certain parameters, what the actual number may be. Estimating classes often begin with the instructor asking someone in the class how long it will take to go from the classroom to a place downtown. When this is asked, almost everyone in the room will be very accurate with their estimate because they are familiar with the mileage and routes. The next estimate required is between the classroom and Phoenix, Arizona. Unless someone in the class is familiar with that trip, it is likely that the estimates will be much rougher because the people giving the estimate will be less sure of the amount of time the trip takes. In the first case, because of the students' familiarity with the trip, their estimates were accurate. Although they were still estimates, the estimates were based on commonly known facts. In the second case, the students knew where Phoenix was but did not have the experience of traveling to it from the current location, so their estimates were not as accurate as those given for the first trip. In all estimating, it is best to find people or documents that can give actual numbers instead of guessing what the correct number is. In cost estimating, it is important that you find some estimating tools, documents, or expert judgment that will make the estimate the closest it can possibly be to the actual cost. Three types of estimates are listed in the PMBOK. Each has a range of accuracy. The first type is:
The second estimate type is:
The third estimate type is:
These types of estimates show ranges that you may have when cost estimating. A project manager should always try to give a definitive estimate because that estimate is the closest a project manager can get to the actual cost. Project managers are often plagued with estimates that are not accurate enough to do a true budget. The better the estimate, the better the final budget and the greater the chance of bringing the project in on budget.
The answer is C. This is the estimate with the largest variance and is often the first estimate done.
The answer is D. This is the final estimate that you will use when executing the project. Although it is extremely difficult to have estimates that are this exact, it is a best practice to try to make the final estimate as close as possible to the actual cost.
The answer is A. This is the middle of the three estimates, and it gives a smaller range than the order of magnitude but a larger range than the definitive estimate.
The answer is C. It is sometimes difficult to remember that the final approximation of cost is just that: an approximation or estimate. There are six inputs into cost estimating: enterprise environmental factors, organizational process assets, project Scope Statement, WBS, WBS dictionary, and the project management plan. These have been discussed in detail elsewhere. The tools and techniques found in cost estimating include: analogous estimating, determining resource rate costs, bottom-up estimating, parametric estimating, project management software, vendor bid analysis, reserve analysis, and the cost of quality. Analogous estimating is also known as top-down estimating. This is simply using another project's cost to estimate the new project's cost. You use an analogous project (one that is like the current one) to do the estimating. This technique is used often when you want a "big picture" of the costs of your project. It does not include much detail, but it can be useful for getting a reasonable idea of cost. As with anything that uses past history to predict the future, make sure that the unique parts of your project are reflected in the estimate. There is no one-to-one correlation between older projects and newer projects, so remember that analogous estimating gives you an idea, not complete detail. One of the reasons to use analogous estimating is that it is almost cost-free. Simply looking up a past project and examining the costs that were incurred is all that needs to be done. Analogous estimating is not considered the most accurate tool in cost estimating, but it is one of the lowest-cost tools. Determining resource cost rates was discussed previously. In the past, this was a major process in itself. Rates must be established at the beginning of the project and used to calculate the costs of doing the project. These rates will be a major input into the overall cost estimate and include both human and mechanical resources. Bottom-up estimating involves estimating the individual work packages and summing the individual numbers to arrive at the final number. The better the breakdown of the work packages, the better the bottom-up estimating will be. This is the most accurate of the estimating tools if the WBS is done in detail. The more detail in the tasks, the more it will cost to estimate because you will have more tasks to look at in the estimating process. There is a tradeoff between detail and cost that should be considered before you begin to estimate. Parametric estimating is one of the tools listed in the cost estimating process. To use parametric estimating, you take characteristics of the project (parameters) and use a mathematical model to predict costs. For instance, if you are going to build a hospital, then you will look at parameters that pertain only to hospitals. By using a parametric model, the accuracy is increased if the information going into the model is as accurate as possible, the parameters are measurable, and the model works at any size.
The answer is B. Analogous estimating is used when previous projects are used as a benchmark for estimating cost.
The answer is C. This type of estimating looks at the large picture first and gives an overall view of the potential costs.
The answer is D. By starting with the lowest tasks and then rolling up the costs, you will arrive at the final cost estimate.
The answer is A. Parametric estimating looks at parameters specific to your project and measures the new project against ones that have been done in the past.
The answer is C. This is true because you start with a breakdown that gives you the most accurate cost estimate possible. Vendor bid analysis begins when you request proposals from the vendors for the execution and completion of your project. The responses to these proposals should give you a good idea of the actual costs of the project you are about to execute. Something to note is that the lowest costs do not always indicate the best "deal" for the project manager and the organization. It is extremely important to analyze the response to your requests so that the quotes from various vendors are estimating the same amount of work and cost to execute what you want in the project. The better you are at writing detailed requests, the easier it is for the vendors to respond to you. Reserve analysis includes contingency allowances that are also called reserves. These are funds that may be used as the project goes on. The obvious problem is that these reserves can inflate the original cost estimates. These costs are called "known unknowns" because you know that they might be incurred, but you are not certain whether they actually will. The cost of quality is discussed at length in the project quality knowledge section.
The answer is B. The better you are at framing the requirements of the project, the better the vendor should be in giving you a response.
The answer is D. You expect that there is a high probability that a cost will occur, but you are not sure when it will happen. The outputs from cost estimating are cost estimates, activity cost estimate detail, change requests, and updates of the cost management plan. When doing cost estimates, it is very important that the people seeing them understand whether they are order of magnitude or definitive. The first budget that most people see is the budget that they remember the longest. Even if you have stamped "order of magnitude" all over the estimate, many people take the first estimate as the final. Remember also that many people have no idea what "order of magnitude" means, so some explanation of the term is needed. When you are going to show cost estimates to others, be sure that they know how accurate the estimates are. Even if you are careful, someone will probably consider your first estimate to be cast in stone. You should be able to refine your estimates as the project progresses because you will acquire more and more detail as the execution of the project goes on. The detail associated with cost estimates will grow as the tasks are better understood and documented. As with any project document, make sure that you put estimates under version control. Any change in the estimate means that a new version number should be assigned. No matter how small the change, you should revise the version number. Failure to do this will result in major problems if different versions of the cost estimates are used by different people to justify costs in the project.
The answer is B. The first estimate that people see is often the one that they remember the most. Even if you explain the major caveat that you are simply showing a first estimate, it always seems that people remember the first information they receive.
The answer is B. Version control is a vitally important part of project management. No more so than in cost estimates. These documents must be kept under version control, and any changes to the estimate necessitate a new version number. The supporting detail used in cost estimating includes a work description, information about how the cost estimate was developed, documentation of assumptions, and a range of possible results. This last item can be done as a numerical explanation, such as estimating a cost at $200 and showing a plus-minus range of +/ $40. You can also show the range by using the types of estimates explained previously, such as order of magnitude, budget, or definitive. If you are using these words, it is a good idea to make sure that you note what they mean in terms of range. Resource calendars are pertinent for a cost estimator, especially when you are using people that will be used on more than one project. Look for overlaps in assignments that will be problematic as the project progresses. Also, it is extremely important to get blocks of uninterrupted time. It is much easier for a coder to work straight through a module than it is for him or her to work on the code for one week, stop for a week, and then come back to the original work. Although this type of schedule may work in theory, it does not work in practice. People need blocks of time to do their best work. When you are doing cost budgeting, you should expect costs to rise if you cannot get the resources sufficient lengths of time to finish tasks. The cost management plan describes how cost variances will be managed. This means that you may choose to manage major variances differently from minor differences in the estimate. How you will handle variances should be explained in your cost management plan. As with many documents and actions in project management, the cost management plan may be formal or informal, highly detailed or broadly discussed. The choice of whether to make the cost management plan a formal document will be determined by the needs of the shareholders. This could be a piece of the communication plan because you will be asking what the stakeholders need you to report in terms of the status of the cost estimates.
The answer is B. This is the PMBOK definition of a cost management plan.
The answer is A. Any of the plans that are used in project management should be useful to stakeholders. They will tell you how much detail they need. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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