E STIMATE C OSTS

Figure ‎4-23- Estimate Costs Process

Source: PMBOK® Guide – Fourth Edition, page 169

1.Scope baseline

6. Reserve analysis 7. Cost of quality 8. PM Estimating

software

Cost Estimating is the determination of approximately how much will it cost the performing organization to provide the product or service involved.

Source: PMBOK® Guide – Fourth Edition, page 168

4- Planning Phase

PMP Exam Preparation Course Page 95

Process Interaction

Figure ‎4-24- Estimate Costs – Process Interaction

Life Cycle Costing vs. Value Engineering

Project cost can be seen from different perspectives, and important perspective is the cost of the project during its whole life cycle. The process of evaluating the project cost over its life cycle is called Life Cycle Costing process.

Life-Cycle Costing (LCC) is the total cost to the organization for the ownership and acquisition of the product over its full life cycle.

LCC = R&D costs + production cost + construction cost + operation and maintenance cost + product retirement and phase-out cost.

Value Engineering (VE) is a creative approach used to optimize life-cycle costs, save time, increase profits, improve quality, expand market share, solve problems, and/or use resources more effectively.

Cost Estimate as an Iterative Process

Cost estimate is refined during the course of the project. Cost Estimate increase as the project progresses over time. This is part of the progressive elaboration concept.

Types of Estimates and Degree of Accuracy

4- Planning Phase

PMP Exam Preparation Course Page 96

Depending on the project phase, different levels of estimates with different levels f accuracy are applied. Below are examples of these levels.

Table ‎4-1 - Estimate Accuracy

4.10.1 Inputs to Estimate Costs 1. Scope baseline

2. Project schedule 3. Human resource plan 4. Risk register

5. Enterprise environmental factors 6. Organizational process assets

4.10.2 Tools and Techniques for Define Activities 1. Expert judgment

2. Analogous estimating 3. Parametric estimating 4. Bottom-up estimating 5. Three-point estimates 6. Reserve analysis 7. Cost of quality

8. PM Estimating software 9. Vendor bid analysis 5. Analogous Estimating

It is based on using the actual cost of previous and similar projects as the basis for estimating the cost of the current project. This technique is frequently used to estimate costs when there is a limited amount of detailed information about the project. It relies heavily on expert judgment and it is generally less costly and less accurate than other techniques.

6. Parametric Estimating

Type Accuracy Project Phase

Rough Order of Magnitude (ROM)) or

Ball Park

50% Initiation

Budget Estimate 10% Early Planning

Definitive Estimate 5% Late Planning &

Execution

4- Planning Phase

PMP Exam Preparation Course Page 97

This technique uses a statistical relationship between historical data and other variables. It can produce higher levels of accuracy depending upon the sophistication. It also involves multiplying the planned quantity of work to be performed by the historical cost per unit to obtain the estimated cost.

7. Bottom-up Estimating

It involves estimating the cost of individual work packages or individual schedule activities. This detailed cost is then rolled up to higher levels for reporting and tracking purposes. The cost and accuracy of bottom-up cost estimating is typically motivated by the size and complexity of the individual schedule activity or work package. Generally, activities with smaller effort increase the accuracy of the schedule activity cost estimates.

4- Planning Phase

PMP Exam Preparation Course Page 98

8. Three-Point Estimates

It is also called “Probabilistic Estimate” or “Weighted Average”. This concept originated with the Program Evaluation and Review Technique (PERT). PERT uses three estimates to define an approximate range for an activity’s duration:

o Most likely o Optimistic o Pessimistic

PERT analysis calculates an Expected activity duration using a weighted average of these three estimates. It uses the following formulas:

Estimated Cost:

Standard Deviation:

Final Cost Estimate:

Where:

cE = Expected Cost cO = Optimistic Cost cM = Most likely Cost cP = Pessimistic Cost SD = Standard Deviation

Determine Probability of Achievement

Estimated cost = cE + 1 x SD with 68% confidence Estimated cost = cE + 2 x SD with 95% confidence Estimated cost = cE + 3 x SD with 99% confidence

4- Planning Phase

PMP Exam Preparation Course Page 99

4.10.3 Outputs of Estimate Costs 1. Activity cost estimates

2. Basis of estimates

3. Project document updates

1. Activity Cost Estimates

A quantitative assessment of the likely costs of the resources required to complete schedule activities. This type of estimate can be presented in summary form or in detail. Costs are estimated for all resources that are applied to the activity cost estimate. This includes, but is not limited to:

 Labor

 Materials

 Equipment

 Services

 Facilities

 Information technology

 Special categories such as an inflation allowance or cost contingency reserve.

2. Basis of estimates

It is mandatory for the project manager to keep records for the supporting documents that proves the information on which he based his estimates on. These supporting documents include, but not limited to:

 Documentation of the basis of the estimate (i.e. how it was developed)

 Documentation of all assumptions made

 Documentation of any known constraints

 Indication of the range of possible estimates (e.g.

$10,000(+10%) to indicate that the item is expected to cost between a range of values)

 Indication of the confidence level of the final estimate.

3. Project Document Updates

Depending on which phase the project is in, all project documents related to the cost estimates are subject to be updated based on the estimates and its type.

4- Planning Phase

PMP Exam Preparation Course Page 100