Different Types Of Cost Estimates -How To Choose The Best For Your project

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As per PMBOK(Project Management Body Of Knowledge) there are many types of cost estimates like parametric, analogous, bottom-up estimating, expert judgement, reserve analysis, three-point estimating, cost of quality and vendor bid analysis. It highly depends on the Project and the resources, material, man days, machine and intellectual property it is going to consume. If your actuals are good and reliable they are as good as parametric or expert judgment. People generally use “actuals” which they can validate against the SOW (Statement Of Work) and execution.

Characteristics of a good estimate: 

  • Must be supported by the assumptions made by the estimators.
  • Must be derived from more than one estimating method.
  • Must always be presented as a range.

Ensure that the estimators are clear about the product or deliverable. They are clear about the process that will be used to build the product or deliverable and also clear about the assumed resource profile that’s skill-sets, knowledge and experience and the risks associated with the product or deliverable. There is a difference between the effort estimate and duration estimate, try to understand this difference for better cost estimation. Give estimators time to produce good estimates and don’t commit any timelines before the complete estimation.

In an IT department they want estimates very fast and with higher accuracy, which is indeed a challenge. Estimates should be created early and often. Top down estimates start when you have a basic understanding of the project. They are usually based on similarity to previous projects, and this is best done with actual historical data.. At times a simple database can significantly improve the accuracy of early estimates. Once you have these estimates you should revisit them as you are creating your WBS (Work breakdown Structure). Here you are transitioning from top down to bottoms up.

Finally, as you wrap up planning you can give your most accurate bottoms up estimate. Of course, accuracy depends on planning appropriately. Schedule planning and estimates are meaningless if you quickly create a schedule to provide dates to your management, without analyzing how to address risk and other quality related issues.
Today there are many applications containing a lot of useful information for project managers related to cost. Some use a three point estimate based on those who will be doing the work with adjustments, which is appropriate basis past experience. There are periodic reviews that accommodate changes and other impacts. Bottom-up estimate (supported with rate analysis) is a better choice if the components of work are known. Sometimes it is combined with Three-point estimate too. But bottom up cost accounting with committed firm price quotes and historic labor data is most accurate. Sometimes given the time and information available you have to be able to take a similar historic project and add some factor to it, to get a ballpark figure. This is the reason why documentation and proper project closure and lessons learned is so important.

It is difficult to get the Actuals when you are in the planning phase of the project. So it is better to get the estimates from the people who are actually going to perform the work and look at the historic data to come up with the best estimates.

About Aditi Malhotra

Aditi Malhotra is the Content Marketing Manager at Whizlabs. Having a Master in Journalism and Mass Communication, she helps businesses stop playing around with Content Marketing and start seeing tangible ROI. A writer by day and a reader by night, she is a fine blend of both reality and fantasy. Apart from her professional commitments, she is also endearing to publish a book authored by her very soon.

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