written by: Kevin-F
• edited by: Jean Scheid
• updated: 5/18/2011
Characteristics of a cost estimating system used in project cost management is achieved thorough planning and preparation of accurate cost estimates. Modern tools like budget spreadsheets are used to control organization expenses, and ensure the maintenance of cost baselines.
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Process Of Cost Estimation
Estimating costs is an important process in project planning that determines the financial impact of material, human, and other resources, for the execution of project activities. The characteristics of a cost estimating system are preparation of estimates, creation of costing options, development of project budget, and control measures for the project execution within the allocated budget. The process validates the success of the project in the allocated budget, including completion of objectives, and the deliverables. Software is available to assist the estimating process; the construction cost estimating software facilitates the process of construction cost estimating. Primavera project management software like Primavera p6 assists in tracking project costs, and how their application will contribute to complete budgets within the allocated budget.
The primary aim of a cost estimating system is to ensure project success. The project success is influenced by the process of cost estimation. A project will be considered successful if it complies the under mentioned criteria:
The quality standards determined during the process of quality planning are achieved.
The needs and expectations of the stakeholders have been met.
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Principles Of Cost Estimating
The cost estimation is a methodological process that should comply with the principles of this vital process. These standards are the foundation for identification and estimation of project costs. The main cost estimating principles are:
Professional Estimating Team: The principle believes that only a trained team should create estimates. Explicit and distinct work statements should be used for the development of project estimating sheets. The team of professionals should utilize modern cost estimating methodology and tools to produce estimates. The team may include members from the project, qualified people from the performing business, and specialists from competent organizations. The team should possess management, technical, and communication skills for the development of cost estimates. They should also be competent to recognize and assess serious project concern and risks.
Cost Estimates for Data: The creation of cost estimates must be based on reliable data. Engineering assessment and technological opinions should be applied, with appropriate assumptions, to develop the cost estimates. All information is thoroughly measured, filtered, and polished to obtain the most precise and pertinent information.
Risk Factors: The risks involved in the project should be considered analytically while preparing the cost estimates. The process involves the qualitative and quantitative analysis of the identified risks, and subsequent development of appropriate risk responses. A methodological technique of evaluation and reassessment of project risks should be applied for obtaining the cost estimates. Cost estimation software is available that can be utilized for all project costs, including the associated potential risks. The software permits consideration of project risks, and creating precise contingency plans that are useful for the development of suitable risk management plans.
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Confirmation: A proficient, impartial team should authenticate the cost estimation. The project manager can create the initial cost estimates, which can be validated by the team of experts. An outside opinion will permit the estimates to be more accurate due to a diverse project perception. This estimation methodology becomes more significant for complicated projects that need production of large estimates.
Vagueness In Estimates: The cost estimates should be produced by the adoption of a process that is transparent and open. The expressions which are not clear should be clarified in simple terms to ensure a common understanding between the sponsor, project manager, and the project management team. This methodology prevents inaccurate judgments.
The estimation of project costs includes the application of numerous techniques that are applied individually or in combination. Some of the important techniques are mentioned below:
Analogous Cost Estimation: This method is also known as Historical Data Analysis. The estimates are based on the real cost of earlier analogous projects. This estimation practice is generally applied to individual project segments, and also in combination with the other cost estimation techniques.
Parametric Cost Estimation: It is a valuable process that uses unit costs to determine the total estimated cost. The sources of information regarding the unit costs are previous projects, statistical data, and published sources. The accuracy of this process may be more reliable, which is dependent upon the accuracy of the data being used for estimation. The method may be used independently, and also in combination with some other cost estimating practices.
Bottom up Cost Estimation: This technique supports the belief that particular activity costs or the cost of work package is extremely important. The cost of small project activities are determined precisely, and then aggregated to produce the total project estimated cost.
Top down Cost Estimation: This process is unlike the bottom up cost estimation technique, and believes that the budget of project is established at the initial stages of the project. This technique uses the work breakdown structure, or WBS to produce the cost estimates.
Reserve Analysis: The method deals with unforeseen circumstances in a project environment, which necessitates the establishment of reserves for the project activities. These reserves are also called contingency allowances that are utilized for reducing risks, and countering threats. Characteristics of a cost estimating system are to ensure that the cost estimates are accurate. If the funds are not adequate, then the reserves are used for the project activities.