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Tools Used to Estimate Costs in Project Management

written by: Rupen Sharma, PMP • edited by: Michele McDonough • updated: 4/24/2013

In the Estimate Costs process of the Project Cost Management knowledge area, there are some tools and techniques recommended by the Project Management Institute (PMI). In this article, we’ll explore each one.

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    Before You Estimate

    Accurate cost estimates help you complete a project on-budget. Before you can perform cost estimation, you need to have completed the following processes: Define Scope, Create WBS, Define Activities, Sequence Activities, Estimate Activity Resources, and Estimate Activity Duration. Some types of project cost estimating techniques that are commonly used are:

    • Analogous Estimation
    • Resource Cost Rates Estimation
    • Bottom-up Estimation
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    Analogous Estimation

    In this type of estimation, estimates from a closed project are used to determine the estimates for the new project. For example, if your Twins organization has designed and developed an Intranet for a company, you could use the same estimates for the design and development of an Intranet for another company. The accuracy of analogous estimates is dependent on the similarities between the two projects.

    Parametric Estimation leverages software that takes historical information as the input, makes assumptions, and then extrapolates the information to compute the overall cost estimates. The accuracy of Parametric Estimation is dependent on the assumptions made!

    PMP Update: In the Project Management Book of Knowledge (PMBOK) version 3, Parametric Estimation was a separate tool. However, with the advent of PMBOK version 4, Parametric Estimation has been clubbed with Analogous Estimation.

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    Resource Cost Rates Estimating

    Resources are required in every project. By applying the resource cost rates to the Estimate Activity Resources (a Project Time Management) process, you can determine the total cost for the resources on a project. This type of estimation is often used in projects.

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    Bottom-up Estimating

    In the Bottom-up Estimation technique, you aggregate individual estimates for each task in the Work Breakdown Structure (WBS) up till the summary node on the WBS. You would then perform this calculation for all activities. Bottom-up estimation is fairly accurate and is possibly the most often used estimation technique for deriving the cost estimates.

    Since the Bottom-up Estimation technique uses estimates from a task level, it is imperative for you to make accurate task estimates. Some best practices you should use are:

    • Include Subject Matter Experts (SMEs) in the estimation process
    • Leverage the people that will actually do the work (commonly used in Agile projects)
    • Use other industry practices, such as the Delphi Method for greater accuracy

    A disadvantage with Bottom-up Estimation is that the overall effort may grow with the degree of planning.

    Tip: Do not rely entirely on one estimation technique.