Projects need to be delivered on-time and on–budget. Accurate cost estimation is crucial for the latter. Otherwise, well let’s just say you won’t be heading projects for long!!!
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Three Estimation Techniques
In the Tools Used to Estimate Costs in Project Management article, you learned about each cost estimation techniques recommended by the Project Management Institute in the Project Management Book of Knowledge (PMBOK) version 4. In this article, we’ll look at some examples of each estimation technique:
Resource Cost Rates Estimating
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Example of Analogous Estimating
Analogous Estimation is dependent upon the similarity of the two projects being considered. Let’s consider the following example.
Suppose in an earlier project, you constructed half a mile of tarmac road for a million dollars. In the new project, you need to estimate the cost for two miles. In this example, you could quite confidently say that the new project will cost approximately four million dollars. Since constructing a road is linear, analogous estimation can be quite accurate. Or, is it?
There are some assumptions that drive the cost estimate accuracy. For example, if in the earlier project the road was constructed on a non-mountainous terrain and the new road is to be constructed in the foothills of the Rocky Mountains, then four million dollars would not be an inaccurate estimate. This is because construction costs zoom up as the terrain gets tougher. In addition, consider that when you implement a project that is four times as big as the baseline project, the complexity increases exponentially. The rule of thumb is:
If the scale of a project grows, the complexity of the project will grow many times more…watch out!!!
As you can see from this example, Analogous Estimation is heavily dependent on the similarities between the two projects being considered; even if they are similar, the estimates may not be accurate. Therefore, do not rely entirely on Analogous Estimation even if two projects seem similar during the initiation of the project. Supplement the estimates with other estimation techniques.
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Example of Resource Cost Rates Estimating
By applying the resource cost rates to the Estimate Activity Resources process, you can determine the total cost of the resources on a project. Let’s take an example to understand this better.
Suppose, your project needs four .NET developers, two User Experience professionals, and one Project Manager. The rates for each of these team members are:
.NET Developers: $80/hour
User Experience Professionals: $90/hour
Project Manager: $100/hour
The project requires the .NET developers for 100 hours, the User Experience professionals for 50 hours, and the Project Manager for 100 hours. This would lead to the following costs:
These Resource Estimation Costs are used in other types of estimation techniques, such as Bottom-up Estimation.
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Example of Bottom-up Estimating
Bottom-up Estimation leverages resource cost rates. It involves the aggregation of individual estimates for each work item in the Work Breakdown Structure (WBS) up till the summary node on the WBS. The approach is similar to the Resource Cost Rates Estimation – the difference being that material costs are also considered and the aggregation begins from work items going upwards to the work packages. All types of project costs, such as Direct and Indirect costs, are considered in this type of estimation. Since all the work items in the WBS are used to compute the estimates, this estimation technique can be time-consuming.
Tip: To get a clearer picture of the total cost of ownership of the project, use Life-Cycle Costing.