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How the Project Manager Conducts Project Cost Estimation

written by: Rupen Sharma, PMP • edited by: Michele McDonough • updated: 6/11/2013

"Our sales people conducted project cost estimation and we got the contract. Unfortunately, the cost estimation was unrealistic and now the project has gone over-budget. We closed on the cost estimation way too early!" When in Project Cost Management should we finalize the cost estimation?

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    Getting Your Feet Wet

    Project cost estimation requires you to implement the Estimate Cost process. The Estimate Costs process, which is a part of the Project Cost Management knowledge area, kicks in after you have completed the following:

    1. Define Scope: Create artifacts, such as the scope statement.
    2. Create Work Breakdown Structure (WBS): Detail out the work that needs to be done.
    3. Define Activities: Create a list of activities that the project involves.
    4. Sequence Activities: Create a Precedence Diagram (Network Diagram) to view the project activity flow.
    5. Estimate Activity Resources: Estimate the resources required for each activity.
    6. Estimate Activity Duration: Estimate the duration of each activity.

    Depending on the type of cost estimation you are looking for, some of these processes can be given a miss. However, ultimately you will have to conduct all processes to accurately conduct project cost estimation. The project cost estimation will evolve depending on where you are in the lifecycle.

    Note: Apart from the Estimate Costs process, Project Cost Management involves the Determine Budget and Control Costs processes. Read this Project Cost Management article to learn more about these processes and the tools and techniques used in them.

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    How the Process Evolves

    In Project Cost Management, the type of project cost estimation depends on the phase the project is in. For example, if you are responding to a Request forEstimateRange  Proposal (RFP), you will most likely not go through all the processes from Create WBS to Estimate Activity Duration. This is because at this stage in business development, expending the effort to compute the project cost estimation based on a set of vague requirements is wasteful as the cost estimation will be fraught with inaccuracies. Therefore, at this stage you will provide a broad range of cost estimation based most probably by using the Analogous Cost Estimation technique and not the Bottom-Up Cost Estimation technique. This is a popular estimation technique in Project Cost Management.

    In terms of Project Cost Management, as you progress in the business development life-cycle and the client gets closer to giving you the contract, the project cost estimation range will get narrower. This is because project cost estimation gets more accurate after you gain more clarity on the work that needs to be done. For example, in Agile projects, an accurate project cost estimation range is only provided when you have defined the stories in a release and divided the work into iterations.

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    Ranges of Cost Estimation

    In Project Cost Management, the main reason for giving a broad project cost estimation range and gradually narrowing it is to reduce negative risks that can lead to cost overruns. The ranges of cost estimation in Project Cost Management are:

    • Order of Magnitude: The cost estimation range is between -50% to +100%.
    • Conceptual: The cost estimation range is between -30% to +50%.
    • Preliminary: The cost estimation range is between -20% to +30%.
    • Definitive: The cost estimation range is between -15% to +20%.
    • Control: The cost estimation range is between -10% to +15%.

    Generally, the clarity you have and how close you are from being hired to start work on the project or release determines the range of project cost estimation you will provide.

    PMP Exam Tip: You must memorize the types of project cost estimation and their ranges. You should also understand the reasons for gradually providing a narrower range. This is essential for being successful in Project Cost Management.


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