Introduction to Accurate Cost Estimates
Cost estimates are an inherent part of daily life. For example, you’d perform a cost estimate for a vacation to Rio. If the estimate isn’t accurate, the vacation can be a miserable affair. Similarly, in projects, when cost estimates aren’t accurate, the project can face tremendous turbulence and even be shelved.
The first question that comes to mind during cost estimation is how to make them 100% accurate. It is better if you give up on the idea of complete accuracy, because it is simply impossible. The sheer act of estimation is an approximation. Therefore, complete accuracy is a mission that cannot really be accomplished. It’s something very similar to striving for Six-Sigma.
However, we can come close to complete accuracy by understanding why estimates often go wrong.
Why Do Cost Estimates Go Horribly Wrong?
There are many reasons cost estimates are inaccurate. If we continue with the vacation example, suppose you have budgeted for $1500 for air tickets. However, when you bought the tickets, the price of jet fuel shot up by 20% and consequently the air tickets now cost $1800. This is an example of how unknown factors can wreak havoc to an otherwise fair estimate. To get accurate cost estimates, you need to identify and mitigate these unknown factors. For information on types of project costs, refer to Example of Costs in Project Management.
So, what else influences cost estimation accuracy? Experience in the task that needs to be accomplished helps in producing accurate cost estimates. For example, if you haven’t gone on a trip to Rio before, check with someone who has and may be a travel portal. The more knowledge you have, the better your chances are of producing accurate cost estimates.
Accurate Cost Estimates Tips
Since cost estimates become inaccurate because unknown factors haven't been accounted for, a good place to start for accurate cost estimates is by conducting risk identification and mitigation. The risks that you unearth have cost implications. If you discover the risk late in the project, naturally your cost estimate will get impacted. The point here is get the project risk management of the project sorted out before getting into cost estimation. Consider using a Risk Breakdown Structure.
Another thing about project cost estimates is that they vary with the phase the project is in. For example, if you are bidding for a project, you'd give a broad range because at this stage there are way to many unknowns. As the project progresses and you have scoped out the work, the accuracy of you estimate would increase. For more on this, refer to How Project Cost Estimation Evolves in Project Cost Management. The lesson here is if there are too many unknowns, let the cost estimates be broad.
Accurate cost estimates can also be achieved by using multiple methods of estimation. For example, you can use analogous cost estimation to a certain cost. At the same time you can use the Delphi method and compare the two results. Using multiple techniques helps in verifying the estimate.
Lastly, get some experts in. If your project involves a new technology, bring in subject matter experts and consultants. They may increase the cost of the project initially, however in the long wrong run you'd have recovered the cost. Expert knowledge is also useful in identifying risks and chalking out decision trees.
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