4 Most Used Cost Estimation Techniques Used By Project Managers

Every project manager aims to provide the most accurate cost estimate. The better the accuracy of a cost estimate, the better the organisation is able to plan and manage it’s resources. Although there are many ways to do so, here are the four main techniques used.

• Analagous Estimation

Analagous estimation, or also known as top-down estimation, is a tool that taps on previously completed projects to provide a cost estimate. It is a quick method and requires little data to do so. However, this also means that estimates produced are not reliable due to the difference in local factors, such as inflation or different types of resources used.

• Parametric Estimation

The parametric estimation uses the statistical relationship between historical data and variables, also known as previous project unit costs (i.e. concrete per cubic meter). To use this method, the project is first divided into units of work. Next, the cost per unit is determined and then multiplied by the number of units. This form of cost estimation is another quick method, but more accurate than the analogous method. However, it is only applied for skill-based projects and cannot be applied for creative projects.

• Three-Point Estimation

The most commonly used method in three-point estimation technique uses the Program Evaluation and Review Technique (PERT) model. Three types of estimates are determined before using their average to arrive at the average cost estimate. The three type of estimates are:

• Most Likely Cost (Cm): Considers a normal case and everything goes as usual.
• Pessimistic Cost (Cp): Considers the worst case and assumes that almost everything goes wrong.
• Optimistic Cost (Co): Considers the best case and assumes that everything goes better than planned.

Estimates done by this method are more accurate than the previous two as risks and biases are reduced.

• Bottom-Up Approach

Lastly, this approach breaks down the total project work into smaller work components. A Work Breakdown Structure (WBS) divides project deliverables into a series of work packages, where each component cost is estimated and then aggregated to arrive at the project’s cost estimate. Although it is most time consuming, the estimate provided at the end is the most accurate and reliable.

Managing Project Costs and Budgets is a 3-day course that will provide personnel involved in project management effective skills and knowledge that will allow them to manage the dynamic project cost function. Through these skills and new knowledge, participants will take home the ability to implement the application of techniques that will contribute directly to more efficient project financial management processes. For more information, please visit us at http://www.opuskinetic.com/training or contact us at info@opuskinetic.com.

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