Tools and techniques 1 Expert Judgment Expert judgment in cost estimating can help you get the most

accurate subject matter experts will have insight into labor rates material costs, the types and amount of resources you will need to complete
the work, risk factors, and other variables that can influence the cost of resources. Subject matter experts can also help determine the best methods to develop cost estimates, and provide assistance in applying the following techniques.

Analogous Estimating is based on actual costs of previous, similar projects and on comparing them to current project work packages. The degree of similarity between the prior project and the current project affects the accuracy of the estimate. Also, remember to consider changes in labor rates, purchased resources and overhead since the prior project. Analogous estimating takes less time and costs less than other types of estimates. Analogous cost estimating is frequently used to estimate a parameter when there is a limited amount of detailed information about the project, for example, in the early phases of a project. Analogous cost estimating uses historical information and expert judgment. Analogous cost estimating is generally less costly and time consuming than other techniques, but it is also generally less accurate. Analogous cost estimates can be applied to a total project or to segments of a project, used in conjunction with other estimating methods. Analogous estimating is most reliable when the previous projects are similar in fact and not just in appearance, and the project team members preparing the estimates have the needed expertise. Parametric estimating Parametric estimating uses a mathematical relationship to determine the cost. This is useful if the work is repetitive in nature. You identify the cost it takes to develop one unit then multiply that effort times the number of units you are developing. This only works if the cost can be estimated using a consistent unit of measure. Problem: An activity cost estimate goes like this: It will take 20 hours of a programmers time to write this program. The average rate to hire a programmer is $50 per hour.

Therefore, the cost of writing this program, assuming that everything else needed to write the program, such as a computer, is in place, is 20X$50=$1,000. What kind of estimation technique is at work here? Answers Parametric estimation

Bottom-up estimating
Bottom-up estimating is the most accurate form of estimating. However, you can employ this type of estimating only toward the end of the planning process when you have detailed information about the scope. This method 1. Determines the cost for each resource needed to create the deliverable 2. Sums all deliverables 3. Includes the contingency reserve (you read about contingency reserve in the later section "Determine Budget: Outputs"). 4. Aggregates the total into a bottom-up estimate Although bottom-up estimating is the most accurate type of estimate, it's also quite time consuming, and you can't do it until you have a significant level of detail for the deliverables.

Three-point estimating
When you have a lot of uncertainty, risk, or unknowns around a work package, you can use threepoint estimating to give you a range and an expected cost. You collect three estimates based on the best case, most likely, and worst case scenarios.

Best case (optimistic): Cost estimates play out while accurate, no risk events occur, and the work takes only as long as estimated. This is represented as an o, for "optimistic." Or you might see it notated as a co for "cost optimistic." Most likely: Takes into account the realities of project life, such as needing extra parts or people, rework, things not going exactly as planned, and so forth. This is represented as an m for "most likely." You might see this presented as cm for "cost most likely." Worst case (pessimistic): Assumes expensive resources, much rework, and delays in work getting accomplished. This is represented as a p, or cp for "cost pessimistic."

The most common way of calculating a weighted average is ce = (co + 4cm + cp) / 6 Notice that the numerator has six factors you are adding; therefore, the denominator to achieve the average is 6. FOR THE EXAM The PMP exam might refer to this as PERT (Program Evaluation and Review Technique) estimating.

Suppose you're estimating costs to travel to a project site. You do some research on plane tickets; based on the time of year and how far in advance you purchase the tickets, you come up with some estimates. If you travel during normal business days (no holidays) and you purchase the ticket three weeks in advance, you can get a cost as low as $300 per round trip. This is the best case scenario. More likely, though, you won't book until two weeks prior to the trip, which will cost $450. However, in the past, you've had but 48 hours advance notice and if this occurs during a holiday, you're looking at a cost of $1,200 per round trip. Using the weighted average, you determine your expected cost to be

(300 + 4(450) + 1200) / 6 = $550 Comparing Cost Estimating Methods Open table as spreadsheet

Type Analogous

Benefits Used if a limited amount of detailed information is available. Useful when the estimate must be delivered within certain time constraints.

Shortfalls Not as accurate as a bottomup estimate. Can be used only when the projects are similar in fact not just in appearance. Parameters must be quantifiable. Not as accurate as a bottomup estimate. Computer program needed.

Parametric

Useful if components are scalable. Useful if historical information on which the model is based is accurate. Quick.

Bottomup

Most accurate. Buy-in from the person doing the work. Used when the project is well defined.

Time consuming. Interaction costs may be overlooked. Contingency costs by task may inflate estimates. Time consuming. Many people have a hard time coming up with one estimate, much less three.

Threepoint

Used if there is a lot of uncertainty on the project. Provides a justification for cost reserve.

Reserve Analysis
Cost estimates may include contingency reserves (sometimes called contingency allowances) to account for cost uncertainty. The contingency reserve may be a percentage of the estimated cost, a fixed number, or may be developed by using quantitative analysis methods. As more precise information about the project becomes available, the contingency reserve may be used, reduced or eliminated. Contingency should be clearly identified in schedule documentation. Contingency reserves are part of the funding requirements.

Cost of quality
The cost of quality (COQ) is the total cost to produce the product or service of the project according to the quality standards. These include prevention costs (such as training and more planning) and appraisal costs (such as test equipment and testing). Cost of quality also includes the costs associated with noncompliance, such as scrap, rework, warranty work, and so forth. Project management estimating software In order to develop a detailed cost estimate you will need some type of project management estimating software. This can be as simple as a spreadsheet, or it can include statistical tools, simulation tools, and estimating tools. Such tools help develop more robust estimates and also speed up the process. They can be used later to monitor and control costs during the project. Vendor bid analysis Vendor bid analysis is used when the project, or sections of the project, will be obtained from external sources. A fixed price bid is easy to incorporate into the cost estimate. However, cost reimbursable contracts, or contracts with incentive and award fees can be more challenging to estimate.

Outputs of Estimate Costs

The following are three outputs that result from the Estimate Costs process:

Activity cost estimates Basis of estimates Project document updates

Activity Cost Estimates Activity cost estimates are quantitative amounts that reflect the cost of the resources needed to complete the project activities. Resources commonly include:

Human resources Material Equipment Information technology needs Any contingency reserve amounts and inflation factors

Basis of Estimates Basis of estimates is the supporting detail for the activity cost estimates and includes any information that describes how the estimates were developed, what assumptions were made during the Estimate Costs process, and any other details needed. According to the PMBOK Guide, the basis of estimates should include the following as a minimum:

A description of how the estimate was developed or the basis for the estimate A description of the assumptions made about the estimates or the method used to determine them A description of the constraints A range of possible results The confidence level regarding the final estimates

Project Document Updates Updates to project documents, as a result of determining cost estimates, commonly include the following to account for cost variances and refined estimates:

Project budget Risk register

Exam Hint

These ranges do show up on the exam. Make sure to MEMORIZE the following:

Rough Order of Magnitude (ROM) Estimate o This type of estimate is usually made during the initiating process. o A typical range from ROM estimate is a +/- 50% from actual, but this range can vary depending on how much is known about the project when creating the estimates. Budget Estimate o This type of estimate is usually made during the planning phase and is in the range of 10% to +25% from actual. Definitive Estimate o Later during the project, the estimate will become more refined. Some project managers use the range of +/- 10% from actual, while others use 5% to +10% from actual.