Cost Estimation: Important aspect in Project Management

It is generally observed that while working on Project Management, Project Manager often focuses on Time (Schedule) and quality (Deliverables) than that on the costs. Every project has a budget and client expects a product according to that budget. If we have budget of 3 Lac to buy a car, we expect car like Alto and not BMW. And if dealer gives us BMW in that price (for say X reason); we may be happy at that point but happiness will be short liven when it comes to maintain the car. Same is with the project; Project manager must ensure that Project is completed within given costs expected/committed to the users. This makes cost estimation very important task for the project manager.

In this blog my aim is just to provide high level overview of cost estimation techniques

Analogous Estimates:

·     As the name estimates, Analogous estimate technique a cost is estimated based on the “Expert Judgment”. The expert judgment can be based on some similar project by performing company, Project done by competitor or other such “Historical” sources. ·        Such cost estimates generally are used during Project Initiation.
Advantages	Disadvantages
·         Quickest approach for Estimation. ·         Helps in determining Budget for the Project at the start without having detailed requirements. ·         Helps in checking the feasibility by comparing Project costs with the business objective (Expected Returns) whether the organization should go ahead with the project or terminate the idea.	·         This method does not use any scientific techniques for cost estimation hence the estimates are not accurate.

Gut – Feel Estimate

·         This estimation technique is similar to the Analogous technique but is used at the Activity level. ·         Activity is the smallest action that need to be performed and team estimates costs for the same by “their” Judgment; hence the name gut-feeling. ·         This technique is used in the Planning Stage.
Advantages	Disadvantages
·         Quickest approach for estimation at the Activity level.	·         This method does not use any scientific techniques for cost estimation hence the estimates are not accurate.

Parametric Estimates:

·         It is an estimating technique that uses a statistical relationship between historical data and other variables (for example, square footage in construction, lines of code in software development) to calculate costs estimates. ·         It is done at Activity level/Task level and is used in Planning Stage ·         The estimation from Parametric estimates is most AccuRate
Advantages	Disadvantages
·         Use scientific methods/ Models hence most accurate estimates	·         Requires more efforts to obtain the estimates. ·         Can be used only when we are fully certain about the tasks/activities.

3 Point / PERT Estimates:

·      This estimation technique is used when we have uncertainties regarding tasks for which costs need to be estimated. ·        It uses 3 points as name suggests for estimation: Optimistic conditions; Moderate Conditions; Pessimistic conditions. Estimates for all three conditions are used to calculate PERT estimates. E.g:  Wall is to be painted by “New” type of paint. Normal paint requires USD100. Optimistic: This will behave as normal paint so USD 100 Pessimistic: The paint will behave altogether different and require special effort. So estimating 500 USD. Moderate: It will behave mostly like normal paint but being new might require little extra cost. So estimating 250 USD. ·         What should be our cost estimation as PM? 100? 500? Or 250? ·         This can be founded by PERT as; Estimate = (O + 4M + P)/6 = (100 + 1000 + 500)/6 = USD 267
Advantages	Disadvantages
·         Can be used when PM has many uncertainties related to task/activities. ·         68.26% chances are that the estimate will be close to the PERT estimated value.	·         The estimates obtained from this technique is not most accurate.

Effective and correct use of cost estimation technique by Project Manager will help him to manage Costs effectively across the project.

About Author:
Saurabh Kane is a consultant in Systems Plus Pvt. Ltd. Within Systems Plus, he actively contributes to the areas of Technology and Information Security. He can be contacted at: saurabh.k@spluspl.com