Estimate Costs

This article contains most of the important information you need to know about Estimate Costs process in order to answer questions related to this topic in the PMP Exam, I recommend you review this type of articles 1 week before your exam date, all information mentioned are based on PMBOK Guide 6th edition and PMP Exam Prep 9th edition for Rita Maclhy’s, ITTO refers to Inputs, Tools & Techniques and outputs.

This process is a part of Planning Process group and Cost Management Knowledge Area with the following ITTO’s

Inputs:

  1. Project Management Plan (Cost and Quality management plans, Scope baseline )
  2. Project Documents (Lessons learned register , Project schedule , Resources requirements , risk register )
  3. Organization process assets
  4. Enterprise environmental factors

Tools & Techniques:

  1. Expert Judgment
  2. Analogues estimating
  3. Parametric estimating
  4. Bottom Up estimates
  5. Three points estimating
  6. One point estimating
  7. Project management information system .
  8. Data Analysis (Reserve Analysis , Cost of Quality , Alternative analysis )
  9. Project Management Software
  10. Decision making techniques ( Voting )

 

Outputs:

  1. Activity Cost estimates
  2. Basis of estimates
  3. Project Document Updates ( Assumption log , lessons learned register , risk register )

 

 

  • This process involves coming up with cost estimates of e ach activity, the costs will be combined into one time-phased spending plan .
  • Costs can be either variable or fixed
  1. Fixed Cost , Costs do not change as production changes like Set up , rent , utilities .
  2. Variable Costs , Costs changes with mount of production or amount of work , material , supply , wages.
  • Costs can direct or indirect
  1. Direct Cost , Directly attributable to the work on the project , like team travel and wages costs , materials cost.
  2. In Direct Cost, Includes overhead items or costs incurred for the benefit of more than one project , like taxes , janitorial services .

 

  • There is different estimating techniques :
  1. One-Point Estimating, the estimator submits one estimate per activity, it can be based on expert judgment or historical information or it could be just a guess , It is not used frequently and have a lot of negative effects such as ; it forces padding , it can result in schedule that nobody believes in.
  2. Analogous Estimating (Top-Down) , It uses expert judgment and historical information to predict the future , it can be done at the project level and can be applied on activity level. The level of accuracy depends on how closely the project or activity matches the past history, it is mainly used when the project is chartered.
  3. Parametric Estimating , looks at relationship between variables on an activity to calculate time or cost estimates , the data can come from historical records from previous projects , industry requirements , standard metrics , it comes like time per code , time per linear meter , time per installation and there is 2 ways of parametric estimating
  4. Regression Analysis, a diagram tracks two variables to see if they are related and creates a mathematical formula.
  5. Learning Curve, The 50th room block work will take less than the first room because of improved efficiency.
  6. Three-Point Estimating, In this method estimators give an optimistic (O), pessimistic (P), and most likely (M) estimate for each activity. It allows more consideration and uncertainty of estimating , three point estimating calculate a risk based expected duration estimate by taking either a simple average or a weighted average of three estimates with the following formula
  7. Triangle Distribution (Simple Average), P+M+O / 3 , It gives equal weight to each of the three point estimates calculating the expected activity duration or cost.
  8. Beta Distribution (Weighted Average) , P+4M+O/6 . It gives stronger consideration for the most likely estimate, this method gives benefits of risk management in reducing the uncertainty of estimates.
  9. Bottom Up estimating , Involves creating detailed estimates for each part of activity or work package , it is more accurate and time consuming.
  • Group decision making is used within the tools in estimating, they will do brainstorming, nominal group techniques and Delphi technique.
  • Reserve analysis. there can be two types of reserves added to the project schedule ,
  1. Contingency Reserves, It is for the identified schedule risks remaining after the plan risk responses process, they are included in the project Cost baseline .
  2. Management Reserves. Additional funds set aside to cover unforeseen risks that would impact the project ability to meet the Budget, management time reserves are not part of project Cost baseline.
  • Project management software, it should be used for estimating activity costs.
  • Resources cost rates , Resources are not just internal human resources , this work might also involves estimating the work of consultants , vendors and suppliers.
  • Cost of quality , The cost of work added to the project to accommodate quality efforts.
  • Accuracy of Estimates , Estimates made in early part in early part of the project will be less accurate than those made later ,
  1. Rough order of magnitude Estimate ( ROM) , During project initiation , -25% to +75% .
  2. Budget Estimate , During project planning , -10% to +25%
  3. Definitive Estimate , As project progress , it is done during planning -5% to 10% .


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