Cost Estimation

In the estimate costs process, the project cost is estimated by using the following three techniques:

-Analogous Estimating

-Parametric Estimating

-Bottom-up Estimating

Analogous Estimating

You use this technique when very little detail about the project is available. Therefore, this estimation is not very reliable. The benefits of this technique are: it is very fast, less costly, and provides a quick result. In analogous estimating the cost of the project is predicted by comparing it with any similar previously completed project. You will select a project which is closest to your project from your historical records, and using expert judgment you will determine the cost estimate of your current project. The analogous estimating is also known as top-down estimating.

Parametric Estimation

This technique also uses historical information to calculate the cost estimates. However, there is a difference between this technique and the analogous estimation technique. Parametric estimation uses historical information along with statistical data. It takes variables from similar projects and applies them to the current project. For example, in the previous project you can see what the cost of concrete per cubic meter was. Then you will calculate the concrete requirement for your project and multiply it by the cost obtained from the previous project to get the total cost of concrete for your current project. In the same way you can calculate the cost of other parts as well. The accuracy of this technique is better than the analogous estimation.

Bottom-up Estimating

The bottom-up estimating technique is also known as the definitive technique. This technique is the most accurate and time-consuming technique. Here, the cost of each single activity is determined with the greatest level of detail and then rolls up to calculate the total project cost. In other words, here the total project work is broken down into the smallest work components. The cost of each component is estimated and then finally, it is aggregated to get the cost estimate of the project.

Project Budget

The project budget is calculated by adding the cost baseline with the management reserve. Project Budget = Cost Baseline + Management Reserve The cost baseline is determined by adding the contingency reserve to the cost estimate. Cost Baseline = Project Cost + Contingency Reserve Now its time to look at some mathematical examples on this topic. The project budget is also known as the Budget at Completion and denoted by BAC>

Example

For your project you have calculated the cost of all activities as 150,000 USD. The estimated contingency reserve is 25,000 and the management reserve is 5% of the cost baseline. Calculate the project budget.

Solution

We know that

Project Budget = Project Cost + Contingency Reserve + Management

Reserve And cost baseline

Cost Baseline = Project Cost + Contingency

Reserve Management Reserve = 5% of cost

baseline

= 5% of (150,000 + 25,000)

= 5% of 175,000

= 8,750 USD

Now the project budget = 150,000 + 25,000 + 8,750

= 183,750 USD.

Practice Question: 1

You have been assigned as a project manager for a new project and are asked to

calculate the budget for it. You have calculated the cost of all work packages as 200,000

USD. The estimated contingency reserve is 40,000 and the management reserve is 6%

of the cost baseline.

Calculate the project budget.