Project Cost Estimating Factors

• Estimate Costs—7.1

• Determine Budget—7.2

CramSaver If you can correctly answer these questions before going through this section, save time by skimming the Exam Alerts in this section and then completing the Cram Quiz at the end of the section. 1. Which type of cost estimation would you use to estimate the cost to finish a floor if you knew the standard cost per square foot? Analogous estimating Parametric estimating Three-point estimating Bottom-up estimating 2. Which of the following is NOT an input for the determine budget process? Basis of estimates Project schedule Risk register Contracts Answers 1. Answer B is the best response. Parametric estimating calculates cost estimates by multiplying the quantity of work or result of work by a known rate. Answers A, C, and D are all valid estimating techniques, but they do not arrive at values based on known rates. 2. Answer C is correct. The risk register is an input to the estimate costs process, not the determine budget process. Answers A, B, and D are all valid inputs for the determine budget process.

The estimate cost process associates an expected cost of performing work to each activity. Cost estimates can include labor, materials, equipment, and any other direct costs for project activities. Based on the activity resource and duration estimates, the cost estimates express the cost, normally in monetary amounts, of completing the work of the project. As with all project documents, the cost estimates can change through the project as conditions change. Different events can cause the cost for any activity to go up or down and require the cost estimates for the project to change. Table 3.11 shows the inputs, tools and techniques, and outputs for the estimate cost process.

Table 3.11. Estimate Cost Inputs, Tools and Techniques, and Outputs

Inputvs	Tools and Techniques	Outputs
Scope baseline	Expert judgment	Activity cost estimates
Project schedule	Analogous estimating	Basis of estimates
Human resources plan	Parametric estimating	Project document updates
Risk register	Bottom-up estimating
Enterprise environmental factors	Three-point estimates
Organizational process assets	Reserve analysis
	Cost of quality
	Project management estimating software
	Vendor bid analysis

Cost estimates are compiled into the project budget. You probably recognize several estimating techniques from other processes. Three of the techniques used in the estimate costs process are the same basic techniques used in the estimate activity durations process. The other technique, bottom-up estimating, is also used in the estimate activity resources process. Although they are the same techniques, they are applied to different criteria and bear revisiting.

• Analogous estimating— This uses actual cost values from similar activities. These activities can be from the same project or another project.

• Parametric estimating— This calculates cost estimates by multiplying the quantity of work or result of work, such as square feet or hours, by a known rate, such as $30 per square foot or $45 per hour. This type of estimate works best for standardized, and often repeated, activities.

• Three-point estimates— This uses three estimate values for each activity:

  • Most likely—The cost most likely to occur

  • Optimistic—The cost of the activity if everything goes as planned, or better

  • Pessimistic—The cost of the activity in a worst-case scenario

• Bottom-up estimating— This technique calculates cost estimates by adding the costs of each individual work package. The technique starts at the most detailed level and rolls up the costs until a total cost for the project is obtained.

After you know the costs to accomplish the work of the project, you can create the project budget. The determine budget process aggregates the activity cost estimates into a single document for the project. The resulting project budget expands on the preliminary budget from the project charter and provides far more detail. Table 3.12 shows the inputs, tools and techniques, and outputs for the determine budget process.

Table 3.12. Determine Budget Inputs, Tools and Techniques, and Outputs

Inputs	Tools and Techniques	Outputs
Activity cost estimates	Cost aggregation	Cost performance baseline
Basis of estimates	Reserve analysis	Project funding requirements
Scope baseline	Expert judgment	Project document updates
Project schedule	Historical relationships
Resource calendars	Funding limit reconciliation
Contracts
Organizational process assets

Cram Quiz

Answer these questions. The answers follow the last question. If you cannot answer these questions correctly, consider reading this section again until you can.

1.	The project cost and schedule for deliverables can be reasonably estimated at what level of the WBS? The highest level The mid level The work package level Both A and C
2.	When the cost of an activity cannot be estimated with an adequate degree of certainty, the work within the activity can be decomposed. The resource requirements for each lower, more detailed work package can be estimated and aggregated to form a basis for estimating the cost for overarching scheduled activity. What is this type of estimating called? Bottom-up estimating Decomposed estimating Should-cost estimating Three-point estimating
3.	Which process results in the project funding requirements document as one of its outputs? Estimate activity resources Estimate activity durations Estimate costs Determine budget

Cram Quiz Answers

1.	Answer D is the correct response. The project cost and project schedule for work can be reliably estimated at the work package, or lowest, level of the WBS. The work package level is the lowest level of the WBS.
2.	Answer A is the correct response. Bottom-up estimating is a technique for estimating cost through decomposition. The bottom-up estimate is based on the cost requirements for each lower work package and then is combined to estimate cost of the entire component of work. Answer B is incorrect because there is no technique called decomposed estimating. Answer C is incorrect because should-cost estimating is an activity duration estimating technique. Answer D is incorrect because three-point estimating does not incorporate decomposition.
3.	Answer D is the correct response. The determine budget process produces the project funding requirements as one of its outputs, along with the cost performance baseline and project document updates. Answers A, B, and C are incorrect because these processes do not produce the project funding requirements document as an output. Make sure you know the inputs, tools and techniques, and outputs of all of the project processes.