#PM Cost Management—A Closer Look at the Tools & Techniques of the Estimate Costs Process


1. Introduction

In yesterday’s post, I gave a breakdown of the various inputs to the Estimate Costs Process, organized by the type of the estimate they were to be used for. Today’s post is a breakdown of the various tools & techniques of the Estimate Costs Process given in the PMBOK® Guide, also organized by the type of estimate involved.

2. Accuracy vs. precision of estimates

Before I get to the accuracy of estimates, I realize that there may be confusion between accuracy and precision of estimates. In the cost management plan I summarized on 10/14/2012, I listed the first element out of six to be the units of measure and the level of accuracy of the estimates. This is a mistake; I should have said the precision of the estimates. I changed it in the table, but the mistake remains in the graphic.

So if I ended up forgetting the difference, I realized I need to make sure nobody reading my blog continues to make the same mistake. If you are firing at a target, the level of precision will mean how close the bullets will cluster together; the accuracy will mean how close the bullets get to the bullseye of the target. The cost management plan specifies the precision of the estimates, i.e., whether they will be rounded to the nearest $1,000, $100, or $10. The accuracy of the estimates specifies how far they end up being from the actual costs. One of the conceptual difficulties here is that you will not know the actual costs until the project is over. But you can zero in on them gradually in the course of the project in the following three stages, each of which reduces the range of the estimates:

Estimate type

Range

When used

1. Rough Order of Magnitude (ROM) -50/+ 50% from actual Initiating process group
2. Budget -10/+25 from actual Planning process group
3. Determine -5 or -10/+10 from actual Executing process group

The Rough Order of Magnitude or ROM estimate is basically made to determine the feasibility of the project during the initiating process. For an ROM estimate, analogous, parametric, or other top-down estimates are most appropriate. It is called an ROM estimate because the upper end and lower end of the range differ by a total of 100%, or the same magnitude as the estimate itself.

The next stage, the Budget Estimate, reduces the range from -50/+50 to -10/+25, with the preference being for an overestimate rather than an underestimate to reduce the chance of an unwelcome “surprise” at the end of the project. The methods used for the Budget Estimate are those that are bottom-up estimates rather than the less accurate top-down estimates used to produce a ROM estimate.

The accuracy of the estimates can be further increased during the actual project itself because the uncertainty associated with various risks will gradually be reduced as the risk or opportunities either materialize or not. The range here can be reduced to -5 or -10/+10 from the actual costs. Reserve analysis and three-point estimates are risk-based tools and techniques used to refine the accuracy of the estimate during the executing process group.

3. Tools & Techniques of the Estimate Costs Process

The ninth entry, that of Project Management Estimating Software, is a tool of estimating; the rest can be considered techniques. I have grouped the techniques based on whether they are top-down, bottom-up, or risk-refined techniques.

Tool or Technique

Category

Description

1. Analogous estimates Top-down Uses overall costs based on actual costs of similar projects.
2. Parametric estimates Top-down Uses unit costs based on actual costs of similar projects.
3. Expert judgment Top-down or

Bottom-up

  • Experts find historical information of company or industry to support top-down estimates.
  • Experts use information from previous projects to support bottom-up estimates.
4. Bottom-up estimates Bottom-up WBS is analyzed to determine more accurate estimates.
5. Cost of Quality Bottom-up\ Costs of quality such as

  • Prevention costs (quality assurance, training)
  • Appraisal costs (quality control)

are added to cost estimate.

6. Vendor bid analysis Bottom-up Costs for vendors contracted to supply deliverables are added to cost estimate.
7. Three-point estimates Risk-refined Costs of activities are given in terms of three estimates based on perceived risks and/or opportunities:

  • Most likely
  • Optimistic (best-case scenario)
  • Pessimistic (worst-case scenario)
8. Reserve analysis Risk-refined Contingency reserves are those additional costs incurred if certain risks in the risk register are triggered. These are added to project estimates to get the cost baseline.
9. PM Estimating Software Tool Spreadsheets, statistical tools, simulation tools are all used in obtaining estimates.

You can see by the nature of the techniques that the top-down techniques (analogous, parametric) are more useful for Rough Order of Magnitude estimates to be used in the Initiating process. The bottom-up techniques (based on an analysis of the WBS, plus the costs for quality and procurements) are more useful for the budget estimates to be used in the Planning Process. Although the risk-refined techniques (three-point estimates and reserve analysis) are started in the planning process, they are set up so that during the execution phase of the project, as certain risks either materialize or not, they can be used to refine the costs going forward so that they are useful for the definitive estimates of what the project will actually cost.

4. Summary

I hope that this organization of the various tools & techniques based on the general category of estimates has been useful.

I will not do a separate post on the outputs to the Estimate Costs process. This is because the next process in the Cost Management processes is that of Determine Budget, and the inputs to that process will include the outputs of the Estimate Costs Process.

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