Estimate Costs (Planning Process Group)

Planning Process Group – a reliable resource that brings together diverse planning processes required for running a project, is an important part of all knowledge areas defined by the PMBOK. These processes are undertaken to define and refine objectives, lay down the total scope of integrated efforts, and develop the way forward for attaining the said objectives. 
Here we take a look at the ‘Estimate Costs Process’ and some important elements of the same. 
Estimate Costs Process 
Often used in combination with the popular ‘Determine Budget Process’ used for smaller projects, the estimate costs process describes the cost methods/ techniques that are required within a specific project. In case of a medium to large project, managers often need a cost management/ budget plan that estimate the costs of tasks, and the ways of budgeting and controlling the same. Along with prescribing how and when certain task information needs to be collected, it consists of valuable budgeted performance and measured scope. Additionally, it includes planning information metrics like currency, the estimate costs that serve as included contracts in relation to the project, and the links that lead to the cost tracking systems existing within an organization. At the time of the initiation of the project, there is very little data related to cost details on hand, but then, the scene changes with the project progressing in the planning group. 
Having said this, ‘estimate’ is defined as a quantitative assessment that reflects upon the likely amount/ outcome.  Remember, cost estimates should include a pre-defined measure of accuracy-- actual figures, plus/ minus x%.
Inputs for the Estimate Costs Process
The accuracy metrics of cost estimates are reliant upon the accuracy and details of the scope of the project, which in turn advises certain constraints like dates, budget or resources. Along with non-human costs like tools and licenses, it includes other project deliverables, information gained from the study of the processes of Estimate Activity Duration, Risk Register, and Estimate Activity Resources. Additionally, human resource plans and schedules provide staffing information like hourly rates.
Outputs of Estimate Costs 
In order to capture the basis and assumptions of estimates, it becomes important to update all documentation as well as the risk register, and modify the project scope, as and when required. The list given below helps in categorizing various cost types:
  • Cost of materials

  • Travel cost

  • Labor cost

  • Training cost

  • Overhead cost

  • Contingency reserve cost

  • Equipment cost

  • Cost of supplies

Estimate Costs Process—Techniques and Tools
In order to carry out the estimate costs process, alternative project approaches like outsourcing are used for determining the most effective resource for the same. Additionally, tools like spread sheets, MS Projects, as well as expert judgment with regards to different kinds of expenditures (direct/ indirect costs) come in handy. The common techniques include:
Analogous Estimating
Historical information and expert judgment is used for developing costs estimates in this case.  These costs are derived from similar phases/previous projects and encompass factors like weight, size and complexity.
Parametric Estimating
This method applies statistical relationships based on historical data to calculate estimates.  
Bottom up Estimating
One of the most accurate ways of estimating costs; it requires detailed information with respect to the scope of the project and is quite time-consuming.
Three-Point Estimating (PERT Estimating)
When single figures are not useful for an estimate, mainly because of the involvement of too many unknown variables, this technique uses three different estimates for better decision making.
Best Case (optimistic) –the scenario assumes that there will be no delays /risk events
Most likely—based on real world experiences
Worst case (pessimistic)--This scenario assumes expensive resources, delays, and rework.
Reserve Analysis 
In case of a large, risky, and complex project, it is best to determine extra cost amounts for all increased and unforeseen costs. This technique bears similarity to risk contingency, wherein the reserve is only used when needed.
Cost of Quality
It considers sunk costs to comply with certain quality requirements like prevention or appraisal costs, and includes those related to noncompliance like scraping used materials, or performing re-work.
Vendor Bid Analysis
This technique covers procurement costs like vendor bids.
All the best in handling your processes of ‘Estimate Costs.’

Author : Uma Daga

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Uma Daga