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Costs can be estimated using the methods that are available in the Time Management concept. One-point estimating, analogous estimating, parametric estimating, and three-point (PERT) estimating. Another method of estimation that we will now study is bottom-up estimating technique.
A project is finely distributed in the form of activities and work packages. The technique of bottom-up estimating involves estimation of costs involved in each activity or work package, rolling it up into control units and then finally to the overall project estimate. This is another reason why a WBS should be well created by the project team. How to create Cost Estimates? The process of creating estimates involves the following:
PROJECT MANAGEMENT SOFTWARE
Project Management Software enhances calculation speed required to estimate costs. These calculations could include direct, indirect, overhead, fixed cost calculations for several hundred activities.
DETERMINING RESOURCE COST RATES
Resources can be internal human resources, vendors, consultants, suppliers, external technicians, among others. Project managers must know-how the rate involved in the resource cost.
Reserve analysis involves identification of activities which have significant risks and determination of the total efforts (time and money) required to manage these risks if they occur.
There are two types of risks:
Contingency reserves deal with known risks. Management reserves deal with unknown risks. Padding should be avoided when doing a reserve analysis.
COST OF QUALITY
Quality efforts are required for the project. The amount of money added due to these efforts are bifurcated as Cost of Quality.
ACCURACY OF ESTIMATES
Estimation of Costs is an iterative process. Costs estimated during early stages of the project have lesser accuracy and the ones estimated at later stages have higher accuracy. Cost estimation should be made by the project manager in the form of ranges. Thus, the ranges will be higher at the start of the project and will narrow down as the project progresses. There are different types of ranges for different scenarios i.e. for preliminary cost estimation, the range will vary for cost estimation during the conceptualization stage and similarly for feasibility and final estimation, the ranges will vary. The ranges will narrow down from a broad level to lower levels.
ROUGH ORDER OF MAGNITUDE (ROM) ESTIMATION:
This estimate is generally made during the project initiation phase. A typical range of estimates for ROM is -25% to +75%. However, this percentage will vary depending on how much is known by the project team about the project when creating estimates.
This is done during the project planning stage. Range varies from -10% to +25%.
It is a more refined project cost estimate. Normally, project managers use -5% to +10% of range from actual. When the Estimate cost process is completed, it results in Activity Cost Estimates with the explanation of how these costs derived changes or updates to other project management documents such as risk register, change control register.
In the process, the project manager determines the number of funds the organization needs to have for the project by calculating the total cost of the project. This calculation leads to the creation of a budget. A project manager must perform risk management activities and include reserves (contingency and management) when estimating the total cost of the project. The cost budget is cost baseline plus management reserves. The cost budget indicates the total money the organization should have allocated for the project. For the creation of a budget, the process of cost aggregation is used. In this concept, the activity costs are rolled up into work package costs, work package costs are then rolled up into control account costs and control account costs are finally rolled up into project costs. Contingency cost is added to the cost baseline. Management reserves are added as a final step. Comparison of cost baseline and cost budget is done by the project manager to parametric estimates, expert judgment or historical records for a sanity check. If there are significant variances between the reference data and project estimates, the project manager needs to investigate and ensure that the estimates are correct.
Checking of the cash flow is the next thing to do. There could be situations where the funding is not available when it is required by the project. Hence, all the activities need to be planned in a time-phased manner. The next step is to identify any constraints in the project charter. The project manager needs to reconcile the cost baseline and cost budget with these constraints. The reconciliation is done as a part of the Integration Management process. If the project estimate exceeds the constraints, the project manager must meet the stakeholders and explain the reasons for exceeding the constraints and also share options to reduce project costs. Else, an unrealistic budget is made available and it is considered to be a project managers fault. The output of Determine Budget Process is Cost Baseline. The efforts involved in determining budget process may lead to changes in other project management documents.
Control costs process is focused on controlling the cost of the project as described in any other knowledge area in the control section. A few activities that could be helpful for controlling costs include:
Use of cost management plan: A cost management plan helps the project management plan for controlling the cost of the project.
Use of Organizational process assets: Organization policies, procedures, tools or reporting formats related to controlling costs can be used
The project manager should avoid usage of guestimates for reporting progress. One of the following techniques can be deployed by the project manager:
50/50 Rule: An activity is considered 50% complete when it begins and gets credit for the rest 50% only when it is completed
20/80 Rule: An activity is considered 20% complete when it begins and gets credit for the rest 80% only when it is completed
0/100 Rule: An activity is considered 0% complete when it begins and gets credit for the 100% only when it is completed