Project Cost Estimating
Tools & Techniques

Project cost estimating scares a lot of people. They don't know how much something will cost, but they know whatever value they give, they will be held to it by their manager.

The challenge with estimating is that it always involves some uncertainty. Some of the factors that contribute to this uncertainty include...

Experience with Similar Projects
Planning Horizon
Project Duration
People

Fortunately, there are some tools and techniques used by professional project managers that you can use to develop more accurate cost estimates.

Expert Judgment	Expert judgment uses the experience and knowledge of experts to estimate the cost of the project. This technique can take into account unique factors specific to the project. However, it can also be biased.
Analogous Estimating	Analogous estimating uses historical data from similar projects as a basis for the cost estimate. The estimate can be adjusted for known differences between the projects. This type of estimate is usually used in the early phases of a project and is less accurate than other methods.
Parametric Estimating	Parametric estimating uses statistical modeling to develop a cost estimate. It uses historical data of key cost drivers to calculate an estimate for different parameters such as cost and duration. For example, square footage is used in some construction projects.
Bottom-Up Estimating	Bottom-up estimating uses the estimates of individual work packages which are then summarized or "rolled up" to determine an overall cost estimate for the project. This type of estimate is generally more accurate than other methods since it is looking at costs from a more granular perspective.
Three-Point Estimates	Three-point estimates originated with the Program Evaluation and Review Technique (PERT). This method uses three estimates to define an approximate range for an activities cost: Most Likely (Cm), Optimistic (Co), and Pessimistic (Cp). The cost estimate is calculated using a weighted average: Cost Estimate = (Co + 4Cm + Cp)/6
Reserve Analysis	Reserve analysis is used to determine how much contingency reserve, if any, should be allocated to the project. This funding is used to account for cost uncertainty.
Cost of Quality	Cost of Quality (COQ) includes money spent during the project to avoid failures and money spent during and after the project due to failures. During cost estimation, assumptions about the COQ can be included in the project cost estimate.
Project Management Estimating Software	Project management estimating software includes cost estimating software applications, spreadsheets, simulation applications, and statistical software tools. This type of software is especially useful for looking at cost estimation alternatives.
Vendor Bid Analysis	Vendor analysis can be used to estimate what the project should cost by comparing the bids submitted by multiple vendors.