Estimation is an important component of the project cost management process and is also a part of the budgeting process followed by organizations. Most project managers understand the importance of cost estimation and find it hard to override it when it comes to planning for the project and deciding the future scope.
It can be tough to take a project to its due completion without the right estimates and the right allocation of funds and resources. Project managers need to ensure that all facets of the process are covered and that the project management team does not experience any cost overruns during any part of the project experience. Estimation is a necessary prerequisite and determines the overall financial health and success of a project.
While businesses and project managers would want to single out the best approach to cost estimation, we don’t believe that a single approach can give answers to this question. Different cost estimation techniques come with their own benefits and make the process easier to manage. An organization might choose a desirable estimation method after taking into consideration the maturity of the project plan and the success that they can look to achieve through it.
This article will help you get actionable insight into how much cost estimation matters and the optimal methods used for calculating cost budgets. We also review some cost estimation techniques and mention some of their strengths and weaknesses.
Factors Contributing to Cost Estimate Credibility
It is highly necessary for your cost estimates to be credible in nature and provide a reasonable and trustworthy cost estimate. How do you guarantee that the process is credible and that the estimates generated through it can be trusted? Well, the 8 rules mentioned below will help give you a better idea:
· Make sure you clearly study the project characteristics, conditions and constraints to determine a realistic view of the financial requirements required under the project.
· Involve different employees from across all levels of the organization to improve the estimation process. The information applied across multiple facets should be reliable and complete in nature.
· Implement a structured and standardized approach to your estimates.
· Make sure that the data you utilize is high quality and relevant.
· Take all the uncertainties, risks and possible environmental changes around you into perspective.
· Recognize all costs that are to be excluded from the estimates, and make sure that you have a reason for the exclusion.
· The forecasts should be updated whenever your project scope and plan are subjected to changes.
· Have an independent reviewer oversee the entire process to find out the accuracy of the final estimates.
Cost Estimation Techniques
Having studied the rules of cost estimation, we now take a look at some of the techniques that come true in cost estimation.
Cost of Quality Analysis
The cost of quality analysis or the CoQ cost estimation technique is used to figure out the money and resources that would be required to meet the present quality standards expected from the project. This process usually includes the following phases:
· Define a clear quality standard and requirement for the project.
· Identify the cost of good quality and the way it helps bring a positive reputation to your brand. Identify the extra expenditures you will have to partake in to enjoy good quality. Costs could include investments in better machinery to reduce system failure.
· Identify the cost of poor quality. All expenses that the project may incur due to internal quality failures should be mentioned here. Usual costs include product re-design, waste of materials, and waste of resources.
· Add both the cost of good quality with the cost of poor quality to get an estimate of the cost of quality analysis.
The final figure here can help businesses find where they stand currently in terms of quality and at what cost they can improve it.
Top-down estimation is another method for performing cost estimation on your projects. This method starts with the identification of the overall scope of the project and the total costs that would be required for it. Once the total scope of the project is identified, all costs are broken down into smaller components, depending on what the project contents and attributes are. The top-down approach is ideal for getting a detailed understanding of the project features and the activities involved within it. The technique does not include any nuances and is relatively simple to implement for most organizations.
Vendor Bid Analysis
The vendor bid analysis is a cost estimation technique that comes in very handy for projects where services and products are going to be provided by vendors. This technique then helps determine the cost of the project based on the components supplied by different vendors and the bids they have submitted for them.
The RFP is the determining document here that outlines the total cost of the project and what the supplier feels would be required to meet strategic demand.
Analogous estimation is a cost estimation method that determines the cost of a project by contrasting it with the costs and knowledge of previous projects. Businesses that have worked on similar projects in the past can turn to these projects to determine the contents and features within them and get an estimate of the cost.
This technique basically involves three steps:
· Determine the attribute of the new project
· Find similar characteristics
· Estimate current cost trends through historical data
Cost estimation is an important part of overall project management, and we hope you are able to implement it in full for all future projects.