Unit Outline

Cost Estimating

Lesson 1: Fundamentals of Cost Management

1. What are the goals of Cost Management?
2. What are the constituent processes of Cost Management?
3. What is a cost management plan?
4. What are the components of a cost management plan?
• Precision level
• Units of measure
• Organizational procedure links
• Control thresholds
• Earned value rules
• Reporting formats
• Process descriptions
5. What types of resources are used for a project?
6. What is resource identification and why is it important?
7. What is the result of careful resource planning?
8. What is life cycle costing?
9. What are the benefits of life cycle costing?

Lesson 2: Cost Estimating Inputs

1. What is the goal of cost estimating?
2. What is a characteristic of cost estimates?
3. Why is it important to know the resource rates when estimating costs?
4. What are the key inputs to cost estimating?
• Enterprise environmental factors
• Organizational process assets
• Project scope statement
• Work breakdown structure (WBS)
• WBS dictionary
• Project management plan

Lesson 3: Cost Estimating Techniques

1. Why is it important to use effective cost estimating techniques?
2. What are some important items to keep in mind when completing cost estimations?
3. What are some project estimating pitfalls I should avoid?
4. What are key cost estimating techniques?
• Analogous estimating
• Bottom-up estimating
• Parametric estimating
• Phased estimating
• Determine resource cost rates
• Project management software
• Vendor bid analysis
• Reserve analysis
• Cost of quality

Lesson 4: Cost Estimating Outputs

1. Why is precision important when communicating cost estimates?
2. What are key cost estimating outputs?
• Activity cost estimates
• Activity cost estimates supporting detail
• Requested changes
• Cost management plan updates

Unit Content

Cost Estimating

Lesson 1: Fundamentals of Cost Management

What are the goals of Cost Management?

As a project manager, one of the most challenging aspects of your job is completing projects on time and on budget. By fully understanding and using Cost Management processes, you
will improve your ability to make accurate estimates, which will enable you to improve project decisions, create accurate budgets, and effectively control costs throughout the project.

What are the constituent processes of Cost Management?

Cost Management is one of nine Project Management knowledge areas that form the foundation of the project life cycle. The constituent processes of Cost Management are cost
estimating, cost budgeting, and cost control. Cost estimating and cost budgeting are constituent processes within the Planning Process Group. During these constituent processes, you
will develop project cost estimates that will help you create an accurate project budget. Cost control is a constituent process within the Monitoring and Controlling Process Group. During
the cost control process, you will monitor specific project results to ensure that the project is completed on time and on budget.

What is a cost management plan?

Before you begin the Cost Management process, you need to have a cost management plan. This plan is part of the project management plan, which is created during the Project
Management Integration planning process. The cost management plan is the underpinning for all of your Cost Management efforts. It establishes the criteria you will use when planning,
estimating, budgeting, and controlling costs throughout the project.

What are the components of a cost management plan?

The cost management plan gives you the information you need to implement effective Cost Management processes including:

• Precision level
• Units of measure
• Organizational procedure links
• Control thresholds
• Earned value rules
• Reporting formats
• Process descriptions

• Precision level

Precision level is the amount to which you will round cost estimates. For example, your cost management plan may direct you to round estimates to the nearest $10, $100, or $1000,
depending on the scope and scale of the project.

• Units of measure
The cost management plan also indicates the required units of measure for project reports. For example, if you need to report the amount of personnel resources needed for your
project, the cost management plan will denote whether you should report this time requirement in hours, days, weeks, or in a lump sum.

• Organizational procedure links

Another set of items included in the cost management plan are organizational procedure links. These links refer to how your cost management plan is connected to your organization's
accounting system. When you look at your project's work breakdown structure (WBS), you will see a list of control accounts (CA) linked to each work package. Each one of these control
accounts is assigned a number, which relates to your organization's accounting system. Relating your project's control accounts to your organization's accounting system will help
ensure efficiency, accuracy, and consistency between them.

• Control thresholds

Control thresholds define the amount of variation from defined plans or specifications that will be tolerated during project execution. Control thresholds stipulate this range of acceptable
variation that management will then consider as within defined specification without raising concerns about performance. The customer and the project team typically determine the
range of tolerance for variation.

• Earned value rules

The cost management plan also indicates earned value rules. These are the rules you will use to determine what estimates to complete, the earned value credit criteria to use during
budgeting, and at what level of the WBS you will perform your analysis.

• Reporting formats

A reporting format is often a template or example that shows you what to report and how the information should be reported.

• Process descriptions

The cost management plan will also include a description of each one of the three Cost Management processes: cost estimating, cost budgeting, and cost control.

What types of resources are used for a project?

An important part of Cost Management is resource planning. There are several types of resources you will use to complete projects:

• People
• Facilities
• Equipment
• Software
• Expenses
• Materials

People are the most common resource needed when completing a project. You will need team members for nearly every aspect of most projects. You will also need facilities to house
the work for most projects. Offices, conference rooms, presentation rooms, and workrooms are a few examples of facilities used for projects. Frequently, the availability of these facilities
can drive the project schedule.

Equipment is another type of project resource. Often, you will need access to machines, tools, or technology to complete project work. Again, the availability of equipment can drive the
project schedule. You can use software to define, plan, and organize available resources and resource rates. In addition, there are several comprehensive software packages that can
help you define your resource calendar.

Expenses such as travel, room and board, and supplies are another important resource to consider. If the end project deliverable is a physical product, materials will also be necessary
project resources.

What is resource identification and why is it important?

You will use resource identification when you need specific people, equipment, and materials to complete a project. Resource identification is the process of quantifying the amount of
each physical resource needed in order to complete the project activities successfully.

What is the result of careful resource planning?

When you conduct careful and thorough resource planning, you will create a detailed description of the necessary resources for a project. Based on the project's work breakdown
structure, you should know what resources are required for each work package, as well as what quantities are needed.

What is life cycle costing?

In addition to estimating the cost of resources, you should be concerned with life cycle costing, which takes into account the cost of operating the end product of the project in production.
Life cycle costing, sometimes referred to as the total cost of ownership, includes consideration of project decisions that will affect the cost of the product throughout its life.

For example, imagine that your organization is considering implementing a new enterprise resource planning system. During the planning phase, your organization should consider both
the cost of initially developing the system as well as the cost of operating and maintaining it. These costs can be considerable and can take management by surprise if not accounted for
as part of life cycle costing. Once the system has been deployed, it will require resource time for maintenance procedures, upgrades, and operational management.

What are the benefits of life cycle costing?

It is important to judge the entire project life cycle when conducting Cost Management. By considering this broader product view, you will be able to make better project decisions, reduce
project cost, reduce project time to completion, and improve the total product quality and performance.

Lesson 2: Cost Estimating Inputs

What is the goal of cost estimating?

Accurate cost estimates are the basis for the entire Cost Management process. The goal of estimating costs is to evaluate the cost of resources you need to complete a project. By
accurately estimating project costs, you will be able to create a cost baseline, which you will use to ensure that you complete the project within an identified budget.

What is a characteristic of cost estimates?

It is important to note that cost estimates become more accurate as the project progresses. Throughout the life of a project, more details become available, and your cost estimates can
be refined. Also, keep in mind that your estimating skills will sharpen as you gain more project experience, allowing you to predict more accurately the cost of project resources from the
outset.

Why is it important to know the resource rates when estimating costs?

Effective cost estimations require you to know what resources you need, as well as the rates charged for each resource. For example, if it takes 20 team members 14 days to complete a
work package, you must know their wage rate in order to estimate the cost of that work package. The same applies to materials. If the project goal is to produce a new software program
that requires 10,000 CD-ROM copies, you must know the cost per CD-ROM in order to estimate the cost of reaching that goal.

What are the key inputs to cost estimating?

There are six key inputs project managers consider when conducting cost estimating. These inputs include:

• Enterprise environmental factors

• Organizational process assets
• Project scope statement
• Work breakdown structure (WBS)
• WBS dictionary
• Project management plan

• Enterprise environmental factors

Enterprise environmental factors are outside issues that can affect project estimations. The state of the market, including competitors' products or services, is one example of an
environmental factor that may affect your Cost Management strategy.

Project managers often turn to estimating publications, another type of enterprise environmental factor, to aid their estimating efforts. Estimating publications are reference materials that
offer current, commercially available information about cost estimating techniques. You can use these materials as external support to supplement internal cost estimating information.

For example, suppose Frank is in charge of a project with the goal of putting 10,000 CD-ROM software copies on the market. He creates a work breakdown structure to break the project
into work packages. He then uses the work packages to estimate costs per task. Frank can supplement any internal estimating tools by using estimating publications to research the
techniques his industry currently uses when estimating costs for similar projects.

• Organizational process assets

Many organizations have existing documentation or information on estimating that is indispensable to project managers. These organizational process assets include cost estimating
policies, cost estimating templates, project files, project team knowledge, lessons learned, and historical information.

Historical information can be invaluable since previous cost estimations are frequently available for the resources you are using in your current project. However, if you use historical
information to estimate costs, remember to adjust for inflation or other possible cost increase factors. In addition, when using historical data, be sure that your previous and current
projects are similar enough so you are able to make a realistic comparison.

You should examine the following sources when looking for historical information on which to base cost estimates:

• The knowledge of experts or team members with similar project experience

• Project databases with your company's records from previous projects
• Cost estimate databases that are kept on an industry-wide basis

• Project scope statement

A third key input you should consider when conducting cost estimating is the project scope statement, which describes the objectives of the project. This statement includes project
constraints, assumptions, and requirements. One common project constraint you will most likely encounter is a limited budget. Another part of the project scope statement that you will
use during Cost Management is the list of deliverables. You can use the list to determine the amount of resources each deliverable will require.

• Work breakdown structure (WBS)

When developing cost estimates for a project, you will use various levels of the work breakdown structure (WBS), depending on the applied estimating technique. The lowest level of the
WBS, called the work package, generally provides the most accurate cost data since it represents the smallest unit of project work. Estimating costs for all of the work packages listed in
the WBS also ensures that you will complete an estimate for all of the labor required for the project. However, you can also use the summary-level deliverables on a WBS to complete
cost estimations for a project.

• WBS dictionary

Another cost estimating input is the WBS dictionary--a document that further defines the WBS by providing more details on its content. The WBS dictionary gives you important Cost
Management related details about each WBS component, including control accounts and resource requirements.

• Project management plan

The project management plan is also an input to cost estimating. This plan defines how you will execute, monitor, control, and close the project. Other project management plan
components that are used for cost estimating are the schedule management plan, the staffing management plan, and the risk register.

Many of the decisions you will make regarding Cost Management will be influenced by the schedule management plan. This plan documents how you will control the project's schedule
and is created as part of the project's Time Management processes. You will reference the schedule management plan when you perform activity resource estimating--the process of
determining what resources you need and when you will use them in a project. You will also use it when you perform activity duration estimating--the process of determining the time
needed to complete project activities, as well as the project as a whole. You will use the staffing management plan in a similar way. This plan specifies the staff resources you will
require, including staff cost rates.

Risk is another key input you will use to determine expected project cost. The risk register is part of the risk management plan, and lists the threats within your company that can
significantly affect your project's cost estimates. Keep in mind, if your organization accepts higher risks, you will need to make contingencies within your estimates to ensure that you are
prepared to handle potential outcomes, should they arise.

Lesson 3: Cost Estimating Techniques

Why is it important to use effective cost estimating techniques?

Implementing effective cost estimating techniques will help ensure that your estimates will give you an accurate picture of the resources you will need throughout the project.

What are some important items to keep in mind when completing cost estimations?

You should keep the following in mind when using techniques to determine the quantitative estimation of the costs for a project:

• Human resources
• Materials
• Supplies
• Freight
• Purchased parts
• Travel
• Inflation allowance
• Overhead rates, such as rent and utilities

What are some project estimating pitfalls I should avoid?

There are also several pitfalls you should avoid when completing project estimates:

• Poorly defined project scope

• Inadequately defined schedule
• Incorrect work breakdown structure
• Incorrect or poorly matched estimating techniques
• Failure to have a clear understanding of overhead costs

What are key cost estimating techniques?

There are several techniques that you can use to derive project estimates:

• Analogous estimating
• Bottom-up estimating
• Parametric estimating
• Phased estimating
• Determine resource cost rates
• Project management software
• Vendor bid analysis
• Reserve analysis
• Cost of quality

• Analogous estimating

Analogous estimating, also called top-down estimating, is a technique that requires you to examine past data from similar projects to develop a cost estimate for a current project. This
process is beneficial because it generally requires less time and expense than other techniques. However, it is also less accurate than other methods of cost estimating. Due to this
shortcoming, many organizations only use analogous estimating when selecting projects to pursue because it gives them the information they need to create a rough estimate of the
project's cost. Then, once a project is chosen, another technique is used to estimate the project costs.

• Bottom-up estimating

The bottom-up estimating technique requires you to develop a cost estimate for each of the work packages in the work breakdown structure. You will then add these estimates to
compile the total project cost estimate. Using bottom-up estimating can be advantageous since you can consult the individuals who complete the work in order to gain the highest level of
accuracy. However, it is not always possible to use the bottom-up process. At the beginning of a project, there may not be enough information to identify all of the work packages
necessary to complete a project. Therefore, any bottom-up estimates made would be incomplete.

• Parametric estimating

Another estimating technique is parametric estimating. When conducting the parametric estimating technique, you use historical ''rules of thumb'' to determine a reasonable estimate.

• Phased estimating

Phased estimating is a fourth cost estimating technique you may use. Project managers may find it difficult to estimate a project's entire cost at the outset of the project if there is not
enough information available to understand all of the project details. The phased estimating technique allows a project to be broken into phases, with separate cost estimates done for
each phase as they initiate, rather than as an entire project.

Some project managers refer to this technique as ''rolling wave planning,'' as estimating is completed in phases, or ''waves.'' As each phase of a project is finished, you generate
estimates for the next phase. This estimating method is generally easier to use than other methods and results in a more accurate cost estimate. In addition, phased estimating protects
the project team from the risks involved with committing to cost estimates for the full project before they have enough information to estimate the overall costs with accuracy.

• Determine resource cost rates

Another cost estimating technique involves determining the resource cost rates for each scheduled activity. To ascertain these rates, you must first know the unit cost rate of the item you
are estimating.

For example, suppose Susan is the project manager for a landscaping project. In order to determine the cost of laying new sod for the landscaping, she must determine the unit cost of
the sod per square foot. Then, after she determines the total square footage of the area that requires sod, the number of hours it will take to install the material, the rate per hour for
labor, and maintenance costs, she will be able to determine the total cost of laying the new sod for her project.

• Project management software

Today's project managers have access to a multitude of project management software to facilitate accurate cost estimating. Conducting estimating techniques through simulations,
spreadsheets, and various software applications allows for easy project comparisons and can often facilitate more precise estimates than those determined by hand.

• Vendor bid analysis

Many times, project managers can determine portions of a project's cost by obtaining and comparing vendor bids. Consulting with vendors can be an extremely accurate way to
determine activity costs. In fact, utilizing vendor bidding is an excellent way to promote healthy vendor competition, driving your project costs down.

• Reserve analysis

Another commonly used cost estimating technique is reserve analysis. This technique enables you to use reserve money, or contingency funds, as a way to manage known or unknown
project risks. There are various approaches to adding contingency to cost estimates to manage risk and uncertainties. Some project managers ''pad'' each individual work package.
Others simply have a large stockpile of funds set aside for contingencies that are not coordinated with specific work packages.

• Cost of quality

Another technique you can use to determine project estimates is to figure the cost of quality. Costs of quality include the total cost of achieving and maintaining quality for the resulting
product or service. Quality expenditures include prevention costs, appraisal costs, internal failure costs, and external failure costs.

Lesson 4: Cost Estimating Outputs

Why is precision important when communicating cost estimates?

Once you have completed cost estimating techniques, you will use your estimates to budget for your project. Keep in mind that communicating estimates can be complicated. Some
project stakeholders may misunderstand estimates as actual project costs, causing confusion and potential risk to the project scope or cost baseline.

For this reason, it is crucial that the cost estimates you provide are as precise as possible and that you communicate them clearly. In addition, you must estimate for project risk
thoroughly, as it is easier to budget for contingencies than it is to secure funds if a problem should occur during project execution.

What are key cost estimating outputs?

The cost estimating techniques you complete will result in four cost estimating outputs:

• Activity cost estimates

• Activity cost estimates supporting detail
• Requested changes
• Cost management plan updates

• Activity cost estimates

An activity cost estimate report is a numeric assessment of the expected costs of the resources that are required to complete scheduled activities. You can either communicate these
estimates in a detailed report or in the form of a summary.

• Activity cost estimates supporting detail

The activity cost estimates supporting detail is a document that supports the information you will provide in the activity cost estimates report. It provides clarifying details that will explain
how you derived cost estimates. These details include activity project scope of work descriptions, the basis for the estimates, any constraints, the range of estimates, and--most
importantly--a full description of assumptions made while estimating.

Communicating your assumptions along with activity cost estimates is essential. For example, if not all cost figures for staff resources are available, be sure to note how you derived the
estimate for human resources hours. Make sure that the figures you use have the same cost component structure and are comparable.

• Requested changes

During the estimating process, you may generate requested changes that will affect the cost management plan, which is part of the project management plan. Any requested changes
are processed for approval through the integrated change control process.
• Cost management plan updates

If approved, these changes are integrated into the cost management plan, which results in an update to that plan.