MODULE 16

Cost Estimation in Project Management

involves predicting the amount of financial resources needed to complete a project
within its defined scope. It is essential for creating a budget that ensures the project
can be completed successfully while keeping costs as low as possible. Cost
estimation helps in forecasting expenses related to materials, labor, equipment, and
other resources necessary for the project's completion. Accurate estimates are
crucial for securing funding, defining project scope, and managing expenses
throughout the project's lifecycle.
Discussion:
Cost estimation is a fundamental aspect of project management that impacts
various stages of a project. Accurate cost estimates are crucial for several reasons:
1. Project Planning and Approval: Before a project begins, an estimate helps
determine if it is financially feasible. Organizations use these estimates to
decide whether to approve or reject a project based on its cost relative to
available resources.
2. Budget Management: Once a project is approved, the initial estimate
serves as a baseline budget. Throughout the project, actual costs are
compared to this baseline to ensure the project remains within financial
constraints.
3. Scope Management: If cost estimates are too high, project scope may need
to be adjusted to fit the budget. This means reducing certain aspects of the
project to make it affordable.
4. Risk Management: Accurate cost estimation helps identify potential
financial risks early in the project. By understanding cost implications, project
managers can plan for contingencies and avoid unexpected expenses.
5. Resource Allocation: Effective cost estimation ensures that financial
resources are allocated efficiently to different project areas, such as labor,
materials, and equipment, to avoid overspending.
Examples:
1. Philippines Example: Manila Metro Rail Transit Line 7 (MRT-7)
 Explain: The MRT-7 project in Manila is an example of a large infrastructure
project requiring meticulous cost estimation. This project aims to improve
transportation infrastructure by extending the metro line.
  Discussion: Accurate cost estimation was critical for this project to secure
funding from both public and private sources. The initial cost estimate helped
in planning the project scope, budget allocation, and risk management. The
estimate needed to account for direct costs (such as construction materials
and labor) and indirect costs (like administrative expenses and utilities).
 Examples: If the initial estimate was too high, adjustments might have been
made to the project's scope, such as modifying the number of stations or
changing construction methods to reduce costs.
2. International Example: NASA's Mars Rover Mission
 Explain: NASA's Mars Rover missions, such as the Curiosity Rover, involve
detailed cost estimation to predict the financial resources required for
research, development, and launch.
 Discussion: For NASA, cost estimation involves accounting for direct costs
(like spacecraft construction and engineering labor) and indirect costs (such
as administrative support and facility usage). Precise estimates are vital for
obtaining funding from government agencies and ensuring that the mission
remains within budget.
 Examples: If the cost estimate for a Mars Rover mission exceeds the budget,
NASA might need to adjust the mission’s scope, possibly by reducing the
number of scientific instruments or extending the mission timeline.

Explain:

Project Cost Management

is a structured approach to planning and controlling a project's budget. It involves
estimating, budgeting, and controlling costs to ensure that the project is completed
within its approved budget. This process includes defining the costs required for
each deliverable, managing resources, and monitoring expenses to ensure that they
align with the project’s financial plan.
Cost Estimation involves forecasting the costs associated with all project
elements, including labor, materials, equipment, facilities, vendors, and risk
contingencies. The goal is to predict the total cost of the project as accurately as
possible to secure funding and manage financial resources effectively.
Discussion:
Project Cost Management is essential for ensuring that a project is financially
viable and stays within budget. Here are key aspects of the process:
1. Creating a Work Breakdown Structure (WBS): The WBS helps in
breaking down the project into smaller, manageable components. Each
component's cost can be estimated and then aggregated to determine the
overall project budget.
 2. Developing a Schedule: Accurate scheduling helps in predicting labor and
material costs over time, ensuring that budget allocations align with project
milestones.
3. Planning Human Resources: Estimating labor costs involves calculating
wages and the amount of time each team member will spend on the project.
This helps in budgeting for personnel costs and managing workforce
requirements.
4. Identifying Risks: Risk management involves estimating the cost of
potential issues and developing contingency plans. This ensures that funds
are available to address unforeseen challenges without derailing the project.
Inputs of Cost Management include:
 Project Management Plan: Provides overall guidelines for managing
project costs.
 Project Charter: Defines the project's scope and objectives, which helps in
estimating costs.
 Enterprise Environmental Factors: External factors that can influence
project costs, such as market conditions or regulatory requirements.
 Organizational Process Assets: Historical data and best practices from
previous projects that can inform cost estimation.
Output:
 Cost Management Plan: A detailed plan that outlines how project costs will
be managed, controlled, and monitored throughout the project lifecycle.
Examples:
1. Philippines Example: Philippine Arena Construction
 Explain: The Philippine Arena, a large multi-purpose indoor arena, required
detailed cost management for its construction. This included estimating costs
for labor, materials, and equipment.
 Discussion: The cost estimation involved creating a WBS to break down the
construction into manageable parts. A schedule was developed to forecast
labor and material costs over time. Human resource planning was crucial,
given the scale of the project, and risk management included contingency
plans for potential delays or cost overruns.
 Examples: Costs for hiring construction workers, purchasing building
materials, leasing construction equipment, and potential risks (like adverse
weather) were all factored into the cost management plan.
2. International Example: The Sydney Opera House Construction
  Explain: The construction of the Sydney Opera House in Australia required
rigorous cost management. The project faced numerous challenges, including
cost overruns and delays.
 Discussion: The cost estimation process involved breaking down the project
into detailed components, forecasting labor and material costs, and planning
for risks. Despite meticulous planning, the project experienced significant
budget increases, highlighting the importance of accurate risk estimation and
management.
 Examples: Costs included wages for workers, procurement of specialized
materials, renting construction facilities, and engaging third-party contractors
for specific tasks. Contingency plans were necessary to address the various
challenges encountered during construction.

Cost Estimation in Project Management

is a systematic process used to forecast the financial resources needed for a
project. It involves several steps and techniques to ensure that all potential costs
are identified and managed effectively. The process includes estimating costs
related to labor, materials, equipment, facilities, vendors, and risk contingencies.
The goal is to create a detailed and realistic budget that supports successful project
execution.
The Estimating Process:
1. Identity Opportunity: Recognize the need for cost estimation and the
opportunity to develop a detailed budget.
2. Assign Project Manager Responsible for Estimating & Execution:
Appoint a project manager to oversee the cost estimation process and ensure
accurate execution.
3. Identify System Requirements With Client: Collaborate with the client to
determine the project’s system requirements and scope.
4. Build a Work Breakdown Structure (WBS): Create a detailed task list that
breaks down the project into manageable components.
5. Write Proposal: Develop a proposal outlining the project’s scope, objectives,
and estimated costs.
6. Identify Risks & Calculate Contingencies: Assess potential risks and
determine the cost of contingency plans to address them.
7. Generate Statement of Work (SOW) Including Assumptions: Prepare a
statement of work that includes assumptions made during the estimation
process.
 8. Conduct Group Estimating Session: Hold a session with relevant
stakeholders to refine and validate cost estimates.
9. Review with Client: Present the estimated costs and budget to the client for
approval and feedback.
Estimating Techniques:
1. Expert Judgment: Rely on the expertise of individuals with extensive
experience in similar projects to provide cost estimates.
2. Analogous Estimating: Use historical data from similar projects to estimate
costs for the current project.
3. Parametric Estimating: Apply statistical relationships between historical
data and other variables to estimate costs.
4. Bottom-Up Estimating: Break down project components into smaller tasks
and estimate costs for each task, then aggregate these to get the total cost.
5. Reserve Analysis: Assess the need for contingency reserves to cover
unforeseen costs.
6. Vendor Bid Analysis: Analyze bids from vendors to estimate costs
associated with purchasing goods or services.
7. Three-Point Estimate: Use three estimates (optimistic, pessimistic, and
most likely) to determine the range of potential costs.
Project Cost Management:
Project Cost Management involves planning, estimating, budgeting, and
controlling costs to ensure a project is completed within its approved budget. It
includes:
 Creating Work Breakdown Structure (WBS): To detail the project into
manageable sections and estimate costs for each part.
 Developing Schedule: To forecast the timing and cost of project activities.
 Planning Human Resources: To estimate labor costs based on project team
requirements.
 Identifying Risks: To estimate the costs of potential risks and develop
contingency plans.
Inputs for Cost Management:
 Project Management Plan: Provides overall guidelines for managing
project costs.
 Project Charter: Defines project scope and objectives.
 Enterprise Environmental Factors: External factors affecting project costs.
  Organizational Process Assets: Historical data and best practices from
previous projects.
Output:
 Cost Management Plan: A comprehensive plan that outlines how costs will
be managed, controlled, and monitored throughout the project.
Examples:
1. Philippines Example: MRT-7 Project
 Explain: The MRT-7 project in the Philippines involved complex cost
estimation due to its large scale and scope.
 Discussion: The estimating process included identifying system
requirements with the client, building a WBS to break down the project into
manageable components, and estimating costs using techniques such as
analogous estimating and vendor bid analysis. Risks such as construction
delays were identified, and contingency plans were calculated.
 Examples: Costs included labor for construction workers, materials for
building infrastructure, and hiring vendors for specialized tasks. The project
budget was adjusted based on these estimates and potential risks.
2. International Example: The Large Hadron Collider (LHC)
 Explain: The LHC project at CERN required detailed cost estimation due to its
complexity and scale.
 Discussion: The project involved assigning a project manager, identifying
system requirements, building a detailed WBS, and estimating costs using
techniques like bottom-up estimating and expert judgment. Risks such as
technical challenges were evaluated, and contingencies were included in the
budget.
 Examples: Costs covered labor for scientists and engineers, materials for
constructing the collider, and facilities for housing the equipment. The project
also involved vendor bid analysis for procuring specialized components.

Explain:

Project Cost Estimation

is the process of predicting the total financial expenditure required to complete a
project. This involves forecasting all costs associated with the project, including
labor, materials, equipment, and other expenses. The accuracy of the cost estimate
depends heavily on the detail and accuracy of the project scope, which serves as
the baseline for estimating costs. The project scope outlines the objectives,
constraints, and deliverables, and helps in identifying different cost categories such
as labor, equipment, supplies, travel, training, and overhead.
Expert Judgment is a technique used in cost estimation where decisions are based
on the specialized knowledge and experience of individuals or groups. These
experts provide insights and recommendations based on their expertise in relevant
areas, which helps in making informed cost estimates.
Discussion:
Project Cost Estimation involves several critical components:
1. Scope Baseline: This defines the project's objectives, deliverables, and
constraints. The accuracy of cost estimates relies on a clear and detailed
scope. For instance, if the scope includes specific milestones and
deliverables, it becomes easier to estimate the costs associated with
achieving them.
2. Cost Categories: These include:
o Labor Costs: Expenses related to the workforce working on the
project.
o Equipment Costs: Costs for machinery, tools, and technology
required.
o Supplies Costs: Costs for materials and consumables used in the
project.
o Travel Costs: Expenses for travel related to the project.

o Training Costs: Costs associated with training project team members.

o Overhead Costs: Indirect costs such as utilities and administrative

expenses.
3. Risk Register: Helps identify potential risks and their associated costs.
Contingency plans and risk management strategies are included in the cost
estimation to handle unforeseen issues.
4. Expert Judgment: Relies on individuals or groups with specialized
knowledge to provide cost estimates. This can include consultants, industry
experts, or internal project team members with relevant experience. Expert
judgment is particularly valuable when there is limited data available or when
dealing with complex or new types of projects.
Estimating Techniques:
 Analogous Estimating: Uses historical data from similar past projects to
estimate costs for the current project. It’s a form of expert judgment where
past experiences guide the estimates. It is typically faster and less costly but
may be less accurate if the current project differs significantly from past
ones.
Examples:
1. Philippines Example: Cebu-Cordova Link Expressway (CCLEX)
 Explain: The CCLEX project, a major infrastructure development in the
Philippines, required detailed cost estimation to plan the budget accurately.
 Discussion: The project scope defined specific deliverables like the bridge
construction and associated roadworks. Cost estimation involved categorizing
expenses into labor (construction workers), equipment (heavy machinery),
supplies (construction materials), and overhead costs (administrative and
utility expenses). Expert judgment was employed to estimate costs for unique
or complex components, such as bridge engineering.
 Examples: Consultants and industry experts provided insights into
construction methods and cost implications, while historical data from similar
infrastructure projects informed some of the estimates.
2. International Example: Boeing 787 Dreamliner Project
 Explain: The Boeing 787 Dreamliner, a large-scale aerospace project,
required comprehensive cost estimation due to its complexity and scale.
 Discussion: The project scope included designing and manufacturing a new
aircraft model. Cost estimation covered various categories such as labor
(engineers and assembly workers), equipment (manufacturing tools and
machinery), materials (composites and electronics), and overhead costs
(facility maintenance). Expert judgment was crucial for estimating costs
related to new technology and innovative materials.
 Examples: Boeing consulted with aerospace experts and industry groups to
estimate costs related to new technologies and manufacturing processes.
Analogous estimating was used based on data from previous aircraft models,
though the unique features of the 787 required adjustments to these
estimates.

Analogous Estimation
is a cost estimation technique that uses historical data from similar past projects to
estimate costs for a new project. This method relies on comparing the current
project to previous ones that are comparable in scope, size, and complexity. The
values from these past projects, such as scope, cost, and duration, are adjusted for
the new project based on factors like differences in scale or complexity.
Parametric Estimating is another cost estimation technique that uses statistical
relationships between historical data and other variables to estimate costs. It
involves analyzing trends and patterns from historical information and applying
them to the current project. This method uses specific parameters, such as cost per
unit or time per task, to develop estimates. The result is a high-confidence estimate
based on current statistical data and trends.
Discussion:
Analogous Estimation:
 Basis: This technique is based on expert judgment combined with historical
data. It requires finding projects similar in nature to the one being estimated
and using their cost and duration as a basis for the new project’s estimate.
 Adjustments: The estimates are often adjusted to account for differences
between the previous and current projects. A common adjustment factor is a
percentage range, such as plus or minus 20%.
 Application: This method is useful when detailed information for the new
project is not available, and it leverages the experience of project managers
and team members.
Parametric Estimating:
 Basis: This technique uses statistical data and relationships derived from
historical information. It involves identifying a cost or time parameter that
can be applied to the current project.
 Statistical Relationships: It relies on cost estimate relationships (CERs),
such as cost per unit or time required per task. For instance, if historical data
shows that 1 hour of filming requires 5 hours of editing, this ratio can be used
to estimate editing costs for a new filming project.
 Application: This method provides a high-confidence estimate by analyzing
trends and applying current data. It is particularly useful for projects with
well-defined parameters and repeatable tasks.
Examples:
1. Analogous Estimation: Philippine National Railways (PNR) North-South
Commuter Railway (NSCR)
 Explain: The NSCR project, a major infrastructure development in the
Philippines, used analogous estimation to forecast costs.
 Discussion: The cost estimation team reviewed historical data from similar
rail projects, such as the MRT and LRT systems, to estimate costs for the
NSCR. Adjustments were made based on differences in project scope and
current market conditions, with estimates adjusted by approximately 20% to
account for these differences.
 Examples: For instance, if a previous rail project cost PHP 50 million per
kilometer, the same rate with an adjustment might be used to estimate the
cost for the NSCR, factoring in inflation and other project-specific variables.
2. Parametric Estimating: Building a Fence
  Explain: When estimating the cost of building a fence, parametric estimating
can be used based on historical data.
 Discussion: You research the cost of fenceposts and determine that each
post costs PHP 3750. With 10 posts needed, the estimated total cost for posts
is PHP 37,500. This estimation is based on the current market data and
statistical relationships between the number of posts and the total cost.
 Examples: This method could be applied to other parameters, such as
estimating the cost of labor or materials based on historical data and
statistical relationships. For instance, if historical data shows that each meter
of fencing requires a specific amount of labor and materials, these
parameters can be used to estimate the total cost for the entire fence.

Bottom-Up Estimating
is a cost estimation technique where the work is broken down into its most granular
level of detail, and estimates are made for each individual component or work
package. These detailed estimates are then aggregated to produce a total cost
estimate for the entire project. This method involves defining each work package or
deliverable in detail, assessing the resources required, and calculating costs for
each element. Bottom-up estimating is known for its accuracy because it accounts
for all aspects of the project at a detailed level.
Other Techniques:
 PERT Estimating (Program Evaluation and Review Technique): A
statistical tool used to analyze and represent the tasks involved in completing
a project. It is useful for estimating project duration and incorporates
uncertainty by using three estimates: optimistic, pessimistic, and most likely.
 Vendor Bid Analysis: Involves obtaining and evaluating bids from suppliers
or contractors to estimate project costs. It provides a real-world cost
perspective based on competitive bidding.
Discussion:
Bottom-Up Estimating:
 Detail and Accuracy: This technique provides a high level of detail and
accuracy because it involves estimating costs for every single component of
the project. By breaking down the work into smaller parts, project managers
can better understand the costs associated with each part and how they
contribute to the overall budget.
 Time and Effort: While bottom-up estimating requires more time and effort
to complete due to its detailed nature, it is often more accurate than other
methods like analogous or parametric estimating. This accuracy comes from
the thorough analysis of each work package.
  Application: After defining the project scope and creating a Work Breakdown
Structure (WBS), each component is estimated separately. These estimates
are then rolled up to provide a total project cost. This method is particularly
useful for complex projects with many detailed tasks.
Other Techniques:
 PERT Estimating: Provides a range of estimates to account for uncertainty.
It is useful for projects with high levels of uncertainty and helps in planning
by providing a probabilistic estimate of project duration.
 Vendor Bid Analysis: Provides a practical cost estimate based on actual
bids from vendors or contractors. This technique is valuable when specific
costs are required for materials or services and helps in making cost-effective
decisions based on competitive offers.
Examples:
1. Bottom-Up Estimating: Construction of a Residential Building
 Explain: For a residential building project, bottom-up estimating would
involve breaking down the project into detailed tasks such as foundation
work, framing, plumbing, electrical work, and finishing.
 Discussion: Each task is estimated in detail. For example, the cost of 10,000
bricks, 25 tiles, and 4 liters of elastomeric paint is calculated. These detailed
estimates are aggregated to form the overall project budget. This method
provides a comprehensive view of the project’s financial requirements.
 Examples: For instance, if the cost of 10,000 bricks is PHP 50,000, 25 tiles is
PHP 5,000, and 4 liters of paint is PHP 2,152, the total cost for these
components is PHP 57,152. Adding estimates for other components (labor,
additional materials) will provide the final project budget.
2. PERT Estimating: Software Development Project
 Explain: In a software development project, PERT estimating can be used to
estimate the time required to complete various tasks like coding, testing, and
deployment.
 Discussion: For each task, three estimates are provided:
o Optimistic: Best-case scenario.

o Pessimistic: Worst-case scenario.

o Most Likely: Most realistic scenario. The PERT formula combines these
estimates to provide a weighted average, giving a more accurate
project duration estimate.
 Examples: If coding is estimated to take between 2 to 6 weeks, with 4 weeks
being most likely, the PERT estimate would use these values to calculate an
average time, helping in scheduling and planning.
3. Vendor Bid Analysis: Purchasing Office Equipment
 Explain: For a project involving the purchase of office equipment, vendor bid
analysis can be used to obtain cost estimates from multiple suppliers.
 Discussion: Different vendors submit bids for the same equipment. The bids
are analyzed to determine the most cost-effective option while considering
factors like quality and delivery time.
 Examples: If Vendor A offers office chairs at PHP 15,000 each and Vendor B
offers them at PHP 12,000 each, the bid analysis helps in selecting the
vendor that provides the best value for the budget.

What is a Project Budget?

A project budget is a comprehensive financial plan that estimates the total costs
required to complete a project within a specified timeframe. It includes all projected
expenses such as labor, materials, equipment, operating costs, and other resources
needed for each phase of the project. However, a project budget is not a static
document; it evolves throughout the project lifecycle. Regular reviews and updates
are essential, often facilitated by project budgeting software, to ensure that the
budget remains aligned with the project's actual financial needs.

Why You Need a Project Budget

1. Financial Planning: A project budget is crucial because it outlines the
financial resources needed to achieve project objectives. It communicates to
stakeholders the amount of funding required and the timing of those needs.
2. Resource Allocation: It ensures that you can pay for necessary resources,
such as labor, equipment, and materials, thus driving the project's progress.
3. Cost Control: The budget serves as a baseline for monitoring and controlling
project costs. By comparing planned costs against actual expenditures, you
can measure project performance and make necessary adjustments to stay
on track.
Creating a Project Budget
Creating a project budget involves several key steps to ensure that all potential
costs are accounted for:
1. Use Historical Data: Refer to the budgets of similar past projects to get a
head start on your estimates. Historical data provides a foundation for
building a more accurate budget.
2. Reference Lessons Learned: Learn from past projects' successes and
mistakes. Understanding how previous projects managed their budgets can
help you make more accurate estimates and anticipate potential challenges.
 3. Leverage Your Experts: Consult with experienced project managers,
mentors, and subject matter experts to gain insights and avoid pitfalls. Their
expertise can help you refine your budget estimates.
4. Confirm Accuracy: After drafting your budget, review it thoroughly to
ensure all figures are accurate. Involve experts and team members in this
review process to catch any errors before the project begins.
5. Baseline and Re-Baseline the Budget: Establish the budget as a baseline
for measuring project progress. As the project evolves and changes occur,
update the budget accordingly by re-baselining, especially after changes are
approved by the change control board.
6. Update in Real Time: Use cloud-based project management software to
keep your budget updated in real-time. This allows you to respond quickly to
changes and avoid delays.
7. Get on Track: Regularly monitor your project’s financial status using real-
time data. If the project goes off track, use the budget to identify issues and
make necessary adjustments to bring it back in line with the financial plan.
Project Budget Example: App Development
For example, let’s consider a project to develop a new mobile app. The first step is
to estimate the costs associated with labor, such as hiring programmers, designers,
content developers, and a development team. This involves listing all tasks and
assigning team members to each, ensuring that all labor costs are accounted for.
Next, you’ll need to budget for materials and equipment, such as laptops or other
devices necessary for the development process. Additionally, consider other
expenses such as travel, office space rental, and any fixed costs that are constant
throughout the project.
Your budget should include columns for both planned and actual costs. This helps
track expenditures and allows for adjustments if the project scope changes,
ensuring you stay within the budget.
Cost Management
Cost management is the ongoing process of planning, monitoring, and controlling
project costs to ensure that the project stays within the budget. Effective cost
management involves tracking expenses, comparing them to the budget, and
making adjustments as necessary to control costs throughout the project lifecycle.