• JLN Murty

4 Principles of Cost Estimation

Cost estimation in project management is the process of forecasting the cost and other resources needed to complete a project within a defined scope. Cost estimation accounts for each element required for the project and calculates a total amount that determines a project's budget.

The 4 principles of cost estimation

1. Cost estimation is used to predict the quantity, cost and price of the resources required by the scope of a project. The accuracy of the estimate depends heavily on the level of project scope definition: as the design and conditions of the project become better defined, so do the estimated values.

2. Cost estimation is needed to provide decision-makers with the means to make investment decisions, choose between alternatives and to set up the budget during the front end of projects.

Related to this principle, it is always challenging to collect and read the huge amount of cost data, which doesn’t help with the decision making. Analyzing and visualizing the cost data opens the doors to making the data useful and meaningful. The dashboards of a project control software system are the data-driven graphical representations of a project; dashboards can provide decision-makers with a quick overview of a project’s progress and turn the data into decision points.

3. Estimating is done by breaking down the total scope of a project in manageable parts, to which resources can be assigned and cost. There are standardised ways of breaking down a project, like the Work Breakdown Structure (WBS) and the Cost Breakdown Structure (CBS), but depending on the needs of the project team and external parties’ multiple structures are often implemented to align reporting and sharing of cost data.

4. A cost estimate is more than a list of costs. It also includes a detailed Basis of Estimate (BOE) report that describes the assumptions, inclusions, exclusions, accuracy and other aspects that are needed to interpret the total project cost. Otherwise, it would be a meaningless number. The BOE is required to communicate the estimate to the various parties involved in the decision making but is also handy during closeout when the performance of the project is compared with other projects. It is the vital part often overlooked, that allows you to learn from your experience and mistakes.

Cost estimation, however, is easier said than done. An accurate estimation method can be the difference between a successful plan and a failed one. Keep these 4 principles in mind and you already have a framework to start making estimates.

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