Project cost estimation

Author : DAOUDI Samir | Context : MSc Software Engineering – IT Project Management

Due to the importance of project within a company and the impact of these projects on business and financial aspects of the company, project managers and PMO are always under pressure. The pressure is created by the senior managers pushing the projects to higher level, or the stakeholders and end users requesting more features and functionalities provided in shorter time scale or changing requirements. The CHAOS report showed some very important results about too many projects failing due to costs overrun (Schwalbe,2011).

The triple constraints of project management are a good description of the relationship between project’s scopes, cost and time goal. Each constraint has a target that is defined at the beginning of the project. Focusing in cost constraint, this last should be correctly estimated or at least approached. Any huge different about initial estimation and real project costs might have significant impact on the project success. The project estimation is no an exact science and in general, one of the most important reasons of projects’ failure is a wrong estimation of time, budget, resources required. And such situations will have other post-failure consequences, if a project fails due to a wrong estimation, it is not only the project which is dead and closed but also the teams involved in will lose confidence and the management will be more difficult and hard to convince for the future projects…etc. I personally think that he best way to provide good estimations is experience; As project managers see different scenarios during the time they are involved in many projects, they can enhance their estimations skills. The estimation is in general undertaken during the initial phases of the project’s analysis, during which, the Project Manager or PMO analyze the project requirements, and try to estimate the costs of every resource (human or not), in addition to the administrative cost and all other project’s costs.

In general, costs estimation is closely related to costs analysis even if the two functions are different. The cost estimation consists in predicting and forecasting the cost of a task or a work, this estimation depends on the costs analysis inputs which is in fact the process of studying and organizing past costs (Stewart et.al, 1995). The cost estimation is not an easy process; in fact, it has been divided into 12 steps that can be summarized as follow:
1. Develop the work element structure.
2. Schedule the work element.
3. Retrieve historical data.
4. Use cost estimating relationships.
5. Develop and production learning curves.
6. Identify skill categories, level and labor rates.
7. Develop labor-hour and materiel estimates.
8. Estimate administrative costs.
9. Apply inflation (cost growth) factor.
10. Compute the estimated costs.
11. Analyze and adjust the estimate.
12. Publish the estimation. (Stewart et.al, 1995).

When we review this list of steps to follow in order to determine the cost estimation, we might think that the cost estimation is a set of technics and data used together to calculate the cost. However, it is really far from this, as we can see, many steps are based on estimations and predictions which is not exact. For this reason, Project Managers have to use different estimations methods and technics and in general the closer estimation is the average of all the estimations. Some specific tools and technics have been developed for this purpose to help cost estimators in this fastidious task. The mostly used technics in project’s costs estimation are:

– Top-Down estimates, which requires data and estimations of previous similar projects. This method can show weaknesses when the quality of inputs is very poor (i.e. no good previous project estimation can be found).
– Bottom-up estimates, this is the preferred budgeting approach, in which the project is divided in smaller tasks that can be easily estimated and the total cost can than be obtained by summing all the related costs (Sweeting, 1997).

Finally, we can say that the project estimation is not an exact science, multiple technics and strong experience are the only way to provide good estimations close of the reality.