Cost Management | By Duncan Haughey | Read time minutes
The Wideman Comparative Glossary of Common Project Management Terms describes estimating cost as,
the process of forecasting a future result in terms of cost, based upon information available at the time.
In his book How to be a Better Project Manager, Trevor L Young defines estimating as
a decision about how much time and resource are required to carry out a piece of work to acceptable standards of performance.
Many books, techniques and software packages exist to help with estimating project costs. A few simple rules will also help ensure you create an accurate and realistic estimate:
- Assume people will only be productive for 80 per cent of their time.
- Allow extra time for people working on multiple projects as they take longer to complete tasks because of time lost switching between projects.
- Use a technique such as three-point estimating as people tend to be optimistic and often underestimate how long tasks will take.
- Make use of other people's experiences and your own.
- Get an expert view.
- Include management time in any estimate.
- Build in some contingency for problem-solving, meetings and any unexpected events.
- Cost the individual tasks in your Work Breakdown Structure to arrive at a total, rather than costing the project as a whole.
- Agree to some tolerance with your customer for additional work that arises during the project.
- Communicate any assumptions, exclusions or constraints you have to your customer.
- Provide regular budget statements to your customer, copying your team, to keep them aware of the current position.
Much data exists about the length of time particular items of work take, especially in the construction industry. Planning Planet has a valuable database of production rates.
These are some of the common mistakes that can lead to inaccurate estimates:
- Not understanding what is needed to complete an item of work.
- Starting with an amount of money and making the project cost fit it.
- Assigning people at more than 80 per cent utilisation.
- Failing to build in contingency cost.
- Failing to adjust the estimate following changes in scope.
- Dividing tasks between more than one person.
- Providing estimates under pressure in meetings.
- Giving single-data-point estimates rather than range estimates.
Three-point estimating is a technique that helps project managers produce better estimates. Rather than a ballpark estimate, project managers can use three-point estimating to gain a greater degree of control when calculating the end value. The end value is the weighted average of three estimates.
To do three-point estimating for a particular task or activity, ask the person for their best-case, most likely and worst-case estimates. Add the best-case estimate to four times the most likely, add the worst-case and divide by six. This technique gives you the estimate, the (E-value), a slightly more balanced view of how long the task or activity is likely to take.
The formula is expressed as:
E = (B + 4 M + W)/6
B = best-case (1/6)
M = most likely (4/6)
W = worst case (1/6)
Monte Carlo Simulation in Microsoft Excel
Developed in the 1940s by John von Neumann and Stanislaw Ulam during World War II to improve decision making, the Monte Carlo method of estimating project cost generates multiple trials to determine the expected value of a random variable. Commercial software packages are often used to run the Monte Carlo simulation; however, you can use a simple spreadsheet such as Microsoft Excel to run simulations.
Download the Monte Carlo Simulation in MS Excel
Recommended read: 12 Tips for Accurate Project Estimating by Adele Sommers.