Project Cost Estimating

Creating the project budget is one of the most challenging aspects of project planning. Developing and managing the project budget is part of the overall project cost management process, which also includes project cost control, project financial performance reporting.

The project budget is based on cost estimates, which are derived from the project scope requirements, the schedule and the resources required to complete the project. Often, associated life cycle costs are also included in the project budget. It is essential that the project budget also account for the overall project quality management plan and include adequate contingency funding for handling project actualized risks.

The cost estimating process requires that the Work Breakdown Structure (WBS), project scope and resource management plan be complete. Other cost estimating inputs will depend upon the primary project constraints — schedule, cost or scope (or perhaps all three factors are equally as important to the project stakeholders). If, for example, scope and cost are the primary project constraints, then the project manager may have flexibility with the project schedule. Extending the schedule may lower project implementation costs without sacrificing project scope. Regardless, the project schedule should be fundamentally complete before undertaking the task of project cost estimating. The balance between schedule, cost and scope is a challenge to maintain, and the project manager will need to work diligently to control the project’s execution.

There are various cost estimating methods which can be used during the initial planning phase. Ideally, the cost estimating process will produce an estimate that is -10% to +15% within the final project budget. Some of the more popular project cost estimating techniques include:

• Bottom up estimating analyzes costs for individual work packages or tasks. Typically this method is highly accurate, as the lowest level of detail is included in the estimating process. Once costs are estimated for all of the individual work packages, the details are “rolled up” into the higher level project deliverables for management and reporting purposes.
• Vendor estimates are provided by organizations experienced in delivering projects similar in scope. The project team will be required to issue a Request for Quote (RFQ) to selected vendors. Often this initial estimate is part of a larger competitive bid and procurement management process. My personal experience with using vendor estimates for project cost estimating has been positive. Vendors are an excellent source of information, and usually provide reliable estimates.
• Analogous estimating uses information from comparable projects to create an estimate. This method is most accurate when the projects are similar in scope and resource requirements.
• Reserve analysis is used to calculate costs associated with project risk actualization. Project Managers often say that executive management will cut the contingency reserve from the project budget. This is because the reserve will often substantially inflate the budgeted cost of an activity. One option for managing the reserve is to allocate the contingency cost at the highest level of related project deliverables – at the highest level on the Work Breakdown Structure. This will enable more accurate assignment of the reserve to the riskiest areas of the project budget. Some organizations fully support contingency budgeting and allow a standard percentage of the overall project budget to be allocated as reserve.

Below are a few lessons learned from my project planning experience:

• Initial cost estimates often become a constraint later in the project. Business cases are built using cost estimates and management often will allocate project funding based solely on the initial business case.
• Ensure that all assumptions and the possible financial impact are fully documented in all project planning documents. If a fundamental assumption changes, then the project cost assumptions must also change.
• Fully evaluate the major project risks and understand the costs incurred should the risk be actualized. The final project budget must include adequate funds for such contingencies. I prefer to explicitly include a contingency percentage for project tasks or deliverables which are subject to cost changes (due, for example, to material availability or staffing issues). For other deliverables, such as those which may be impacted by a rigorous quality standard, I generally include a contingency allowance as a zero duration activity, and adjust the budget accordingly as the project progresses.

Cost Budgeting Resources

Past projects and cost estimating databases are both excellent resources for project cost information. Each U.S. Government department maintains extensive project costs records. The U.S. Department of Energy is one of many excellent U.S. Government project management websites. In addition, commercial databases, such as the rsmeans commercial, facilities, civil, and residential construction estimating database, provide invaluable information for engineering and infrastructure projects.

Additional Resources