Saturday, August 18, 2007

Cost Estimating for PMP

An interesting process within the Planning process group. This looks to be a small process with a few items to learn but it can be crucial when someone is doing a practical project planning. It gets more important when the project is a Fixed Bid project.

Cost Estimating is a part of the Cost Management Knowledge area as defined by the PMBOK Guide 2004 (Third Edition). This is an important part of project planning after the project scheduling and it usually precedes the Cost budgeting process.

A Guide to the PMBOK usually describes each process with inputs, tools and techniques and outputs. Every process in the PMBOK list follow the same convention in order to give a uniform idea about Project Management. Cost Estimating also has a list of such items. They are as follows.

The Inputs for Cost Estimating are,
  • Enterprise Environmental Factors
  • Organizational Process Assets
  • Project Scope Statement
  • WBS (Work Breakdown Structure)
  • WBS Dictionary
  • Project Management Plan
The tools and techniques of this process are of some specific interest and they need to be understood clearly. They are
  • Analogous Estimating: This is also called Top down estimating. This is calculated using some previous historical project data stored and kept for reference. This can be calculated easily if the referred previous project is similar to the current project. This type of estimating is particularly useful when we do not have enough or complete information about the project.
  • Resource Cost Rates: This can be found from the list of vendors and their published rate details maintained within the organization.
  • Bottom Up Estimating: This is exactly opposite to the Analogous Estimating. This relies on calculating estimates for individual or work package level activities and working upwards. This typically results in better and accurate estimates.
  • Parametric Estimating: This is a simple estimation using some previous measurements. For example if laying a 1 meter concrete road costs $100,000 dollars then we can workout and calculate for 10 kilometer projects.
  • Project Management Software: Using the PM softwares for calculating the estimates. Of-course they won't calculate the estimates if we don't provide the required input values depending on the project and the software.
  • Vendor Bid Analysis: Information can be gathered from different vendors for our estimatin
  • Two more are Reserve Analysis and Cost of Quality
Outputs of this process are the Cost Estimates and the Supporting Detail for the estimates. The supporting details should explain the assumptions, basis for calculating the estimates.

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