7.2.1 Inputs to Cost Estimating

.1 Work breakdown structure. The WBS is described in Section 5.3.3.1. It is used to organize the cost estimates and to ensure that all identified work has been estimated.

.2 Resource requirements. Resource requirements are described in Section 7.1.3.1.

.3 Resource rates. The individual or group preparing the estimates must know the unit rates (e.g., staff cost per hour, bulk material cost per cubic yard) for each resource to calculate project costs. If actual rates are not known, the rates them-selves may have to be estimated .

.4 Activity duration estimates. Activity duration estimates (described in Section 6.3.3.1) will affect cost estimates on any project where the project budget includes an allowance for the cost of financing (i.e., interest charges).

.5 Historical information. Commercially available data on cost estimating.

.6 Historical information. Information on the cost of many categories of resources is often available from one or more of the following sources:

   Project files—one or more of the organizations involved in the project may maintain records of previous project results that are detailed enough to aid in developing cost estimates. In some application areas, individual team members may maintain such records.

   Commercial cost-estimating databases—historical information is often available commercially.

   Project team knowledge—the individual members of the project team may remember previous actuals or estimates. While such recollections may be useful, they are generally far less reliable than documented results.

.7 Chart of accounts. A chart of accounts describes the coding structure used by the performing organization to report financial information in its general ledger. Project cost estimates must be assigned to the correct accounting category.

.8 Risks. The project team considers information on risks (see Section 11.2.3.1) when producing cost estimates, since risks (either threats or opportunities) can have a significant impact on cost. The project team considers the extent to which the effect of risk is included in the cost estimates for each activity.

7.2.2 Tools and Techniques for Cost Estimating

.1 Analogus estimating. Analogous estimating, also called top-down estimating, means using the actual cost of a previous, similar project as the basis for estimating the cost of the current project. It is frequently used to estimate total project costs when there is a limited amount of detailed information about the project (e.g., in the early phases). Analogous estimating is a form of expert judgment (described in Section 7.1.2.1.
  Analogous estimating is generally less costly than other techniques, but it is also generally less accurate. It is most reliable when (a) the previous projects are similar in fact and not just in appearance, and (b) the individuals or groups preparing the estimates have the needed expertise.

.2 Parametric modeling. Parametric modeling involves using project characteristics (parameters) in a mathematical model to predict project costs. Models may be simple (residential home construction will cost a certain amount per square foot of living space) or complex (one model of software development costs uses 13 separate adjustment factors, each of which has 5 to 7 points on it).
  Both the cost and accuracy of parametric models varies widely. They are most likely to be reliable when (a) the historical information used to develop the model was accurate, (b) the parameters used in the model are readily quantifiable, and (c) the model is scalable (i.e., it works as well for a very large project as for a very small one).

.3 Bottom-up estimating. This technique involves estimating the cost of individual activities or work packages, then summarizing or rolling up the individual estimates to get a project total.
  The cost and accuracy of bottom-up estimating is driven by the size and complexity of the individual activity or work package: smaller activities increase both cost and accuracy of the estimating process. The project management team must weigh the additional accuracy against the additional cost.

.4 Computerized tools. Computerized tools, such as project management software spreadsheets and simulation/statiscal tools, are widely used to assist with cost estimating. Such products can simplify the use of the tools described earlier and thereby facilitate rapid consideration of many costing alternatives.

.5 Other cost estimating methods. For example, vendor bid analysis.

7.2.3 Outputs from Cost Estimating

.1 Cost estimates. Cost estimates are quantitative assessments of the likely costs of the resources required to complete project activities. They may be presented in summary or in detail.
  Costs must be estimated for all resources that will be charged to the project. This includes, but is not limited to, labor, materials, supplies, and special categories such as an inflation allowance or cost reserve.
  Cost estimates are generally expressed in units of currency (dollars, euros, yen, etc.) to facilitate comparisons both within and across projects. In some cases, the estimator may use units of measure to estimate cost, such as staff hours or staff days, along with their cost estimates to facilitate appropriate management control. Cost estimating generally includes considering appropriate risk response planning, such as contingency plans.
  Cost estimates may benefit from being refined during the course of the project to reflect the additional detail available. In some application areas, there are guidelines for when such refinements should be made and what degree of accuracy is expected. For example, The Association for the Advancement of Cost Engineering (AACE) International has identified a progression of five types of estimates of construction costs during engineering: order of magnitude, conceptual, preliminary, definitive, and control.

.2 Supporting detail. Supporting detail for the cost estimates should include:

   A description of the scope of work estimated. This is often provided by a reference to the WBS.

   Documentation of the basis for the estimate, i.e., how it was developed.

   Documentation of any assumptions made.

   An indication of the range of possible results, for example, $10,000 ± $1,000 to indicate that the item is expected to cost between $9,000 and $11,000.

The amount and type of additional detail varies by application area. Retaining even rough notes may prove valuable by providing a better understanding of how the estimate was developed.

.3 Cost management plan. The cost management plan describes how cost variances will be managed (e.g., different responses to major problems than to minor ones). A cost management plan may be formal or informal, highly detailed or broadly framed based on the needs of the project stakeholders. It is a subsidiary element of the project plan (discussed in Section 4.1.3.1).