Saturday, May 17, 2008

Attributes of Effective Cost Estimates

Cost estimates, which are outputs of the project cost estimating process, are quantitative assessments that you, as a member of a project management team, make. You assess the likely costs of the resources required to complete project activities and then present them in summary or in detail.

Once you've estimated a total project cost, how can you determine if the estimate is good? You'll know its good if it includes the three attributes of an effective cost estimate. Good cost estimates should have the following three attributes.

1. They should include all the resources for a project.
To be accurate, an overall estimate must include all the resources that will be charged to a project. Study the project's work breakdown structure (WBS). The more resources you overlook, the less accurate your estimate will be.

To ensure you include all the resources for a project in your cost estimates, you may want to develop a checklist. This can help you ensure that all costs related to labor, materials, supplies, and special categories, such as inflation, are included in your estimates.

If you are unsure whether your finalized cost estimates truly reflect every resource that can and should be charged to your project, go back to the WBS and verify that the estimate is complete. As long as each work package for your project has been fully decomposed, you should be able to tell from the WBS if any resource has been omitted from the estimates.

2. They are expressed in the appropriate units.
Cost estimates are most typically expressed in a unit of currency, such as dollars, pounds, or yen. Use the currency that most simplifies estimating, measurement, and reporting. For example, use the currency of the country where costs are incurred or the home currency of the parent organization.

Expressing costs in a consistent unit of measure makes it easier to compare costs both within, and across, projects. Multinational corporations will find comparative analysis much easier if they convert costs into one currency.

Some types of estimates are commonly indicated in units of time. Labor costs, for example, are usually expressed in hours, days, or weeks. Your cost estimates may include two columns: one for total "work effort," or duration, and one for total costs in dollars. Reporting labor costs in units of time provides the following benefits.
  • You still can produce estimates even if you do not yet know who will be making up the project team. All you need to know is how long tasks should take to perform.
  • Using work effort to report cost estimates allows you to tie into the automated scheduling tool that has been used to estimate and report activity durations.
3. They should include an appropriate contingency.
Cost estimates should include contingencies, or allowances, to cover specific risks and expected inefficiencies or problems. They reduce the necessity of revising cost estimates later on when one or more of your figures are causing unacceptable cost variances.
You should make every effort to produce accurate cost estimates, but don't forget that a good project manager will plan for the risk of change occurring during a project. Adding contingencies to cost estimates is one way you can do this.

Most project management software applications contain cost estimating and budgeting functions that select appropriate contingencies for you. They are based on risk factors and statistical analysis of data from previous projects.

In summary, examine your cost estimates closely for accuracy before relying on them. They will form the basis of the budget, the cost baseline, procurement planning, and the entire cost control system for your project.

No comments: