Friday, May 9, 2008

Using Parametric Cost Modeling

Certain industries have been around long enough that project managers who work in those industries have developed standardized mathematical formulas for estimating project costs. The use of mathematical formulas in cost estimating is called parametric modeling.

For most projects, the main parameters, or characteristics, that affect costs are time and materials. A good example of a parametric model is the cost of residential home construction. Builders often base cost estimates for a house on so many dollars per square foot of living space. Examples of simple and complex parametric models are provided below.
  • Simple. The costs to build a road are based on a standard cost per mile. The cost to blast through bedrock is based on the volume of rock to be removed.
  • Complex. A model for estimating software development may incorporate several adjustment factors for each function within an application.
Some parametric models are meant to give a rough estimate of costs, while others are designed to provide more accurate estimates. You can use parametric modeling when the following three criteria are in place.

1. Your project has quantifiable parameters.
Since a parametric model is a mathematical formula, the variables or parameters of a project that you use must be readily quantifiable. This means that the component or components upon which you base costs must have a unit of measurement, such as weight, length, number, or grade.

Most types of projects contain quantifiable variables. For example, a training company could estimate costs to be so many dollars per hour of instruction, or a food manufacturer could estimate so many dollars per pound of finished product.

2. The parametric model is scalable.
To be reliable, a parametric model must also be scalable, meaning that it must apply to a large project as well as it does to a small one. Most projects, even those of a similar nature, vary in terms of product scope, so you need a model that allows for a range in the number or size of products delivered.

Some models, though perfectly scalable, may have upper and lower limits that invalidate the model if project scope exceeds the limits. For example, economies of scale may come into effect for a large project, reducing costs proportionately. For other models or types of projects, larger scale means extra work, thereby increasing costs.

3. Accurate historical information has been used to develop an appropriate model.
The third main criteria for determining whether using a parametric model is appropriate for your project is whether there is an existing model, or the potential to build one, based on historical information. The accuracy of your estimates increases with the accuracy of the data used in the model.

Many companies develop their own parametric models specific to the types of projects they perform. All you need is enough data from previous projects to establish the mean costs of products or services provided in the past.

Many industries have used historical information to develop parametric models in the form of software applications. The time that the software saves you in estimating costs quickly, and the accuracy it provides, are worth the cost.

In summary, you can use parametric modeling when your project has quantifiable characteristics and there is sufficient accurate historical data to develop a scalable and dependable mathematical formula for estimating costs.

2 comments:

Unknown said...

This blog is really very informative. Thank you..!! The service of construction management is a comprehensive approach for the architects and builders as it is helping them to design build the building with pre-construction planning. You can find many pre-construction firms on the internet. While surfing for some real estate for one of my relative, I found a recognized website on the internet, named as, Miller Construction, that is providing the service of preconstruction, design/build and construction management.

Anonymous said...


Tag: PM206A55. Let me share all of you about #5 Tips for Project Management Success,, I hope you enjoy it

1. Plan your day using time management techniques

As a project manager, time management skills are essential because you are dealing with a wide range of tasks that demand a quick turnaround time. Planning your day will go a long way in keeping you organized and increasing your productivity. Assist your task planning by using project management software which helps you track the work of you and your team.

If you are not very tech savvy, a simple to-do list can also be a great organizational tool. Prioritize your most important tasks by putting them at the top of the list and less important ones at the bottom. Having a visual plan of your daily tasks helps to keep you on track and aware of time.

Related post: Free ebook 104 secrets to become a great project manager

2. Include stakeholders in important project conversations

While you will have plenty of responsibilities regarding the project, don’t neglect your clients.

Good communication is essential is keeping both parties informed of project progression, curtailing scope creep, and apprised of changing requirements. Some clients may have different expectations when it comes to communication, so make sure to establish the frequency and type of communication (like emails, phone calls, and face-to-face conversations) at the beginning of your project.

Establishing communication expectations early helps alleviate stakeholder uncertainty about communication frequency and delivery.

3. Regularly communicate with your team

Daily team communication helps keep misunderstandings and unclear requirements under control. Keeping your team informed in every step of the project is essential to project management success.

For example, a study published by Procedia Technology found that good communication skills were the cornerstone of project management. The study examined over 300 “construction project managers, architects, construction managers, engineers and quantity surveyors” and their successes and failures on various construction projects.

4. Anticipate project setbacks

Even the best-laid plans often go awry.

Remember that even with a high amount of planning and attention to detail, your project may still encounter some challenges. Pay attention to complaints from stakeholders or colleagues, and other warning signs, like a missed deadline or cost overrun, that there may be a problem.

Preventing a crisis will keep your project running smoothly, save you a lot of time, and keep you, your team, and your stakeholders confident in progressing with the project.

Unfortunately not every complication can be avoided. Crisis management skills are essential for dealing with the unexpected. Project managers need to be flexible and pragmatic. Improvise and make sharp decisions when needed.

Related post: 92 free project management templates

5. Stay focused on the details

A common problem project managers encounter is having the project aims not aligned with the organization’s objectives. A great project manager will strategize a plan for the project to lead back to the overall success of the business.

Know your project’s scope by heart and avoid wandering outside of the project’s requirements. It’s too easy to get lost in minor details and forget what your focus is, so a well-planned project scope is essential for success.

And final, you should use KPI to measure effectiveness of the project, here are full list: 76 project management KPIs