Monday, May 19, 2008

Supporting Detail for Cost Estimates

A civil engineer will tell you that the supports that uphold a bridge and keep it in place are as important as the structure itself. For project cost estimates, the same holds true. Your estimates must be accompanied by supporting detail, which is an output of project cost estimating.

Any additional information that accompanies a cost estimate provides supporting detail. You did not establish your cost estimates in a vacuum. Supporting detail provides context for your estimates, and should include the following documentation.

1. A description of the scope of the work estimated
Every project file should contain a description of the scope of the work performed. You could include the project's entire work breakdown structure (WBS), or simply a written description of the work for which you have estimated costs.

This information will be useful in the future if you want to use the cost estimates in another project. Use project or product scope statements to assess the similarity between projects when you want to use analogous estimating.

2. A description of how the estimates were developed
You also should record how the cost estimates were developed. Which of the estimating techniques did you use? Perhaps you used one method for a particular phase or task of the project and a different method for another phase.

If the estimates prove to be off, you may want to revisit the process you went through in developing them to check for problems in your methodology. Provided below are examples of supporting detail you may want to provide when using specific estimating techniques.
  • Analogous estimating. You'll want to know exactly which former project or projects were used as a basis for establishing cost estimates for the current project. Record how costs were established for aspects of the project that differ from the others.
  • Parametric modeling. List all of the activities or resources for which you used a mathematical formula in estimating costs. If any resource rates change drastically during the project, this list will enable you to quickly pinpoint the estimates affected and make the necessary revisions.
  • Bottom-up estimating. If you estimate project costs "from scratch," or from the bottom up, hold on to notes about the sources you used. This would include names, phone numbers, prices, and other information that would form an audit trail.
3. Any assumptions that were made about costs
Assumptions are factors that, for planning purposes, are considered to be true. Keep a record of assumptions that you or team members make during cost estimating in case they turn out to be false. You make assumptions about such things as resource rates, resource availability, and activity durations.
False assumptions usually cause cost variances because your actual costs will deviate from the planned costs. Hold on to the assumptions upon which estimates are based in case you have to account for discrepancies later on.

4. The range of possible results
The supporting detail for a cost estimate also should include an indication of the range of possible results for each resource, activity, or task. For example, an estimate of $10,000 plus or minus $1,000 indicates that an item is expected to cost between $9,000 and $11,000. The relative size of the range indicates whether it is a rough estimate or if it is accurate enough to be considered a finalized estimate (that is, with an accuracy of plus or minus five percent).

There are two other ways to express the accuracy of an estimate besides "plus or minus" a certain dollar figure. Sometimes you see the accuracy range for an estimate given as a percentage. Other times, estimates are tagged with a range that shows the probability that actual costs will under- or overrun the estimate.
  • If you had an estimate of $1,000 plus or minus 15 percent, the range for the estimate would be plus or minus 15 percent of $1,000, or plus or minus $150. You are estimating that actual costs will fall between $850 and $1,150.
  • When you express an estimate as $1,000 -10 percent, +25 percent, you are saying there is a 10 percent chance the estimate will be less than $1,000, and a 25 percent chance of it being more than $1,000. This risk factor is considered during the cost budgeting stage.
The amount and type of supporting detail varies by project application area. Keeping even rough notes may prove to be valuable by providing a better understanding of how the cost estimates were developed.

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