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.

The Analogous Estimating Technique

One of the most common methods of estimating project costs enables you to take advantage of the similarities between a current project and projects that have been performed in the past. This technique is called analogous estimating.

An analogy is a set of comparisons you draw between two things with similar characteristics. Analogous estimating is also known as "top-down" estimating because you apply the total costs from a previous project in order to estimate the total costs of a new one. Just keep breaking the budget down according to the new work breakdown structure (WBS).

The main benefit of using the analogous estimating technique is that it is less costly than other estimating techniques. The down side of using this technique is that it is also generally less accurate.

You may be wondering, "If analogous estimating is not considered to be accurate, why would I use this technique?" However, before you disregard analogous estimating altogether, you should be aware of the circumstances under which it is most reliable. It is particularly beneficial when the following conditions are present.

1. The new and previous projects are similar
There are two situations in which analogous estimating is used. One is when your project is similar to other, previous projects. The more similar the projects are, the more accurate the estimates will be. You also can base estimates on a similar project when you don't have detailed information about a new project. More details are provided below.

• Are they similar? To determine the degree of similarity between the past and current projects, examine the scope and purpose of the former project to ensure the projects are alike in fact, and not just in appearance.
• Not enough detail. Sometimes important costing information becomes available only after a project has begun. A similar project's budget will provide a general baseline to go by.

2. The individuals preparing the estimates have the necessary expertise
Knowledge about, and experience with, the subject matter determines whether the individuals preparing the estimates have the needed expertise. You may want to hire one or more external experts to help with cost estimating.

3. The estimating team has access to adequate information about the previous project
If your current project lends itself to the analogous estimating technique, you'll want to furnish your cost estimating team with everything they will need to produce accurate results. Listed below are some types of information they should have on hand when they are developing cost estimates using analogous estimating.

• Scope statements. The team will not know whether two projects are in fact similar unless it can compare descriptions of the project and product scopes.
• Work breakdown structure. The work breakdown structure from the previous project is also necessary to ensure that similar processes and steps will be followed in the current project. Differences in the two projects could affect the accuracy of cost estimates.
• Performance reports. Actual costs are the most important information from the old project. Your team will use them to determine which of the previous estimates were accurate. It should use the actual costs to revise any inaccurate estimates before copying them into the new project.

Remember the analogous estimating technique as a less costly way of estimating project costs when your team has the needed information and expertise to effectively compare the current project to previous, similar projects.

Project Tools: Analogous Estimating

One of the tools you can use for project activity duration estimating is analogous estimating. The dictionary defines analogous as "being similar in some particular way."

Think of the similarities between the human brain and a computer. One of the similarities is that they both process and store information. The similarities between the human brain and a computer make them analogous.

Project managers can use similarities between project activities when they are estimating activity duration. This technique of using similarities is called analogous estimating and involves the use of the actual duration of a previous, similar activity as the basis for estimating the duration of a future activity.

Sometimes referred to as top-down estimating, analogous estimating is used when there is a limited amount of detailed information about the project. This is especially true in the early phases of project planning.

Analogous estimating saves project managers time and money because it enables them to avoid the cost of hiring experts. However, project managers must be careful when using this tool. It is most reliable when:

• both activities are similar in fact and appearance
• the individuals preparing the estimates have the needed expertise.

Analogous estimating can be a powerful tool when used properly. When using this tool, always ensure that the two projects are similar in appearance and fact. Also, make sure that the person who performs the estimates has the necessary experience. Analogous estimating can help you ensure that you accurately estimate the duration of project activities.