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.

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.