Cost Estimating Approaches

Why are estimates required, and what are the different approaches?

 

The need for estimates

Estimates are required to

·         Provide senior management with financial decision-making information

·         Provide a basis for comparison with other competing projects

·         Enable calculations of product value, profitability

·         Compare the cost of alternatives and options

·         Evaluate economics and feasibility

·         Determine financing requirements

·         Provide the basis for cost control

 

Focus of all estimating

·      All estimating must be consistent

·      And reflect

·         the most likely cost

·         And not a "padded" cost

·      Allowance for

·         Contingencies

·         Special risks

·         Unknowns

·         Scope changes

·         All must be shown separately

 

Cost Estimating Approaches - 1

·      Various approaches are possible

·         Depending on the time and data available

·      Gross comparison

·         This approach is "top down"

·         Sometimes known as "Analogy Method"

·         The estimate is based on comparing the project, or major system elements with data from a previous similar project

·         Adjustments are made to account for obvious differences such as size, time, location, inflation, etc

·         Results in an "order of magnitude"

·         Target range: -25% to +75% or higher

 

Cost Estimating Approaches - 2

Parametric

·         Sometimes known as "factored" estimate

·         Similar to gross comparison

·         Also top down, but more and better data available

·         I.e. "parameters" of individual systems or elements

·         Based on statistical relationships between historical costs and relevant project variables

·         E.g. physical size, capacity, performance, output etc

·         Results in a "feasibility" or "preliminary" estimate

·         Target range: -15% to +25%

 

Cost Estimating Approaches - 3

Parametric: basic equation

·         $2=$1(C2/C1)n

·         Where

$1 = Estimated cost of new element

$2 = Known cost of known element
C1 = Capacity of new element
C2 = Capacity of known element
n = cost-capacity factor for type of element

·         Capacity factors range from 0.5 to 0.9

·         Actual value determined from statistical records

 

Cost Estimating Approaches - 4

Composite

·         Estimate derived partly top-down (parametric)

·         And partly bottom up

(See detailed estimating on next page)

·         Depending on data available

·         Results in an "Appropriation" or "Budget" estimate

·         Target range: -10% to +20%

 

Cost Estimating Approaches - 5

Detailed

·         Sometimes known as a "Definitive" or "Pre-bid" estimate

·         Estimate based on detailed information

·         As a result of detailed planning and design

·         Considerable time and effort is required for this level of estimating

·         The cost of this effort must be justified by the intent

·         Results in a "definitive" or "tendering" estimate

·         Target range: -5% to +10%

 

Cost Estimating Approaches - 6

Detailed estimate: basic equation

·         $ = Q x p

·         Where

$ = Computed cost of the activity or element

Q = Quantity involved, number of units
p = Price of each unit

·         Developed at lowest level of WBS, and summarized

·         Detailed estimating is still subject to judgment

·         Of both quantity and unit pricing

·         Labor items are subject to "learning curve" effects and wage negotiations

·         Materials and equipment may be subject to escalation or inflation