Estimating the project costs has a massive impact on the project’s success. Organizations that estimate their project’s budget effectively deliver multiple projects consistently each year. Therefore, project management’s cost estimating process is vital to the project management methodology. Project Managers manage the three project constraints – scope, schedule, and cost to ensure a successful project delivery for their organizations. However, accurately estimating project costs is much more difficult than it appears. So, project managers use the estimate costs process of project cost management to get an approximation of the project’s monetary requirements.
Estimate Costs Process
Usually, the project cost is estimated even before the project has begun. Although, at the time, it is only an approximate amount that organizations allocate for the project. The actual cost estimation starts after the project scope and activities needed to complete the project have been defined. Thus, estimating project costs is an ongoing process that can change depending on the project requirements.
According to the sixth edition of a guide to the project management body of knowledge (PMBOK Guide), the estimate costs process helps project managers develop an approximation of the monetary resources needed to finish the project. The main objective of the estimate costs process of project management is to determine the cost required to execute and compete the project. The determine budget process follows this process wherein the actual project cost is defined.
Types of Cost Estimates
Project costs are measured periodically throughout the project life cycle. It generally starts during the project initiation phase or process group, and the estimated costs are mentioned in the project charter. As the project proceeds, the cost estimates become clearer and are regularly updated in the project documents updates.
There are two types of cost estimates according to the PMBOK Guide 6th Edition. They are:
- Rough Order of Magnitude (ROM) that has an accuracy of -25% to +75%
- Definitive Estimate that has an accuracy range of -5% to +10%
The main difference between the two cost estimates is the accuracy. Definitive Estimates are much more accurate than ROM; therefore, it is used in the later stages of the project development process. ROM is preferred during the initiation phase as it gives a range of possible outcomes.
Cost re-estimation is done halfway through the project when project managers discover that the cost baseline cannot be met according to the previous estimates. Estimate to Complete (ETC) is used for the cost re-estimation process to calculate a new estimate at completion (EAC). Here, EAC replaces the initial budget at the completion of the project; thus, ETC becomes the new cost baseline.
Components of the Estimate Costs Process
Like the other project management processes mentioned in the sixth edition of the PMBOK Guide, the estimate costs process has inputs, tools, techniques, and outputs. These are as follows:
Inputs of Estimate Costs Process
- Cost Management Plan
- Human Resource Management Plan
- Scope Baseline
- Project Schedule
- Risk Register
- Enterprise Environmental Factors
- Organizational Process Assets
Tools and Techniques of Estimate Costs Process
- Expert Judgement
- Analogous Estimating
- Parametric Estimating
- Bottom-up Estimating
- Three-point Estimating
- Reserve Analysis
- Cost of Quality
- Project Management Software
- Vendor Bid Analysis
- Group Decision-making Techniques
Outputs Created in Estimate Costs Process
- Activity Cost Estimates
- Basis of Estimates
- Project Documents Updates
The outputs of the estimate costs process are used to determine the budget baseline of the project, especially in the cost aggregation technique of the determine budget process. Project Managers can procure resources from vendors or suppliers to execute the project by estimating the project budget. This important project management process will also require effective communication and collaboration between all project stakeholders.
There are several cost estimation methods in project management that are used at various stages of project development. ROM is the only cost estimate in the project initiation phase, and Definitive Estimates are generated in the subsequent phases with the availability of more project information. Analogous, Bottom-up, and Parametric Estimating are used to find the definitive estimates, with both bottom-up and parametric estimating providing accurate cost estimates. After the project stakeholders approve the determined budget, project managers use Earned Value Analysis and Variance Analysis to control the project costs.
As per the latest changes to the PMP Exam Content Outline (January 2021), PMP (Project Management Professional) Certification aspirants must refer to the seventh edition of the PMBOK Guide. The new edition of the PMBOK Guide includes the cost estimation in the planning performance domain, which is a part of the eight performance domains of project management. Therefore, candidates preparing for the PMP Exam in 2022 should use both editions of the PMBOK Guide for their PMP Certificate Study to get a detailed and thorough examination preparedness.