In the field of cost engineering and cost management, project cost estimation plays a central role. What is project cost estimation and why is it so important?
1. What is a cost estimate?
Project cost estimation is the process of predicting the quantity, cost, and price of the resources required by the scope of a project.
Since cost estimation is about the prediction of costs rather than counting the actual cost, a certain degree of uncertainty is involved. This uncertainty arises from the fact that the project scope definition is never entirely complete until the project has been finished, at which point all expenses have been made and an accountant can determine the exact amount of money spent on resources.
Cost estimation, therefore, is like ‘looking into a crystal ball’.
2. Why project cost estimation?
Different reasons: investment decisions, comparing alternative plans, budgeting, cost control, and validation.
Cost estimates are prepared to different ends throughout the project lifecycle. Upfront, the goal is to provide input for investment decisions. The cost estimate is used to determine the size of the required investment to create or modify assets. It is also during the early phases that alternative plans are considered that need to be priced. The cost estimate is a deliverable that serves the decision-making process at each gate of the project lifecycle.
Later in the project, the budget is determined from a more extensive cost estimate that also serves as a baseline for project controls and earned value measurement. As such, it is maintained up-to-date and in synchronization with the planned schedule. By comparing expenses and progress information with the baseline estimate, an indication of the project’s performance is obtained that allows the cost control and project management to steer the project.
3. Types of estimates
The tools and techniques used to compile estimates vary widely per project type, phase and size. Early on, when the level of scope definitions is premature, capacity scaling, parametric and factor methods may be used. When the scope gets better defined and with more detail, so do the estimates, but effective cost estimating also requires an understanding of the work that needs to be carried out. While a number of advanced tools exist to assist the estimating process in the determination of quantities, cost and hours, it is still a process that requires judgment and experience to come to a confident result.
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