Intro to Project Management: Project Cost Management Cost Estimation Rough Order of Magnitude Budgetary Definitive

What This Is

Cost estimation is the process of determining the approximate cost of a project. It's essential for project managers to estimate costs accurately to ensure that the project stays within budget and meets stakeholder expectations. For example, when planning a wedding, the project manager (often the bride or groom) needs to estimate costs for venue rental, catering, decorations, and photography to ensure that the budget is sufficient and that the event is executed as planned.

Key Terms & Formulas

• Rough Order of Magnitude (ROM): A high-level estimate of the project cost, usually within ±25% of the actual cost.
• Budgetary Estimate: A detailed estimate of the project cost, usually within ±10% of the actual cost.
• Definitive Estimate: A highly detailed estimate of the project cost, usually within ±5% of the actual cost.
• Cost Estimating Methods: Techniques used to estimate costs, such as Analogous Estimating, Parametric Estimating, and Bottom-Up Estimating.
• Cost Estimating Accuracy: The degree of accuracy of the cost estimate, usually measured as a percentage.
• Earned Value (EV): The value of work completed, calculated as EV = % complete × BAC (Budget at Completion).
• Cost Performance Index (CPI): A measure of the project's cost efficiency, calculated as CPI = EV / AC (Actual Cost).
• Schedule Performance Index (SPI): A measure of the project's schedule efficiency, calculated as SPI = EV / PV (Planned Value).
• Budget at Completion (BAC): The total budget for the project, including all costs and contingencies.
• Cost Variance (CV): The difference between the actual cost and the earned value, calculated as CV = EV - AC.
• Schedule Variance (SV): The difference between the earned value and the planned value, calculated as SV = EV - PV.

Step-by-Step / Process Flow

1. Identify the Cost Estimating Method: Choose the most suitable cost estimating method based on the project's complexity, size, and available data.
2. Gather Historical Data: Collect data from similar projects to use as a basis for the cost estimate.
3. Estimate Costs: Use the chosen cost estimating method to estimate the costs for each activity or task.
4. Validate the Estimate: Review and validate the estimate with stakeholders and subject matter experts to ensure accuracy and completeness.
5. Update the Estimate: Refine the estimate based on new information or changes to the project scope.
6. Monitor and Control Costs: Continuously monitor and control costs throughout the project to ensure that they stay within the estimated range.

Common Mistakes

• Mistake: Failing to validate the cost estimate with stakeholders and subject matter experts.
• Correction: Validate the estimate with stakeholders and subject matter experts to ensure accuracy and completeness.
• Why: Inaccurate estimates can lead to cost overruns and project delays.
• Mistake: Not considering contingencies and risks in the cost estimate.
• Correction: Include contingencies and risks in the cost estimate to ensure that the project stays within budget.
• Why: Failing to consider contingencies and risks can lead to cost overruns and project delays.

Exam Tips

• Tip: Be aware of the different types of cost estimating methods and their applications.
• Tip: Understand the concept of cost estimating accuracy and its importance in project management.
• Tip: Be able to calculate earned value, cost performance index, and schedule performance index.

Quick Practice Questions

1. If the CPI is 0.8, is the project under or over budget? Answer: Under budget. Explanation: A CPI of 0.8 indicates that the project is completing work efficiently, resulting in a lower actual cost compared to the planned cost.
2. If the EV is $100,000 and the AC is $120,000, what is the cost variance? Answer: -$20,000. Explanation: The cost variance is the difference between the actual cost and the earned value, which is -$20,000 in this case.
3. If the SPI is 1.2, is the project ahead or behind schedule? Answer: Ahead of schedule. Explanation: A SPI of 1.2 indicates that the project is completing work efficiently, resulting in a higher earned value compared to the planned value.

Last-Minute Cram Sheet

• Rough Order of Magnitude (ROM): A high-level estimate of the project cost, usually within ±25% of the actual cost.
• Budgetary Estimate: A detailed estimate of the project cost, usually within ±10% of the actual cost.
• Definitive Estimate: A highly detailed estimate of the project cost, usually within ±5% of the actual cost.
• Earned Value (EV) = % complete × BAC: The value of work completed, calculated as a percentage of the budget at completion.
• Cost Performance Index (CPI) = EV / AC: A measure of the project's cost efficiency, calculated as the earned value divided by the actual cost.
• Schedule Performance Index (SPI) = EV / PV: A measure of the project's schedule efficiency, calculated as the earned value divided by the planned value.
• Budget at Completion (BAC): The total budget for the project, including all costs and contingencies.
• Cost Variance (CV) = EV - AC: The difference between the actual cost and the earned value.
• Schedule Variance (SV) = EV - PV: The difference between the earned value and the planned value.
• ⚠️ Cost Estimating Methods: Techniques used to estimate costs, such as Analogous Estimating, Parametric Estimating, and Bottom-Up Estimating.
• ⚠️ Cost Estimating Accuracy: The degree of accuracy of the cost estimate, usually measured as a percentage.