10 Cost Estimation Techniques in Project Managment

I don’t know about you, but I find that estimating cost in project management is one of the toughest parts of projects in the real world. It must be psychological: people simply don’t like to talk cost. Perhaps it’s because vendor don’t want to mislead their customers

This article on cost estimation techniques in project management (1) will help you remember the tools and techniques in the PMBOK guide for the estimate costs process and (2) can be used as a reference later when you are working on projects to estimate costs. After all, your goal in studying for the PMP is not only to pass the exam but also to sharpen your project management skills.

I have broken down this article into three sections: Brief Definitions, When to Use It, and Memory Tricks. If you need more background on any of the tools and techniques listed here, take a look at pages 204-207 in the PMBOK guide. At the end of this article is a one-page grid of all of the information presented here.

cost estimation techniques in project management

This photo is NOT a PMI-approved cost estimation technique. – Pixabay.com

Brief Definitions

Remember to use this list of brief definitions in conjunction with the PMBOK Guide. It is not enough to know just the short definitions!

  1. Expert Judgment – Someone who knows a lot more than you do about estimating a cost
  2. Analogous Estimating – Using values from a similar project to estimate costs for your current project
  3. Parametric Estimating – Using similar data as you might use in analogous estimating but spending more time to use current variables and analyze
  4. Bottom-Up Estimating – Estimating each work package, then rolling up to a summary level
  5. Three-Point Estimation – Using formulas to improve accuracy
  6. Reserve Analysis – Contingency reserves (AKA allowances) that account for the “known-unknown” risks & management reserves that account for the “unknown-unknown” risks
  7. Cost of Quality (COQ) – Assumptions about quality used to develop cost estimates
  8. Project Management Software – Software used to do simulations and make estimates
  9. Vendor Bid Analysis – Analyzing & using bids from vendors to determine what is an appropriate cost, especially if you don’t have much information
  10. Group Decision-Making Techniques – Getting a group together that is close to the work develop a cost estimate

When to Use It

It’s just as important to know when to use certain estimation techniques as it is to know the estimation techniques themselves.

  1. Expert Judgment – When you can! Expert judgment is a useful tool in a variety of situations
  2. Analogous Estimating – Know a similar project and need a rough estimate in a short amount of time? Use it!
  3. Parametric Estimating – Do you have some analogous data but have more time? Use it!
  4. Bottom-Up Estimating – It’s time consuming, but use it when you need a more precise estimate.
  5. Three-Point Estimation – When you have Pessimistic (P), Most Likely (L), and Optimistic estimates (O)
  6. Reserve Analysis – Throughout the project — contingency reserves may be used or decreased/remove as the project progresses. If management reserves are used, then they need to be added to the cost baseline
  7. Cost of Quality (COQ) – If needed, depending on the focus on quality within your project
  8. Project Management Software – When available and you need to make complicated calculations easier
  9. Vendor Bid Analysis – Don’t know what something will cost, and neither does your team? Collect bids from vendors, then analyze to get a range.
  10. Group Decision-Making Techniques – In order to gain commitment and when you want accuracy

Memory Trick

Use these or adapt them to your own to help remember the cost estimation techniques. It is definitely not important to memorize each of these. Rather, use your understanding of the definition, when to use it, and a memory trick to help your brain piece everything together when you need it.s

  1. Expert Judgment – When in doubt, ask someone who knows more than you!
  2. Analogous Estimating – Find analogies to similar projects, but remember that its use is limited due to the nature of projects — they create something new and unique, so analogy can only go so far.
  3. Parametric Estimating – Historical data + other variables + statistical analysis = parametric
  4. Bottom-Up Estimating – Estimating every work package in excruciating detail
  5. Three-Point Estimation – Know the formulas! (Sorry, no other way, folks!), Triangular = (P+L+O)/3, PERT Beta = (P+4L+O)/6
  6. Reserve Analysis – Contingency reserves are for the “known-unknowns” that you ID in your risk register. Management reserves are for when the unexpected happens, and management can approve or deny use. Both make up reserve analysis!
  7. Cost of Quality (COQ) – This tool is described in more detail in the Quality Management Plan — just known that it can impact cost!
  8. Project Management Software – Use it if you have complex calculations and it is available to you
  9. Vendor Bid Analysis – Don’t get this one confused with a Procurement Process — Vendor Bid Analysis allows you to develop a cost estimate if you don’t have your own expertise.
  10. Group Decision-Making Techniques – Group decision-making is often a tool & technique. Cost management is no different! Increase buy-in by getting folks involved.

If you want to see all of this information together, you are in luck! I made a PDF table that describes the 10 tools & techniques for estimating cost. Print it out or save it to your study folder here.

Have a better way to remember one of the cost estimation techniques? Share it in the comments below.

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