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Cost estimate classifications

MAJOR COST ESTIMATING TECHNIQUES: BEST USES FOR EACH

To create accurate estimates, cost estimators use a combination of estimating techniques that allow for varying levels of accuracy. While the cost estimator always aims to create the most accurate estimate possible, they may have to start with less accurate estimates and revise once project scope and deliverables are fleshed out. The most widely used cost estimating techniques are:

Analogous estimating: Like expert judgment, analogous estimating — also called top-down estimating or historical costing — relies on historical project data to form estimates for new projects. Analogous estimating draws from a purpose-built archive of historical project data, often specific to an organization. If an organization repeatedly performs similar projects, it becomes easier to draw parallels between project deliverables and their associated costs, and to adjust these according to the scale and complexity of a project.

Analogous estimating can be quite accurate if used to form estimates for similar projects and if experts can precisely assess the factors affecting costs. For example, a similar project conducted three years ago might be used as the basis for a new project cost estimate. Adjust the estimate upward for inflation, downward for the amount of resources required, and upward again for the project’s level of difficulty. These adjustments are typically stated as percentage changes — a new project might require 10 percent more preparation time and 15 percent more on resources. However, project management professional Rupen Sharma stresses the need to make sure that projects really are comparable since projects that appear similar, such as road construction, can actually cost vastly different amounts depending on other factors — say, local landscapes and climates.

Bottom-up estimating: Also called analytical estimating, this is the most accurate estimating technique – if a complete work breakdown structure is available. A work breakdown structure divides project deliverables into a series of work packages (each work package comprised of a series of tasks). The project team estimates the cost of completing each task, and eventually creates a cost estimate for the entire project by totaling the costs of all its constituent tasks and work packages — hence the name bottom-up. Bottom-up estimates can draw from the knowledge of experienced project teams, who are better equipped to provide task cost estimates.