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empirical data to establish economies and diseconomies of scale

Cost estimates for construction projects fall into three classes:

Design estimates: Created during project planning and design, these include a number of estimates ranging in accuracy from screening through conceptual to definitive.
Bid estimates: This is a finalized definitive estimate used to conduct competitive bidding.
Control estimates: Use these to measure cost performance during project execution; they are susceptible to revisions during a project.
An important aspect of cost estimation in construction projects is determining the relationship between project scale and average cost per unit. Typically, estimators using empirical data to establish these relationships will find that there are economies or diseconomies of scale. That is, the average cost per unit changes as the scale of the project increases. Estimators seek to take advantages of economies of scale to minimize unit costs.

Information Technology

In producing cost estimates for information technology projects, many of the conventional cost estimation practices do not adapt well to Agile project development, given this approach’s emphasis on changing project scopes.

However, since the primary input in Agile processes is labor – not resources – and that Agile development supports fixed-time iterations, use parametric estimating techniques to create accurate cost estimates. Agile development teams divide work into manageable portions for each iteration and can thus charge fixed costs depending on the number of developers needed to complete the work scheduled for each iteration.

Even here, however, there may be difficulties. Fixed price cost estimating works well for adaptation work, which focuses mainly on amending already designed IT products. Developmental work, on the other hand, is more difficult to estimate, given that it involves product design. Because Agile methods encourage scope changes, it is difficult to pre-plan the amount of time to spend on design. Therefore, cost overruns for developmental work are quite common.

On the whole, therefore, cost estimation for IT development projects (involving both developmental and adaptation work) is best conducted as a combination of top-down and bottom-up estimating. Adaptation, which is generally well defined, can be estimated using bottom-up estimating techniques since its scope is fixed. Developmental work, which does not have a fixed scope, is better estimated using top-down techniques such as expert judgment and analogous estimating.