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# Expert judgment: magnitude and intermediate estimates

R which involves increasing the budgeted cost for each scheduled activity beyond the actual expected cost by a fixed percentage. Critical path activities may have larger percentages assigned as padding. The Project Management Institute (PMI) also suggests other methods for managing contingency reserves, including the use of zero-duration activities that run in tandem with scheduled activities and the use of buffer activities that contain both time and cost contingency reserves.

Resource costing: Resource costing is a simple mathematical method to compute the costs of hiring resources for a project. It is easily done by multiplying the hourly cost of hiring a resource by the number of projected employment hours.

Three-point estimating: Three-point estimating has roots in a statistical method called the Program Analysis and Review Technique (PERT), which is used to analyze activity, project costs, or durations by determining optimistic, pessimistic, and most likely estimates for each activity. Three-point estimating uses a variety of weighted formula methods to compute expected costs/durations from optimistic, pessimistic, and most likely costs/durations. One commonly used formula for creating estimates is:

Expected value = [Optimistic estimate + Pessimistic estimate + (4 x Most likely estimate)] ÷  6

The standard deviation is also calculated to create confidence intervals for estimates:

Standard deviation = (Pessimistic estimate – Optimistic estimate) ÷ 6

Three-point estimating can construct probability distributions of estimates in a number of fields. In project cost estimating, estimators may create a three-point estimate of cost using optimistic, pessimistic, and most likely costs. Alternatively, for projects that measure deliverables in units of time with fixed costs, estimators may use expected durations as the number of units and determine costs via parametric estimates. However, remember that three-point estimates are only as good as their initial optimistic, pessimistic, and most likely estimates – if these are not accurate, the expected values are useless.

Download Three-Point Cost Estimating Template – Excel

U.S. Government Accountability Office (GAO) 12-step process: The GAO recommends a 12-step process for creating high-quality cost estimates. Essentially a deterministic estimating technique, the 12-step process is a systematic approach where estimators select an appropriate estimating technique for each component of a work breakdown structure, fully identify the assumptions underlying estimates, and conduct risk and uncertainty analyses for estimates.

Using cost estimating software: Project management software can simplify, speed up, and enhance cost estimating. You can use a variety of project management software to create cost estimates or to determine the levels of uncertainty involved in cost estimates via probabilistic modeling.

The Monte Carlo method is one example of this modeling approach. It refers to the risk analysis simulations performed by researchers working on the atomic bomb and named after the gambling resort in Monaco. The Monte Carlo method produces a range of potential outcomes and offers probabilities for their occurrence based on different variables.