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Reserve analysis:

WHAT MAKES A GOOD COST ESTIMATE?

The usefulness of a cost estimate depends on how well it performs in areas like reliability and precision. There are several characteristics for judging cost estimate quality. These include:  

Accuracy: A cost estimate is only as useful as it is accurate. Aside from selecting the most accurate estimating techniques available, accuracy can be improved by revising estimates as the project is detailed and by building allowances into the estimate for resource downtime, project assessment and course correction, and contingencies.

Confidence level: Since even the best estimates contain some degree of uncertainty, it is important to communicate the amount of potential variability in any estimate to stakeholders. Confidence levels can communicate estimates as ranges, such as those produced by three-point estimating techniques or Monte Carlo simulations.

Credibility: Stakeholders or sponsors preparing to authorize budgets want to know that estimates are founded in established fact or in practical experience. Increase the credibility of an estimate by incorporating expert judgment and by using set values for variables, such as unit costs and work rates.

Documentation: Since project managers are eventually held accountable to cost estimates, it is important that the assumptions underlying estimates are identified and recorded in writing, and that regular budget statements are provided. Thorough documentation precludes misunderstandings and helps stakeholders understand the reasons behind estimate revisions.

Precision: To reduce the variation in cost estimates due to techniques used, estimators should compare and corroborate estimates. Cost estimating software makes this fairly easy.

Reliability: Reliability is a concept based on the extent to which historical cost estimates for a certain type of project have been accurate. For new projects that are similar to successfully-completed past projects, analogous estimating techniques will allow reliable estimates.

Risk detailing: All projects can be affected by negative risks, so it is important to build allowances into cost estimates. Thorough risk identification and allocation of contingency reserves is the most common approach. Estimates should be overestimated rather than underestimated, and estimators should establish tolerance levels for cost deviation.

Uniformity: For performing organizations that conduct many projects of the same type, expect unit costs to be reasonably consistent across projects and only adjusted for inflation. This type of unit cost uniformity is possible for organizations that have undertaken several similar projects, which enables them to create reference lists for recommended unit costs.

Validity: Confirming the validity of a cost estimate involves checking the underlying data for accuracy. Improve validity by relying on established cost literature, and on cost indices when up-to-date literature is unavailable.