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project cost management

Order of magnitude estimates: An order of magnitude estimate, or ASPE Class 5, is an extremely rough cost estimate created before a project has been defined. It is based only on expert judgment and the costs of similar past projects. An order of magnitude estimate is typically presented as a range of costs spanning -25% to +75% of the actual project cost. It is only used in high-level decision making to screen projects and determine which ones are financially feasible.

Intermediate estimates: An intermediate estimate can be created using stochastic or parametric techniques when a project is defined to some limited extent. Like an order of magnitude estimate, its main purpose is determining project feasibility based on the general project concept.

Preliminary estimates: Created when a project’s deliverables are about halfway defined, a preliminary estimate uses somewhat detailed scope information to incorporate unit costs. Preliminary estimates are accurate enough to be used as a basis for project financing. Some project budgets are authorized based on the preliminary estimate.

Substantive estimates: A substantive estimate uses a reasonably finalized project design to create a fairly accurate cost estimate based mainly on unit costs. At this point, the project’s objectives and deliverables are established, so a substantive estimate is accurate enough to create a bid or tender to complete a project. Substantive estimates may also be used to control project expenditure.

Definitive estimates: Drafted when a project’s scope and constituent tasks are almost fully defined, a definitive estimate makes full use of deterministic estimating techniques, such as bottom-up estimating. Definitive estimates are the most accurate and reliable and are used to create bids, tenders, and cost baselines.

Of course, even definitive estimates do not remain static through project execution. Since all estimates are based on numerous assumptions and are contingent upon risks of all magnitudes, cost estimates are often updated if these base assumptions change significantly or additional risks are realized. When this happens, the project cost baseline is revised accordingly so that you can continue to assess project performance accurately.

Estimates of all types are created using a combination of estimation techniques (with varying levels of accuracy). As we have seen, the most accurate estimates rely more on deterministic methods than on conceptual methods.