The practice of projecting the financial and other resources required to execute a project within a stated scope and timetable is known as the cost estimate. Cost estimates that are accurate and trustworthy are critical for policy formation, decision-making, and effective delivery.
The ability to produce reliable, accurate and transparent cost estimates is critical to ensuring world-class project delivery.
The approach performance structure is organized in an eight-step cycle. The requirements guide goes over the intended process and the checks that practitioners must undertake at each step in further detail.
Step 1: Create A Brief
Developing a complete project brief and outlining clear objectives at the start of the project and the beginning of each stage gate cycle is a crucial step in generating a reliable cost estimate. The project summary should provide a clear understanding of the cost estimate’s context and requirements.
The attention should shift to choosing the suitable technical team to develop the cost estimate using the information gleaned from the project brief. Specific attention and additional investment should be considered for more complicated projects to guarantee the proper specializations (e.g. tunnels, bridges, high-speed rail, etc.) and experience are available at the right moment of the project.
The cost estimate should not be done in isolation, but as part of a collaborative team effort in which design and delivery stakeholders contribute timely feedback.
Using a review panel, independent assurance, or ‘critical friend’ approach, the project leadership should agree on a clear cost estimate review and assurance points. The review panel, independent assurance, or ‘critical friend’ approach should include diverse perspectives and expertise tailored to the project’s needs.
Step 2: Collect Information and Evidence
Create a standardized structure. A consistent “Level 0” cost breakdown structure should be used in all cost estimation. Comparisons, benchmarking, and uniform terminology at the lowest common denominator across projects are all aided by a shared high-level breakdown.
“Level 0” Cost Breakdown Structure
- Land and property
- Indirect costs
- Direct costs
A sound foundation of evidence supported by high-quality data is required to build a reliable and robust cost estimate. The less reliable the facts and data, the more uncertainty there will be in a cost estimate. The data’s quality and maturity should grow with time. Throughout the project lifespan, the cost estimate team must examine the underlying data, incorporating new information and any lessons gained as the project progresses.
When putting together a cost estimate, one of the most important things to do is document your assumptions. As the cost estimate is established, assumptions should be conveyed explicitly to all project stakeholders (SRO, Project Director, and Project Team). This guarantees that the cost estimate’s context is explicit, agreed upon, and accurately interpreted by the cost estimating team in accordance with the project’s goals.
Step 3: Decide On a Cost Estimation Method
Cost estimating can be done in a variety of ways. The methodology chosen must be backed up by solid facts. As the cost estimate evolves and the project moves through the stages, the cost estimate technique should be examined and reflected on. Combining and employing several strategies is rather usual.
There are two typical ways to cost estimation (cost and risk estimation):
Cost estimating methods include:
- Parametric cost estimating
- First-principles (bottom-up) cost estimating
- Analogy cost estimating
- Expert opinion
Step 4: Determine The Base Estimate, The Uncertainty, The Risk, And The Opportunity
The base cost estimate is a computation of the predicted cost based on the information available, assumptions made, and the method chosen. Prepare an Anticipated Final Cost and a range of probable values that reflect the project’s level of risk and uncertainty.
Step 5: Create A Cost Estimate Report
The cost estimating team must compile the various calculations done until step 4 into a logical and consistent report to aid project decision-making. To eliminate uncertainty, the cost estimate is constructed and priority regions are recommended.
Step 6: Check and Double-Check Everything
Reviewing and confirming cost estimates is a common procedure for increasing cost estimate accuracy and confidence. Based on the influence the cost estimate will have on decision-making and the risk of a calculation error, choose the appropriate type of review and level of assurance. If an error is found, go back to Step 4.
Step 7: Approval of The Project’s Leadership
The goal of the sign-off procedure is to provide project leadership with an opportunity to clarify and question the cost estimate data, as well as to comprehend and formally acknowledge their ownership of the data so that they may rely on its insights when regulating the project. In preparation for stage-gate (SG) review and approval, make sure the Project Director and Senior Responsible Owner (SRO) understand the cost estimate’s maturity and accept ownership.
Step 8: Use The Cost Estimate to Help You Make a Decision
To account for the project’s inherent risk and uncertainty, present the cost estimate as a range. As the project proceeds, it is advised that the technique outlined below be actively used and evaluated to assist set and challenge the right budget and support important choices in order to keep the project on track for successful completion.
Cost Estimation’s Fundamental Principles
The estimation procedure follows a set of guidelines that serve as a foundation for identifying and calculating appropriate project costs. The following are the main principles:
· Risk and Uncertainty
Any project cost should be defined and incorporated in an estimate that takes uncertainty and risk into account. A comprehensive technique of assessing and reassessing project risks and uncertainties should be used for this aim.
All estimated costs must be created with a high level of ethical integrity, clearly and openly.
· Information Relatability and Authenticity
Only the most up-to-date information should be used to produce expense estimates. When a planner creates an estimate, any assumptions made should be based on engineering judgment and technical guidance.
· Release and Application
To minimize misuse and misinterpretation, estimates should not be provided to the project team and stakeholders until the expert team has thoroughly examined and validated their content.
· A Skilled Team
Only a skilled, interdisciplinary team should develop cost projections and calculations, according to this approach. To generate their expenditure projections, the expert team will need to apply methodological techniques and approaches.
Cost predictions should be validated by a professional and unbiased team.
The Difficulties of Cost Estimation
Because cost estimation is merely a forecast of a project’s costs, there is still some uncertainty when calculating it. Because the project’s cost isn’t complete until you finish it and can quantify the money spent on resources, this uncertainty develops.
Calculating a cost estimate for a unique or big project might be difficult since the specific expenses may be more difficult to ascertain precisely. Working with your team and taking the proper strategy when estimating project costs might help you avoid some of these issues.
A Great Project Cost Estimate
You can use a number of criteria to determine how useful a project cost estimate is, including:
A project cost estimate is frequently based on facts or experience. When calculating expenses, you can improve the trustworthiness of your estimate by using expert judgment and historical data.
A cost estimate for a project is only useful if it is accurate. Select the most appropriate estimating technique, revise estimates during the project, and plan for unforeseen expenditures in your estimate to attain accuracy.
Make sure the mathematical processes utilized to calculate a project cost estimate are correct. You can double-check these calculations using the estimate’s documentation.
• Risk Detection
In project cost estimates, you can identify and plan for hazards. To guarantee that there is enough money in the budget to compensate for these risks, management frequently overestimates them.
It’s critical to keep track of the assumptions used in an estimate. Documentation can assist others to understand the reasoning for an estimate and avoid misconceptions.
The ability to produce reliable, accurate and transparent cost estimate is critical to ensuring world-class project delivery. To produce accurate cost estimate, it is vital to carefully implement the cost estimation process keeping in mind the principles of cost estimation.