PM: How accurate is your Project Cost Estimates?

As a project manager estimating cost is the first step you take towards creating a Cost Management Plan. How accurate your estimate should be, must be plan. There has never a project under the sun which matches with the exact cost estimated. I mean to say there has never been a case where you estimated that project will cost $12,067 and after closing the project the project expenditure exactly matches with the $12,067.

So how accurate the estimates should be?

Estimates must be in a range. A range which has a lower and upper limit. Example:- A project during the planning phase might have an estimates range of +-50% of the estimated amount.

When a project is in planning phase there might be many requirements which are not very much visible. So estimating during this phase will have a wide range.

When you do the estimates in later phases this gap will be narrowed as you know more details about the project.

Estimates should be based on a WBS (Work Break Down Structure) if at all possible. Estimates if done by the resource who has to work on the activities is more realistic.

Estimates done during the project phases are following:

ROM Estimates (Rough Order of Magnitude)

This type of estimates is done during the project initiating phase. The estimates could be in the range of +-50%. This wide gap is attributed to the reason that at this phase project baselines are not ready; project clarity might be vague etc.

Budget Estimates

This type of estimates is done during the project planning phase. The estimates could be in the range of -10 to +25%. At this stage project clarity has been sharpen well. The baselines (Scope, time) are very much known.

Definitive Estimates

This type of estimates is done during the later phases. The estimates could be in the range of -10 to +10%. Project has very much clarity. The project team knows much more details about the project.

How Estimates can be reduced?

An experienced project manager knows how to reduce the estimates. Remember in my post Do you know your Project Cost, we outlined that what do we estimates about?

…So we can cut on those areas to cut the estimates…

We can reduce the risk to decrease the cost. We can opt for a cheaper resource or may be cut on qualities; it all depends on the nature of projects.

So know we can be assured that Estimates are never a fixed cost. They come with a range.

We will cover more on Cost Management in our future posts…till then please feel free to add your comments:

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• PM: How accurate is your Project Cost Estimates?
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