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Project Cost Estimating


Project Cost Estimating is the process of predicting the total cost of the tasks, time, and resources required to deliver a project's scope of work.



Five Cost Estimation Techniques

The Australian Institute of Project Management recommends the following five techniques for project cost estimating:

  1. Expert Judgement - If the project team is experienced in delivering the type of work in the scope, they can use their specialised knowledge to estimate costs. The accuracy of this method relies on the skill of the project team and a tightly defined project scope.
  2. Analogous Estimate - This technique uses historical data from similar projects or business as usual tasks to create cost estimates. Adjustments are made for known differences between the old and new projects or tasks. This method is usually used in the early phases of a project.
  3. 3-Point Estimate - This concept calculates a project’s costs based on the weighted average of the most likely (a realistic estimate), optimistic (best case estimate) and pessimistic (worst case estimate) cost projections. For example, let’s say you usually outsource web development for $10,000 (realistic estimate). A friend told you they used a contractor who charged $7,500 (optimistic estimate), but you’re concerned labour shortages might inflate costs to $15,000 (pessimistic estimate). You get your 3-point estimate by adding them together and dividing by 3, giving you a cost estimate for your web development of $10,833.
  4. Parametric Estimate - Parametric estimating uses statistical modelling to derive cost estimates. It uses historical data of key cost drivers to calculate an estimate the cost for different projects. For example, if it takes one person an hour to build 20 components, then parametric estimating suggests 100 components will take one person five hours to build, or five people one hour, and so on.
  5. Bottom-Up Estimate - Bottom-up estimating uses the estimates from individual work packages to calculate the overall cost estimate for the project. It’s generally more accurate because it analyses costs at a granular level. It’s a good idea to get the team members or vendors responsible for the task to make the estimate as they’ll have a better idea of how long it will take. The downside to this method is it can be time-consuming and resource-intensive, especially in large, complex projects.

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