PLANNING STAGE (COST) : ESTIMATE COST

This is the second process of planning cost whereby the monetary resource to be used for project activities is approximately developed. The costs are estimated to all activity resources (human resource, equipment, material, facilities etc.)

Estimating costs can start by referring:

• Cost management plan (which explains the agreeable procedures or methods for estimating activity costs)
• Human resource management plan (to be discussed in future but in short it explains about staffing persons with their rates and whether there is a need for adding rewards or recognition after performing their best)
• Scope baseline (whereby the assumptions and constraints indicated might impact the costs. The question is: do you only estimate direct costs for project activities or do you also include indirect costs which can not be traced easily? Another question: does the project need to consider other cost estimates like insurance, license, permits, safety etc?)
• Project schedule (which provides types and quantities of activity resources as well as amount of durations for project activities. Their availability and working hours will determine the project costs)
• Risk Register (which explains all the risks that may affect the project activities. Here the cost is considered when you try to response those risks once happened)
• Enterprise Environmental Factors (which explain the resources' cost rate and market conditions depending on the demand and supply at that particular moment)
• Organizational Process Assets (which explain the historical information as well as the lessons learnt in the process of estimating cost from the previous similar projects. They also provide cost estimating templates if available)

Also this process can also be done by:

• Using experts who can provide valuable knowledge concerning this process basing their own experiences from the prior similar projects.
• Analogous estimation whereby the costs can be estimated using the previous similar activities or projects.

• Parametric estimation whereby the costs can be estimated through the relationship between the historical data and other project parameters/variables.

• Three point estimation whereby the costs can be estimated using three points of the activity costs of the most likely (M) based on normal scenario, optimistic (O) based on best scenario and pessimistic (P) based on the worse scenario for the activity. Remember the formulars: 
• Triangular distribution as (M + O + P)/3
• Beta distribution as (4M + O + P)/6
• Group decision making whereby the project team brainstorms together to reach the costs estimates.
• Bottom-up Estimation whereby the cost of every activity is estimated by using Work Breakdown Structure.

• Reserve analysis whereby the contingencies are also given their estimated costs as a reserve for uncertainties. For example the cost may be needed for the rework which is unknown at the moment.
• Vendor Bid Analysis whereby the responsive tenders, proposals or bids from the vendors are analyzed and therefore provide the cost estimates.
• Project Management Software Tools whereby through their applications, the costs can be estimated.

The output of the process is called Activity Costs Estimates presented in terms of currency (dollars, Tanzania Shillings, Euro, Pound etc). It will include all the costs estimated for all resources and other categories like contingency reserve, indirect cost etc. Remember also to document all assumptions, constraints, acceptable range of estimates etc. as the basis used for estimating costs.

References:

PMI (2013). A Guide to the Project Management Book of Knowledge (PMBOK Guide 5^th Ed.) USA, Project Management Institute

http://www.coolneasy.co.uk/2017/01/free-air-conditioning-installation-cost-calculator/

Thank you and please don't hesitate to ask, suggest or comment below.

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