The cost estimation process consists of a set of principles which act as a foundation for identifying right project expenses. The key principles of cost estimating has been listed below.
- Integrity
- Information Accuracy and Relevance
- Uncertainty and Risk
- Expert Team
- Validation
- Release and Use
- Historical Data
- Project Breakdown
- Contingencies
- Inflation
Explanation
The detailed explanation of all the principles of the cost estimation has been below.
Integrity
Any cost estimate should be produced with a high standard of ethical integrity by an open and transparent process. Any uncertainties and vagueness associated with the estimate should be explained in an easy-to-understand manner. This principle allows avoiding false precision and rash decisions by integrating all people involved in the process into a team which works as a single mechanism and uses the same sources of information.
Information Accuracy and Relevance
The development of cost estimates should be based only on the best information available. When a planner develops an estimate, engineering judgement and technical advice should be applied to any assumption made at that estimate. By this principle, all information used for developing estimates can be thoroughly considered, filtered and refined in order to get the most accurate and relevant information.
Uncertainty and Risk
Any type of project cost should be identified and included in an estimate considering the uncertainty and risk. For this purpose, an exhaustive method of assessing and re-assessing the project risks and uncertainties should be employed. A kind of cost estimation software can be used to associate each cost with potential risks or uncertainties surrounding the project. This software will also consider risk by producing accurate contingencies in cost estimates that may be used later on for developing a risk management plan.
Expert Team
This principle assumes that only a skilled, interdisciplinary team should produce best cost predictions and make accurate calculations. Project cost estimation sheets should be developed utilizing a clearly defined statement of work. The expert team needs to use methodological tools and approaches to develop their expenditure forecasts. The team can be composed of project team members, experienced personnel of the performing organization, as well as experts from outside qualified agencies. Technical, managerial, and communication skills are required skills for the candidates. They should also be able to identify and evaluate critical issues and risks.
Validation
The expert and unbiased team should validate cost predictions. First, the project manger develops initial estimates and submits them to the team for validation. A second independent judgment will help then make the estimates more correct and capture different perspectives on the estimating process. This principle becomes more important to complex projects which require producing large estimates.
Release and Use
It assumes that while cost estimates might have been developed for a specific purpose, they can be used improperly by those people who do not understand the real context. Until the expert team has been thoroughly reviewed the estimates and validated their content, these estimates shouldn’t be released to the project team and stakeholders in order to avoid misuse and misunderstanding. This approach allows the estimates to be consistent with the project scope and accurate indicators of the real expenses.
Historical Data
Historical data from the previous projects serves as valuable reference point and helps to make more accurate estimates for new projects.
Project Breakdown
Must divide the project into smaller or manageable tasks which increases accuracy and accountability.
Contingencies
Unforeseen events can cause huge loss so, it is essential to include contingency allowances in the estimates to cover unexpected expenses.
Inflation
Over a long projects, inflation can impact the purchasing power of the budgets.
Conclusion
Hope, you have clearly understand about all the principles of cost estimation. Make sure to leave your opinion and suggestion about this post in the comment section below.