What is a cost estimate and who prepares it?

1. What is a cost estimate (i.e., your definition) and who is responsible for preparing it?

Cost estimation is a science that uses various techniques to project the expense of activities and assets a project. Cost estimation anticipates the resources as well as the related costs required to execute a specific project. Therefore cost estimation aid the project manager by making sure that the project attains its objectives within the agreed budget and timeframe. Similarly, Trendowicz and Jeffery (2014) define cost estimation as a practice of predicting the expenses required to complete a project with a defined scope.

Accordingly, cost estimation is the main component of project cost management which entails the knowledge of controlling, monitoring and planning a project’s financial expenses. Thus, the approximated aggregate project expense referred to as cost estimate is utilised to authorise a project’s budget in addition to managing its expenses. The individual who is responsible for preparing a cost estimate is the project manager.

Project managers use defined techniques to create cost estimates which are utilised in analysing the financial feasibility of a certain project, the budget for the project expenses, and monitoring the project expenditure. As a result, an accurate cost estimate is key for deliberating on whether to take on a project, determining the final scope of the project and for making sure that the project remains financially feasible and does not incur cost overruns.   

1. What are some of the major factors that influence the determination of a cost estimate?

A cost is a set of all the expenses that are involved to ensure that a project is accomplishing all the way from inauguration up to completion. Therefore, these project costs are classified into various approaches and detailed levels (Boardman et al., 2017). The most common and simplest classification groups cost into two major classes direct costs and indirect costs.

Direct costs: These expenses are broadly categorised as those related with a specific part as a project activity. In the case of project management, direct costs are costs which are billed solely to a particular project activity such as the expense of resources to generate physical products; money spends to address specific project risks, wages for the project team and fuel for machinery.

Indirect costs: These are expenses related to a given cost center which are incurred by several projects concurrently and at times with wavering amounts (Harrison, and Lock, 2017). Under project management, security expenses, quality control, and utilities are often categorised as indirect costs because they are jointly used across various projects and are not directly payable to a particular project.

Factors influencing the determination of a cost estimate

Certainly, a cost estimate is more than a simple list of costs. Nonetheless, a cost estimate also illustrates the underlying assumptions for every cost. Therefore, these assumptions are grouped into a report referred to as the basis of the estimate which describes in detail the cost inclusions and exclusions. Consequently, the basis of estimate offers a chance to the project stakeholders to interpret the costs associated with the project to have a clear picture regarding how and where the actual costs are likely to vary with the projected costs (Mahamid, 2015, p. 117. Furthermore, past the comprehensive divisions of direct and indirect costs, the expenses of a project come in some more distinct subdivisions. Some of the common types of costs include:  

• Services: These refer to the expenses incurred on external operations that an organisation looks for any specific project contractor.
• Labour: This cost is associated with human effort directed towards a project’s objectives.
• Equipment: this is costs incurred for purchasing and maintaining equipment utilised in running the work of a project.
• Materials: These are expenses related to resources required to develop project products
• Software: This cost involves non-physical resources such as computer resources.  
• Hardware: this cost is associated with the physical computer resources.
• Contingency costs: These are costs that are added to the budget of a project to cater for particular risks.
• Facilities: This is the cost incurred for renting or utilising specialised equipment or service.             

1. What are the three main components of a cost estimate?

The chief constituents of a cost estimate include the development of standard units of measure, determining the quantity units for every component which means the real-time measurement process and determining the reasonable cost for every unit.  

1. What questions would you ask (and why) when presented with a cost estimate?

When offered with a cost estimate some of the questions that I will ask include:

How did you establish your standard unit of measure?

Which estimate component did you use in determining the number of units?

What is your cost determinant for each unit reasonable?

1. How should the contingency component be developed?

The contingency plan can be established by exhaustively analysing the risks facing a specific project. Therefore, when developing a contingency plan the project manager and the team ought to always adhere to the following principles:

Maintaining the project operations by closely focusing on what is to be realised by delivering a minimum level of service and operability.

Defining the project’s timeframe.

Identifying the triggering factors that are likely to cause the project to develop a contingency plan.

The contingency plan should be made simple and clear

Defining success that is what is required to ensure the projected return to usual business operation.

Question 2: Managing and reporting cost & schedule

1. A colleague of yours has asked you to consider adopting the Earned Value Management as part of a program of improving project governance and controls.

Provide an outline of the EVM concepts for senior management to review. Include your summary your analysis as to whether this concept would be beneficial for adopting and also what some of the challenges may be (e.g., advantages/disadvantages)

Earned value management (EVM) is a practise used by project managers to quantity the performance of the project as well as its progress in an objective way (Fleming, and Koppelman, 2016). Accordingly, EVM can collectively include the measurements of the three elements of the project management triangle that is costs, scope and time.

Components of a cost estimate

Therefore, earned value management can accurately project the performance problems of a project in a single integrated system. Indeed, this is a significant plus to project management (Batselier, and Vanhoucke, 2015). Therefore earned value management is a systematic project management tactic that is utilised to determine changes in projects with regard to the differences of work planned and work performed. Consequently, EVM is vital on the schedule and cost control which is important to predicting the project, hence EVM offers project managers with quantitative data for making project decisions.

Advantages of Earned Value Management

NASA research shows that the initial version of EVM was advanced by the Defence Department (DOD) to monitors its programs in the 1960s (Colin, and Vanhoucke, 2015, p. 3160). In the recent past, EVM has become a compulsory requirement for the administration of the United States whereby the Office of Management and Budget (OMB) is supporting the application of EVM as the most effective performance-oriented management system for controlling software projects (Davies, 2016). Similarly, EVM is gaining strides in different sectors such as education institutions, consulting corporations, and private industries.

Measures of Earned Value Management

The EVM comprises both derived data and primary components having individual data point value being built on the period when the EVM was undertaken on the project (Webb, 2017).

Primary data points

Budget At Completion (BAC): refers to the overall project costs.

Budgeted Cost for Work Scheduled (BCWS)/Planned Value (PV): It refers to the amount of time conveyed in Pounds of the work carried out alongside the schedule plan

PV = BAC* percentage of planned work.

Budgeted Cost for Work Performed (BCWP)/Earned Value (EV): It refers to the time amount expressed in Pounds on the real work undertaken

EV = BAC * percentage of actual work

Actual Cost of Work Performed (ACWP)/ Actual Coat (AC): It refers to the actual cost expressed in Pounds that is spent on a given task up to date.

Derived Datapoints

Derived data points  

• Cost forecasting:It refers to the Estimate At Completion (EAC)

The expected total costs needed to accomplish the work

EAC = BAC/CPI

= AC + ETC

= AC + ((BAC-EV) / CPI) this is for a typical scenario

= AC + (BAC –EV) for an atypical scenario where atypical assumes that the same variance is not likely to happen in future

Estimated to Complete (ETC): It refers to the projected expense needed to complete all the outstanding work.

ETC = EAC – AC

Questions to ask when presented with a cost estimate

= (BAC / CPI) – (EV/CPI)

= (BAC – EV) / CPI

• Variances:

Cost Variance (CV) illustrates the level of under or over budget

CV = EV – AC a negative sign means over budget while positive is under budget

Schedule Variances (SV) it shows the extent to which the project is lagging or is ahead of timeframe.

SV = EV – PV negative sign imply behind schedule and positive ahead of schedule

Variance At Completion (VAC): refers to the variance of the entire cost of the work and projected cost

VAC = BAC – EAC

• Performance indices

Cost performance index

CPI = EV /AC where < 1 means over and > 1 under budget

Schedule performance index

SPI = EV / PV where > 1 means ahead and < 1 means behind the schedule

1. Review and analyze the EVM charts for each of the four scenarios.

For each scenario list your assessment of

1. Cost (e.g. CV & CPI > = 0) &

Scenario 1: CPI = EV/AC

= 80/50 and 3700/3100  

= 1.6 and 1.193 respectively which means that the scenario is under budget.

Scenario 2:  CPI = EV/AC

= 50/80 and 3100/3700

0.625 and 0.838 meaning the scenario under budget

Scenario 3: CPI = EV/AC

= 15/10

= 1.5 meaning it is under budget

Scenario 4: CPI = EV/AC

1900/1350

= 1.407 meaning it is under budget

All the four scenarios have a positive cost variance (CV) thus, they are all under budget.  

1. Schedule (e.g. SV & SPI > = 0 )

Scenario 1

SV = EV – PV  

= 80-50 = 30-scenario 1 is ahead of schedule

SPI = EV/PV

= 80/30 = 2.67-which means it is ahead of schedule

Scenario 2

SV = EV – PV

50-80 = -30-sceraio 2 is behind the schedule

SPI = EV/PV

50/30 = 1.67- which means it is ahead of schedule    

Scenario 3

SV = EV – PV  

15-10 = 5-scenario 3 is ahead of schedule

SPI = EV/PV

15/30 = 0.5- which means it is ahead of schedule

Scenario 4

SV = EV – PV

15 -10 = 5- scenario 4 is ahead of schedule

SPI = EV/PV

15/30 = 0.5 – which means it is ahead of schedule

• Critical ratio determination and assessment.

Critical ratio is determined as a measure of the achieved progress against the planned progress of a project. Therefore, the critical ratio comprises a schedule performance index and cost performance index. Therefore, for SPI scenario 1 and 2 their tasks are ahead of schedule which 3 and 4 their task and behind schedule. In the case of CPI tasks for scenario 2 are behind schedule while tasks for scenario 1, 3 and 4 are ahead of the task.  

1. A brief dot point summary of your interpretation of the data for each scenario. For example:

What the data may indicate re: project performance

What are some possible factors/causes?

Any recommendations that you would make as the PM?

Based on the data for scenario 1, 3 and 4 it indicates data the project performance for these is effective because both the cost performance index and cost variance, schedule variance and schedule performance index are all under budget and ahead of schedule respectively. However, the performance of the scenario seems to have incurred problems since its schedule performance index is behind schedule.

Some of the possible factors that could be doing the project to lag could be introducing changes in the course of the project. As a project manager, I would recommend that the project should involve stakeholders in all project stages to help in identifying all the possible needs to be accomplished by the project. Involvement of stakeholders helps to reduce the probability of introducing change along the project course. Consequently, as such help to guarantee that the project is delivered in time, under approved budget and effectively meet customer requirements.      

Batselier, J. and Vanhoucke, M., 2015. Empirical evaluation of earned value management forecasting accuracy for time and cost. Journal of Construction Engineering and Management, 141(11), p.05015010.

Boardman, A.E., Greenberg, D.H., Vining, A.R. and Weimer, D.L., 2017. Cost-benefit analysis: concepts and practice. Cambridge University Press.

Colin, J. and Vanhoucke, M., 2015. A comparison of the performance of various project control methods using earned value management systems. Expert Systems with Applications, 42(6), pp.3159-3175.

Davies, R.H., 2016. Value management: Translating aspirations into performance. Routledge.

Fleming, Q.W. and Koppelman, J.M., 2016, December. Earned value project management. Project Management Institute.

Harrison, F. and Lock, D., 2017. Advanced project management: a structured approach. Routledge.

Hatamleh, M.T., Hiyassat, M., Sweis, G.J. and Sweis, R.J., 2018. Factors affecting the accuracy of cost estimate: case of Jordan. Engineering, Construction and Architectural Management, 25(1), pp.113-131.

Mahamid, I., 2015. Factors affecting cost estimate accuracy: Evidence from Palestinian construction projects. International Journal of Management Science and Engineering Management, 10(2), pp.117-125.

Trendowicz, A. and Jeffery, R., 2014. Software project effort estimation. Foundations and Best Practice Guidelines for Success, Constructive Cost Model–COCOMO pags, pp.277-293.

Webb, A., 2017. Using earned value: a project manager’s guide. Routledge.