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PMP ElementK Part 5: Cost Estimates
ElementK- PMP Certification: 4th Ed. Part 5, Cost Estimates, Baselines, & Reconcile Funding and Costs
57
Management
Professional
12/15/2011

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Term
Bottom-Up Estimating
Definition
Method for estimating cost for each work packet in WBS. Costs rolled up for progressively higher levels within WBS, plus add overhead costs, for total cost.
Term
Bottom-Up Estimating Advantages and Disadvantages
Definition
Most accurate & gives lower-level managers more responsibility, but requires the most detail, challenging, time, and costly.
Term
When use Bottom-Up Cost Estimating
Definition
Later on in project life cycle, when have more detail, need more accuracy required, and have time to invest in estimates. Use with work packages with highest level of uncertainty. Weigh need for accuracy of estimate with cost of doing the estimate.
Term
Parametric Estimating
Definition
Use project's characteristics in mathematical model. Statistical analysis of historical information using scope, duration, cost, & budget as parameters. Accuracy is as good as the data used in it.
Term
Analogous estimating advantages & disadvantages
Definition
Can ensure no work is inadvertently omitted from work estimates. Can sometimes be difficult for lower-level managers to apportion cost estimates.
Term
Parametric advantages & disadvantages
Definition
Is not time consuming. May be inaccurate, depending on the integrity of the historical information used.
Term
Accurately estimating costs important because...
Definition
...avoid overruns and unforeseen expenditures. Help create a strong cost baseline, which will be used to measure cost performance.
Term
Why developing Cost Estimates & Budgets important?
Definition
Deliver projects on time and on budget. Monitor progress against expectations. Meet expectations and deliver desired results.
Term
Estimate Costs Process
Definition
Projecting total expenditures necessary for the completion of the project. Provide a basis for making sound decisions about a project, and establish base lines against which success of project can be measured. Involves ID different cost alternatives, and may need different methods for different phases of project.
Term
Choosing a cost estimating method based on:
Definition
-S/W availability
-Team member experience
-Project life cycle phase
-Time constraints
-Project definition
-Personal preference
Term
Estimate Costs Inputs
Definition
Scope baseline
Project schedule
Human resource plan
Risk register
Enterprise environmental factors
Organizational process assets
Term
Estimate Costs input: Scope baseline
Definition
Includes approved detailed project scope statement along with assoc WBS & WBS dictionary.
Term
Project scope statement
Definition
contains relevant information, such as project requirements, constraints, assumptions, and deliverables.
Term
WBS
Definition
Provides the relationship b/n individual project components and deliverables
Term
WBS dictionary
Definition
WBS dict, along with statement of work, provide specific details of work activities and deliverables
Term
Estimate cost input: Project schedule
Definition
Includes start and finish dates for each activity, and details of resources along with the time needed for them to complete project work that will incur project cost.
Term
Estimate cost input: Human resource plan
Definition
includes components necessary for developing cost estimates such as the project staffing attributes, personnel rates, and its related rewards and recognitions.
Term
Estimate costs input: Risk register
Definition
Risks that have an impact on cost
Term
Estimate costs input: Enterprise environmental factors
Definition
External factors, such as market trends, unavoidable budget restructuring, or commercial financial analysis may affect cost estimation.
Term
Estimate costs input: Organizational process assets
Definition
Intra-organizational cost estimating policies or templates, team experience, or data from old projects.
Term
Tools & Techniques to Estimate Costs
Definition
Expert judgment
Analogous estimating
Parametric estimating
Bottom-up estimating
Three-point estimate
Reserve analysis
Cost of Quality (COQ)
Project management estimating software
Vendor bid analysis
Term
Estimate cost tech: Expert judgment
Definition
Variable such as labor costs, material costs, inflation, and risk factors can influence cost estimates. Expert judgment along with historical information will provide an insight on the information related to prior similar projects.
Term
Estimate costs technique: Analogous estimating
Definition
Uses the cost of a previous project with similar scope or activities to predict the cost of future activities.
Term
Estimate cost technique: Three-point estimate
Definition
Incorporates three types of estimates into a singular cost estimate scenario: most likely, optimistic, & pessimistic.
Term
Estimate cost technique: Reserve analysis
Definition
Contingency funds that are built into a cost estimate for as-yet unknown costs. Reserve analyses run the risk of inflating a cost estimate.
Term
Estimate cost technique: COQ
Definition
Cost of Quality: A technique that focuses on the cost of ensured quality. Peripheral costs include quality planning, control, and assurance.
Term
Tool: Project management estimating software
Definition
simplifies the cost estimation process, can accelerate estimation time, and is applicable to most projects, regardless of scale or scope.
Term
Tech: Vendor bid analysis
Definition
cost estimation based on the responsive bids obtained from vendors. results must often be revisited once contract approval has been gained.
Term
Outputs
Definition
Activity cost estimates
Basis of estimates
Project document updates
Term
Output: Activity cost estimates
Definition
Provide estimates on probably costs necessary to finish project work. This includes costs on direct labor, materials, equipment, facilities, services, information technnology, contingency reserves, or indirect costs, if any.
Term
Output: Basis of estimates
Definition
Supporting or additional information needed to justify the cost estimates. Details can include project scope, justification for the estimate, range of estimates, the assumptions, constrains, confidence level on the estimate, and expected range of estimates.
Term
Output: Project document updates
Definition
may include: the risk register, HR plan, activity list, project schedule, and training plans.
Term
Type or Level of Accuracy
Definition
Rough Order of Magnitude (ROM)
Budgetary
Range of estimate
Approximate estimate
Definitive estimate (or "control" or "detailed")
Phased estimate (or "rolling wave" or "moving window")
Term
Type of Accuracy: ROM
Definition
Rough Order of Magnitude: Generally made early in the project. Developed without basis of detailed data and often based on v high level historical data, expert judgment, or a costing model. Accuracy: -50% to +100%.
Term
Type of Accuracy: Budgetary
Definition
Often used for appropriation purposes. Accuracy: -10 to +25%
Term
Type of Accuracy: Range of estimate
Definition
Often used as an alternative to ROM where the accuracy of the estimate is not well known. Rather than $10M +-30%, the estimate could be stated as $7.5M to $13M. Accuracy: +-35%.
Term
Type of Accuracy: Approximate estimate
Definition
Based on more information than ROM estimates, but still lacks the detail required for high accuracy. May be possible if the project is similar to previous ones with reliable historical data for costing or where a proven costing model is applicable. Accuracy: +-15%.
Term
Definitive estimate
Definition
(or "control" or "detailed")
Based on detailed information about the project work. Developed by estimating the cost for each work package in the WBS. Accuracy: -5% to +10%.
Term
Type of Accuracy: Phased estimate
Definition
or "rolling wave" or "moving window"
Allows the use of ROM or approx estimates for some later parts of the work, while work that must be done earlier in the project life cycle is estimated at the definitive level. Accuracy: +-5% to +-15% in the window closest to present time; +-34% farther in the future.
Term
Analogous Estimating
Definition
Top-down estimating.
Use experience, historical info, and expert judgment.
Generated for top levels of WBS and aportioned across and then down levels of WBS.
Term
Use Analogous estimating when...
Definition
-limited amt of detailed info about the project is available
-a similar project for comparison can be employed
-requisite expertise is provided
Term
How to Estimate Costs Guidelines
Definition
-Involvement
-Information
-Technique
-Options
-Units of measure
-Risks
-Accounts
-Cost estimates
Term
Guideline: Involvement
Definition
Involve the work package owners
Term
Guideline: Information
Definition
Gather any relevant input information that may help you prepare the estimates, such as estimating publications and resource rates.
Term
Guideline: Technique
Definition
Determine the estimate technique to be used.
Term
Guideline: Options
Definition
Look for alternative costing options
Term
Guideline: Units of Measure
Definition
Determine the units of measure that will be used.
Term
Guideline: Risks
Definition
Consider possible risks that may impact cost
Term
Guideline: Accounts
Definition
Ensure that all cost estimates are assigned to the appropriate account, according to the chart of accounts.
Term
Guideline: Accounts
Definition
Ensure that all cost estimates are assigned to the appropriate account, according to the chart of accounts.
Term
Guideline: Cost estimates
Definition
Make sure your cost estimates include key elements.
Term
Cost Baseline
Definition
Time-phased budget that will measure that will monitor cost performance throughout the project lift cycle.
-Developed by adding estimated costs of cost components by period.
-Typically includes budget contingency to accommodate risk of unexpected costs hat may come up.
Term
Determine budget process
Definition
Allocating overall cost estimates to individual activities across project life cycle.
Purpose is to develop a budget and baseline to measure project's cost performance.
Term
Cost budgeting inputs
Definition
-Activity cost estimates
-Basis of estimates
-Scope baseline
-Project Schedule
-Resource calendars
-Contracts
-Organizational process assets
Term
Budget Input: Activity cost estimates
Definition
Cost estimates for each activity are added together to create an overall cost estimate for the work package.
Term
Budget Input: Basis of estimates
Definition
Supporting information required to justify the activity cost estimates should be specified. Assumptions made to the addition or exclusion of indirect project costs made to the project budget are to be mentioned in the basis of estimates.
Term
Budget Input: Basis of estimates
Definition
Supporting information required to justify the activity cost estimates should be specified. Assumptions made to the addition or exclusion of indirect project costs made to the project budget are to be mentioned in the basis of estimates.
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