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Cost Estimates
What are cost estimates in a project? Well in project management you may need to estimate the cost of a work package, an activity or the project as a whole, and knowing the different types of cost estimates that you can make – from easy and inaccurate to more difficult and more accurate – will help you budget for your project at the appropriate times and the appropriate levels.
What do we mean by this? Well there are five types of cost estimates that you will come across in project management and in the PMP exam.
The first one is your order of magnitude estimate, also called the rough order of magnitude or ROM. The preliminary estimate is next, the budget estimate is after that, the definitive estimate gets a little bit more definitive as the name says, and finally we have the final estimate which is where we end up with the final cost for our project.
Let’s delve into them.
The rough Order of Magnitude estimate. If we had $100,000 where we thought it might be, we can’t just say it’s a hundred thousand dollars and be done with it because ultimately things change and adjust as the project goes on – sometimes we need to get a little bit more definitive as we get more information in our project. So our range is minus 25% to plus 75%. We would take 25 percent off that (so $75,000) but also add 75 percent (so $175,000) and that is our range. This is a ballpark estimate used to provide a starting estimate and move forward.
Next we have the Preliminary estimate, where we’ve got minus fifteen and plus fifty percent. So we might have $85,000, 100,000 in the middle and $150,000 on the top end. As you can see we might have a bit more information and we are honing it down, so it’s more of a top-down estimation approach. We’re just using the the high-level packages and looking at what they might cost and we’re also using Analogous estimation techniques which means we’re looking for similar projects or similar activities and what they cost, and we’re just sort of using that as our guide to get the costings for our project at this early stage.
Next we have the Budget estimate which is minus 10 percent to plus 25 percent, so we might have $90,000, $100,000 in the middle and $125,000 on the top end. This is also a top-down estimation approach, where we’re still looking at the high level approach and also using that Analogous technique, with similar projects and similar activities to get this budget estimate which is still fairly broad.
Next is the Definitive estimate, where we really start to delve deeper into it. We’re looking at minus 5 percent to plus 10 percent. So potentially $95,000, $100,000 in the middle and $110,000 on the top end for our estimate. The Definitive estimate is more of a bottom-up estimation technique. In other words for our work package we’ve got our feature and all the different activities or work packages that are needed to deliver that feature, and now we are looking at the cost for each of these different activities. We’re really delving a lot more into the detail for those particular activities and using that to budget for the overall feature, adding them all together.
Lastly we have the final estimate in which there is ZERO leeway. It’s finally ended up and it is actually a hundred thousand dollars for this particular example, now there’s no leeway left or no change in the budget then we know that potentially the project has been delivered, because there’s no chance for it to change. Or we might be using contracts where something needs to be locked in at a certain price and that’s what’s going to happen – that’s the work that is going to be delivered for that particular price.
And those are the different estimates that you’ll see in your project.
– David McLachlan