Cost-estimate approaches: An overview

- Many people believe estimating costs is a matter of collecting all costs and simply adding them up together. That's not really what cost estimating is about. It would also give you a very inaccurate result. So, how do cost estimators evaluate costs? Well, there are a few different techniques. Actually, there are five. Let's get an overview of each one. One of the most common and popular approaches with senior management is the top-down approach. If you ever heard your boss is saying something like, this project will cost approximately X number of dollars, chances are, this came from a top-down estimate. Simply, analysts will first break down the budget into its major components. Then, they'll make comparisons to other similar projects. They'll adjust for differences, and then come to an overall rough cost estimate. It's the quickest, but it's also the most inaccurate approach. Analogous estimating is similar to top-down since it uses past projects to estimate project time and cost. You just take a bit more time to go into a bit more detail than the top-down approach. When you think analogous, think analogy. You're comparing two things that aren't exactly the same, but you still get some helpful information from the comparison. It's especially helpful when there's a lack of information. But it can only be used when you have access to a database of similar projects or items. Parametric estimating uses specific parameters to identify costs. It's one of the most accurate techniques to determine duration and cost, and it's also fairly easy to use and implement. All you have to do is to define specifications or the parameters for the components for the effort you're working on. Many companies publish specifications you can research and use to define the hours and costs of the required work. For example, a city asks a paving company to provide a quote to resurface a section of a four-lane avenue. An analyst finds published data from a variety of cities showing it costs an average of $100,000 per kilometer, and then quotes $400,000 to the city. So, four lanes, $100,000 each, you get $400,000. Three point estimation is a way to calculate a realistic cost estimate, applying three different scenarios. Typically, panelists will create optimistic, realistic, and pessimistic scenarios, layering a cost analysis to each one. So, say you ask a painter to repaint a room in your house. If all goes well, they tell you they can do it in say maybe three hours. If they have to make some repairs, it may take eight hours. But they believe it can be done in five hours. So, what's happening here is the painter did a three point cost estimate. Three hours is the optimistic estimate. Five hours is the realistic estimate. And eight hours is the pessimistic estimate. Average them all together, and you get 5.3 hours, and that's your quote. Build-up estimating is the most accurate of all approaches. It arrives at an overall cost by approximating cost values for smaller components. The sum of these values gives you the overall cost estimate. Typically, the project work is broken down into its smallest components. Then, the analyst will assign a duration and cost estimate to each component. This level of detail accounts for almost all of the elements in the project or purchase. So, now that you're aware of the various estimating approaches, let's go through each one in more depth.