6 | Planning Project Costs

Question 1

What are the 6 common cost estimate types?

Answer 1

1. Rough Order of
Magnitude (ROM)
estimate
2. Range of estimate 
3. Approximate estimate
4. Budgetary estimate
5. Definitive (or control or
detailed ) estimate
6. Phased (or rolling wave or
moving window) estimate

Question 2

Rough Order of
Magnitude (ROM)
estimate?

Answer 2

Developed without any detailed base data and often based on high level historical data, expert judgment, or a costing model. ROM is generally made early in the project.

Accuracy: -25 percent to +75 percent

Question 3

Range of estimate?

Answer 3

Often used as an alternative to ROM where the accuracy of the estimate is not well known. So, rather than $10M ±30 percent, the estimate can be stated as $7M to $13M.

Accuracy: ±35 percent

Question 4

Approximate estimate?

Answer 4

Based on more information than ROM estimates, but still lacks the detail required for high accuracy. Approximate estimate 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 percent

Question 5

Budgetary estimate?

Answer 5

Often used for appropriation purposes.

Accuracy: -10 percent to +25 percent

Question 6

Definitive (or control or

detailed ) estimate?

Answer 6

Based on detailed information about project work. Definitive estimate is developed by estimating the cost for each work package in the WBS.

Accuracy: -5 percent to +10 percent

Question 7

Phased (or rolling wave or

moving window) estimate?

Answer 7

Allows the use of ROM or approximate estimates for later parts of work, while work that must be done earlier in the project life cycle is estimated at the definitive level.

Accuracy: ±5 percent to ±15 percent in the window closest to present time; ±35 percent farther in the future

Question 8

Project Management Estimating Software?

Answer 8

Project management estimating software is any software application that assists in cost estimating while managing projects. This helps simplify the usage of cost estimating techniques and facilitates effective cost estimate alternatives.

Question 9

Vendor Bid Analysis?

Answer 9

Is a cost estimation technique based on the bids obtained from vendors. The proposed costing from vendors is considered while developing estimates for the project. Generally, a part of the project is outsourced to a vendor, so the costing for that outsourced part of the project can be sought from the vendors through their proposals, bids, or quotations. The costing can be indicative figures with less accuracy or very accurate detailed figures.

Question 10

Activity Cost Estimates?

Answer 10

Activity cost estimates provide estimates of costs necessary to finish project work. This includes costs on direct labor, materials, equipment, facilities, services, information technology, contingency reserves, and indirect costs. Cost estimates for each activity are added together to create an overall cost estimate for the work package.

Question 11

Basis of Estimates?

Answer 11

The basis of estimates involves supporting and additional information needed to justify cost estimates. Details can include the project scope, justification for the estimate, assumptions, constraints, confidence level on the estimate, and expected range of estimates.

Question 12

Analogous estimating advantage and disadvantage?

Answer 12

Advantage:
Ensures that no work is inadvertently omitted from work
estimates

Disadvantage:
Can be sometimes difficult for less experienced managers to apportion cost estimates.

Question 13

Bottom-up estimating advantage and disadvantage?

Answer 13

Advantage:
Accurate and gives lower level managers more responsibility.

Disadvantage:
Might be time consuming and can be used only after the WBS has been well-defined.

Question 14

Parametric estimating advantage and disadvantage?

Answer 14

Advantage:
Not time consuming.

Disadvantage:
Might be inaccurate, depending on
the integrity of the historical
information used.

Question 15

Cost Baseline?

Answer 15

Is a time-phased budget that will monitor and measure cost performance throughout the project life cycle. It is developed by adding the estimated costs of project
components by period. The cost baseline typically includes a budget contingency to accommodate the risk of incurring unidentifiable, but normally occurring costs, within the defined scope.

Question 16

Cost Aggregation?

Answer 16

Is a technique that is used to calculate the cost of a whole component by finding the aggregate cost of the constituent parts of the whole component. Activity costs are combined into work package costs, which are then aggregated up the WBS until a single project cost is
produced. Cost estimation uses the cost aggregation method. You can aggregate the cost of all project components to determine the total cost of the project.

Question 17

Contingency Allowances?

Answer 17

Are additional funds that are sometimes built into cost estimates to allow for unanticipated events. Planning contingency allowances for a project ensures that the project manager is able to manage unforeseen costs and expenditures.

Question 18

What are the 2 types of contingency allowances?

Answer 18

1. Contingency reserves

2. Management reserves

Question 19

Contingency reserves?

Answer 19

Contingency reserve is added at the activity level of
the project by the project manager, to account for risks that might affect an activity; for example, an additional $1,000 for renting a piece of equipment for one more week than scheduled.

Question 20

Management reserves?

Answer 20

Management reserve is added at the project level by the sponsor, to account for unknown-unknowns; for example, 5% would be added to the project for things that cannot be identified or envisioned.

Question 21

What are the 3 types of cost assignment methods?

Answer 21

1. 50/50 percent rule
2. Percentage complete rule
3. Weighted milestones

Question 22

Cost Assignment

Method | 50/50 percent rule?

Answer 22

50 percent credit is given when the activity begins and the remaining 50 percent credit is given when the work is completed.

For example, if an activity is budgeted to cost $3,000, the activity will receive $1,500 when the work begins and the other $1,500 when the work is complete. This same method can vary in the percentage values. You can also use a 25/75 or 75/25 rule, for instance. Some of the variants to the 50/50 percent rule include 20/80 and the 0/100 rule.

Question 23

Cost Assignment

Method | Percentage complete rule?

Answer 23

Completion percentages are estimated and assessed at specified reporting intervals. This is perhaps the most commonly used rule, and also generally considered to be the most accurate.

Question 24

Cost Assignment

Method | Weighted milestones?

Answer 24

The total work package value is divided up and assigned to milestone intervals within the work package. Each milestone carries a budgeted value. The value is earned when the milestone is achieved. This method works well for long work packages with multiple activities.

Question 25

Project Funding Requirements?

Answer 25

Project funding requirements help define the amount of funds required and when they are required.

Question 26

Historical Relationships?

Answer 26

Historical relationships involve relationships that are used in parametric or analogous estimates to develop simple or complex mathematical models for calculating project costs. The cost and accuracy of the parametric and analogous estimates will vary widely. They can be relied upon when the historical information used is accurate, parameters used are quantifiable, and when the models are scalable.

Question 27

Funding Limit Reconciliation?

Answer 27

Is a method of adjusting, spending, scheduling, and allocating resources in order to bring expenditures into alignment with budgetary constraints. Most budgets
are created on the premise of steady incoming and outgoing flows. Large, sporadic expenditures are
usually incompatible with organizational operations. Therefore, funding limits are often in place to regulate the outgoing capital flow and to protect against overspending.

Budgets must be reconciled with such limits. This will affect the scheduling of project work and possibly reshuffle WBS work packages entirely. The schedule, in turn, can affect the distribution or acquisition of resources.

Example: Set Funding Limits for Projects
Customers set funding limits for large projects based on internal considerations such as when their fiscal years begin and end and how healthy their cash flows are. A customer who wants to spread the costs of a project over two quarters may authorize $250,000 to be spent during Quarter 1 and $350,000 during Quarter 2. In response, the project manager will have to align the resources, schedules, and activities so that the project work does not exceed the limits on funding.