Lecture 1

Question 1

Explain and define the concept of project cost?

Answer 1

Cost estimation is the estimation of cost.
Estimation is the process of creating the guess of what the value of a given quantity is

Few definitions:
* Estimate cost is the process of developing an approximation of the monetary resources needed to complete project activites.
* Cost estimating is the predictive process used to quantify, cost, and price the resources required by the scope of an investment option, activity, or project.
* A cost estimate is the determination of the likely future cost of a product or service based on an analysis of data.
* A cost estimate is the approximation of the cost of a program, project, or operation. The cost estimate is the product of the cost estimating process.
* An approximation of the probable cost of a product, program, or project, computed on the basis of available information.

Question 2

How does the accuracy of project cost estimation affect the profitability of a project?

Answer 2

• Avoding cost overruns: if the estimated costs are too low, the project may experience cost overruns. This means that the actual expenses exceed what was initially planned, potentially eating into profit.
• Profit: the accuracy of cost estimation directlly impacts profit margins. If costs are underestimated, the profit margins shrinks, and the company may end up making less money than anticipated.
• Client satisfaction: accurate cost estimations contribute to meeting client expectations. If costs are well estimated, it is more likely that the project will be completed within the agreed-upon budget, leading to satisfied clients.
• Decision-making: can make wrong decision based on weakly calculated cost estimates.

Question 3

Explain the relationship between cost estimation and project management.

Answer 3

**Cost estimation is a sub-discipline of project management. **

Project management consist of ten knowledge areas which are:
1. Procurement
2. Quality
3. Risk
4. Human resource management
5. Integration
6. Communication
7. Scope
8. Time
9. Cost

As cost is one of the knowledge areas, cost estimation is therefore linked to project management.

Another way to view project management is to refer to the five process groups, which constitute the lice cycle of a project. Cost estimation relates to several of these process groups.
1. Scoping - provides input to cost estimation. We need to know what exactly we are trying to find the cost of.
2. Planning - cost estimation occurs here.
3. Launching
4. Monitoring and controlling - cost estimation used as input. The actual cost is compared to the cost estimate.
5. Closing - cost overruns can be calculated. Find the difference between the cost estimate and the actual cost.

Question 4

Explain the project budgeting process.

Answer 4

Project budgeting consist of four sequential phases:
1. Resource planning: determining what physical resources (people, equipment, materials) and what quantities of each resource should be used to perform project activites.
2. Cost estimating: developing an approximation of the costs of the resources needed to complete project activites.
3. Cost budgeting: relating cost estimates to the schedule and producing time-phased cost and cash flow projections.
4. Cost control: controlling cost in relation to schedule and changes to the project budget.

Question 5

What is the difference between budgeting and cost estimation?

Answer 5

Budgeting is not the same as cost estimation, although these concepts are closely related and frequently confused with each other.

Project budgeting is one of many activities within project management. Cost estimation, on the other hand, is an activity within project budgeting.

Cost estimation is not equivalent with budgeting. Budgeting can either refer to project budgeting or cost budgeting. In other words, cost estimation is a part of project budgeting and a seperate and preceeding process to cost budgeting.