Tools and Techniques to Estimate Costs

Estimate Costs has nine tools and techniques used to derive estimates:

■ Expert judgment

■ Analogous estimating

■ Parametric estimating

■ Bottom-up estimating

■ Three-point estimate

■ Reserve analysis

■ Project management estimating software

■ Vendor bid analysis

I covered analogous estimating, parametric estimating, three-point estimate, and reserve analysis techniques in Chapter 4. These are also tools and techniques of the Estimate Activity Durations process to help determine schedule estimates. All of the information we discussed in Chapter 4 applies here as well, except you're using the tools and techniques to derive cost estimates. Three-point estimates are used in this process when you want to improve your estimates and account for risk and estimation uncertainty. And, in the case of reserve analysis, you're adding cost reserves (or contingencies) during this process, not schedule reserves. You could aggregate these cost contingencies and assign them to a schedule activity or a WBS work package level.

The project management estimating software tool can help you quickly determine estimates given different variables and alternatives. Some systems are quite sophisticated and use simulation and statistical techniques to determine estimates, while others are less complex. A simple spreadsheet program can do the trick much of the time. We'll look at the remaining tools and techniques next.

Exam spotlight

According to the PMBOK® Guide, if the Project Cost Management Knowledge Area includes predicting the potential financial performance of the product of the project, or if the project is a capital facilities project, you may also use additional tools and techniques in the process, such as return on investment, discounted cash flow, and payback analysis. We talked about these techniques in Chapter 2, "Creating the Project Charter."

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