Project management question (project costing approaches) It is important to reme
ID: 395310 • Letter: P
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Project management question (project costing approaches)
It is important to remember that cost is one of those inter-related variables surrounding any Project ie time, outcome and cost, IF you change or constrain one, there will be a flow on effect to the others, roject costing is a critical issue in the project lifecycle. - Project costs need to be estimated early on as part of any preliminary business case Guick 'ball park' methods for estimating are useful to have for this purpose The concept of analogous costing is useful for this, otherwise, considerable time and effort is devoted to toward detailed costing for very little benefit Many of my colleagues with considerable experience in the construction sector would argue that effective quoting is a critical success factor for anyone operating in that industry, Effective and efficient quoting along with cost management is important for both the larger and small firms alikie - Once a level of commitment is made toward a project, in most cases, a detailed estimate of costs will be required. - Beyond this the management of costs is critical - how many projects are your aware of that don' t come in on budget? Almost all? -Project costs may also have to be reported in a number of was. For example, there may be a focus on expenditure line items e 9. what is the overall salary cost for a project? There may also be a requirement to report the costs of the various project stages Largerrojects in particular require staging and identifying project "deliverables which then form the basis for project paymen Finally, there should be an overall review of the project management How did the project perform in terms of cost, time and output requirements? Question - Do you have any observations on the above issues? Which costing / estimating approaches are more suited to particular situations?Explanation / Answer
Project costing is one of the most critical aspects of a project's success in that estimating the cost requires passing several uncertainties. These uncertainties will stem out of the factors such as less experience with similar projects, very long planning horizon, long duration, and poor availability of quality staffs. Various approaches are available to estimate the cost of a project although each approach is applicable to some specific contexts.
For example, the cost can be estimated using Expert Judgement method. This is used when experts have high experience of similar projects. Generally, this method is applied to particular components of a project and not for the entire project because there is a high chance of bias associated. Another method is the Analogous Estimating i.e. estimating based on the historical measures of earlier similar projects. This is generally conducted at the beginning stage for getting a 'ballpark' estimate of cost.
More advanced methods of cost estimation include Parametric Estimation, Reserve Estimation, Bottom-up Estimation and so on. Parametric estimation still uses historical data but not the cost data. Instead, it uses data for the parameters consumed (e.g. square footage for construction projects). Then using statistical models, the cost is predicted. The Reserve Estimation is used to find how much contingency reserve could be allocated to a project. This funding is used to account for cost uncertainty. A project requiring a very high level of accuracy (higher than the other methods) is generally a candidate for Bottom-up Estimation. In this case, the estimates of individual work packages are summarized or "rolled up" to determine an overall cost estimate for the project.
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