Cost Estimation Techniques
The estimation of project costs includes the application of numerous techniques that are applied individually or in combination. Some of the important techniques are mentioned below:
Analogous Cost Estimation: This method is also known as Historical Data Analysis. The estimates are based on the real cost of earlier analogous projects. This estimation practice is generally applied to individual project segments, and also in combination with the other cost estimation techniques.
Parametric Cost Estimation: It is a valuable process that uses unit costs to determine the total estimated cost. The sources of information regarding the unit costs are previous projects, statistical data, and published sources. The accuracy of this process may be more reliable, which is dependent upon the accuracy of the data being used for estimation. The method may be used independently, and also in combination with some other cost estimating practices.
Bottom up Cost Estimation: This technique supports the belief that particular activity costs or the cost of work package is extremely important. The cost of small project activities are determined precisely, and then aggregated to produce the total project estimated cost.
Top down Cost Estimation: This process is unlike the bottom up cost estimation technique, and believes that the budget of project is established at the initial stages of the project. This technique uses the work breakdown structure, or WBS to produce the cost estimates.
Reserve Analysis: The method deals with unforeseen circumstances in a project environment, which necessitates the establishment of reserves for the project activities. These reserves are also called contingency allowances that are utilized for reducing risks, and countering threats. Characteristics of a cost estimating system are to ensure that the cost estimates are accurate. If the funds are not adequate, then the reserves are used for the project activities.