It is very important to choose the right method of cost estimation for any project. These cost estimation methods are very helpful for smooth running of the project.
In this article I have described 15 cost estimation methods.
Let’s start!
Table of Contents
1. Analogous Estimating:
This type of cost estimation method utilized old data of a similar project. Various other things such as government policies, inflation and taxes are considered to calculate detailed estimation.
2. Bottom-Up Estimating:
Bottom-up estimating is a way to estimate the total cost and time of a project by estimating the cost and time of each small part of the project and then adding them up. This takes more time, but it’s more accurate because you think about all the little details.
This type of estimation is less risky because of the higher accuracy. This type of cost estimating method is used for small projects…
3. Parametric Estimating:
Parametric estimating is a methodology for estimating the time, cost, and resources required for project completion, based on statistical and accuracy-based techniques.
This approach leverages historical and statistical data to establish a relationship between variables and to generate estimations that are reliable and precise. By employing this method, project managers can accurately predict the project’s outcomes and identify potential risks and opportunities.
4. Three-Point Estimating:
The three-point estimation technique is a way to predict what might happen in the future, even when you don’t have much information. It creates an estimate of the probability of different outcomes, which could be represented by a normal or a triangular distribution. It’s often used in management and information systems.
5. Reserve Analysis:
Reserve analysis is a cost estimation method in project management that involves creating a contingency reserve to cover unforeseen expenses and risks.
There are two types of reserves: contingency reserve for known unknowns and management reserve for unknown unknowns. Reserve analysis involves identifying and evaluating risks, calculating the reserves, and monitoring them throughout the project to ensure that the project stays within budget. This technique helps to ensure that the project is completed on time and within budget, even when unexpected risks and events occur.
6. Expert Judgment:
Expert judgment is a commonly used technique in cost estimation for complex projects or industries where historical data is not readily available. It involves seeking input from experts with specialized knowledge or training.
However, it’s important to make sure that the experts are qualified and objective. To ensure accurate estimates, organizations may use other methods in combination with expert judgment, such as benchmarking or sensitivity analysis.
7. Vendor Bid Analysis:
Vendor bid cost estimation is a way of figuring out how much a project will cost by asking different vendors for price estimates. The project manager or estimator asks vendors to provide estimates for the materials, equipment, and labor needed to complete the project. This helps the manager or estimator to compare prices and choose the most affordable option. However, it’s important to note that these estimates may not always be accurate and prices may change.
8. Cost of Quality:
The Cost of Quality (COQ) is a method used to assess a company’s expenses related to maintaining product quality and preventing failures, as well as the costs incurred due to internal and external failures. COQ is made up of two factors: the Cost of Good Quality (COGQ) and the Cost of Poor Quality (COPQ). COGQ refers to the expenses related to preventing failures and maintaining quality, while COPQ relates to the costs incurred due to both internal and external failures. The COQ takes into account all costs related to product quality, including preventive measures, process controls, and failure-related expenses.
9. Delphi Technique:
The Delphi Technique is a decision-making method commonly used for complex issues that involves a group of experts sharing their individual opinions with a facilitator. The facilitator compiles a summary report of each expert’s perspective, which is then reviewed by the group. The experts provide updated predictions to the facilitator, who compiles a new report. This process continues until a consensus or agreement is reached among the participants.
10. Monte Carlo Simulation:
Monte Carlo Simulation is a powerful technique that is utilized to estimate the range of potential outcomes for a given project. This method involves generating a set of simulations with different input parameters and probability distributions to create a range of possible results. Monte Carlo Simulation is particularly helpful when dealing with complex systems and uncertainty. It is commonly used in fields such as finance, engineering, and project management to make informed decisions, evaluate risk, and improve the accuracy of cost and time estimates.
11. Life Cycle Costing:
Life cycle costing is a comprehensive method of estimating the total cost of a product or system over its entire life cycle, including acquisition, operation, maintenance, and disposal costs. Common methods include traditional life cycle costing, activity-based costing, environmental life cycle costing, discounted cash flow analysis, and total cost of ownership.
By taking a comprehensive approach to cost estimation, businesses can make informed decisions about product design, pricing, and resource allocation, leading to improved profitability and sustainability.
12. Historical Costing:
Historical costing is a method of cost estimation that involves determining the cost of an asset, product, or service based on its actual past cost. Common techniques include actual costing, normal costing, standard costing, absorption costing, and job costing. Historical costing can provide a baseline for comparison and decision-making, but it may not reflect current or future cost trends and may require other estimation methods for accuracy.
13. Sensitivity Analysis:
Sensitivity analysis is a cost estimation method that involves varying inputs or assumptions in a cost model to determine their impact on the overall cost estimate. This helps to identify the key cost drivers and determine the range of possible costs under different scenarios, and can help to reduce uncertainty in the estimate.
14. Cost Indexing:
Cost indexing is a method used to adjust historical costs for inflation and changes in the cost of materials and labor. This is done by using an index, such as the Consumer Price Index (CPI), to calculate a cost index factor. The factor is then used to adjust the historical cost to its current cost. This method is useful for estimating the cost of a project at different points in time and for comparing costs of similar projects constructed at different times.
15. Group Decision-Making Techniques:
It is not a direct estimation technique. In this method, various people and stakeholders give their opinion to arrive at a consensus estimate.