What are the methods of estimating project costs?

MANAGING COSTS

An important part of a project manager’s job is managing money. All types of organizations must manage their money well in order to fulfill their mission, including not-for-profit and government organizations. The tools and methods used to manage money on a project vary depending on the phase and complexity of the project. This chapter describes the methods used to estimate the cost of a project, create a budget, and manage the cost of activities while the project is being executed.

During the conceptual phase when project selection occurs, economic factors are an important consideration when choosing between competing projects. To compare the simple paybacks or internal rates of return between projects, an estimate of the cost of each project is made. The estimates must be accurate enough so that the comparisons are meaningful, but the amount of time and resources used to make the estimates should be appropriate to the size and complexity of the project.

Projects seldom go according to plan in every detail. It is necessary for the project manager to be able to identify when costs are varying from the budget and to manage those variations.

DISCUSSION REPLIES: See attached Word doc with two student discussion posts create a reply for both students.

Discussion Points:

What are the methods of estimating project costs? Provide an example.

What is Earned Value and why is it important in a Project?

Requirements: couple paragraphs

Create two replies to the two following students:

Student 1: Worku Kassa

Hello Class/Professor.

There are different project cost estimating techniques available. They are, analogous, Parametric, and bottom-up estimating techniques. Each technique has its own characteristics and procedures. We can take the analogous estimating methods that seek the help of experts who have experience in similar projects or use your own historical data. example John’s move. If you have access to relevant you can use analogous estimating techniques which can show precedents that help define what your future costs will be in the early stages of the project. Another cost estimation approach, statistical modeling, or parametric estimating analyzes historical data on major cost drivers to calculate project costs if the length or other factors change. However, bottom-up estimation estimates individual jobs and adds them together to calculate project costs. This cost-estimating approach is more thorough than parametric estimating and utilized in complicated projects with numerous variables like software development and construction.

Earned Value is a project Key Performance Indicator that represents a quantified value of the work accomplished to date. Earned value is calculated as the sum of the budget for all completed work on a project or portion of a project. This includes the budget for all work, that is 100% complete work, plus partial budgets for work in progress. The amount of earned value calculated for work-in-progress is based on a pre-assigned calculation rule called an Earned value Method (or Earned Value Technique). Earned Value Methods are used to provide objective measures of progress and avoid subjective estimates of completion that can introduce bias into the calculations.

Why earned value is important? This approach helps you spot trends, forecast issues, brainstorm solutions, and improve performance. Earned value management compares project performance to project scope management plan baselines. Earned Value is crucial in a project because it gives a more accurate financial evaluation than budget and actual comparisons and can enhance schedule progress by measuring job completion.

https://www.pinnaclemanagement.com/blog/earned-value-management-an-introduction

https://www.indeed.com/career-advice/career-development/earned-value-management

student 2: Spencer Wagner

Good evening everyone. Some methods of estimating project costs are Analogous Estimates, Parametric Estimates, Bottom-Up Estimate, and Activity-Based Estimates. Analogous Estimates uses a prior project with similar requirements to estimate the cost of the new project. If developing a website for a local restaurant cost 1000 dollars than a website for another restaurant would likely cost the same. Parametric Estimates combine the activities of the project to estimate the cost of the project. Each part of the project is assigned an estimate based on prior or known costs and these are all added up to get the total cost of the project. One example would be assigning an employee to set up a computer lab at a local school. If it takes a single employee twenty minutes to set up a computer and there are three computers that would be an hour’s worth of work. If the employee makes twenty dollars an hour than the project could be estimated to cost 22 dollars (ten percent for overhead). Bottom-up estimates, provide a cost of the project “from the bottom up”. This includes determining the cost of each product, materials, and labor and adding them up to find the total cost of the project. This is one of the most accurate methods for estimating a project. In the last example it would be similar to adding the cost of the materials to the cost of the labor to install a new computer in a computer lab. This would be the cost of the computer in addition to the software being loaded to the computer. Lastly Activity-Based Estimates are determined by the activity of the project. For example, the cost associated with building a website for a business may be different than building a website for a nonprofit organization as the website designer can “write off” a portion of the website design for the nonprofit organization as a donation. Earned value determines the financial performance of the project and reports it to the stakeholders. Earned value is important during a project because it can be used to keep the project management team, stakeholders, and customers informed on the status of the project such as being on track, over budget, or behind schedule.

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