Cost Management Frameworks and Estimation Methods, Explained

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Cost Management Frameworks and Estimation Methods

Project Management · Chapter 4: Financial Planning and Cost ManagementSection 4.1 · lesson 25 of 7311 min · free with a free account

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In this lesson

Four cost management processes and the methods for estimating project cost.

  • Describe the four cost management processes and the rules a cost management plan sets
  • Distinguish an estimate from a budget and a price, and precision from accuracy
  • Calculate analogous, parametric, and bottom-up estimates and match each method to a project stage
  • Explain why estimates carry a range, an estimate class, and a basis of estimate

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Transcript

Everything said in the video, section by section (1,447 words). Read along, or search it.

Opening Question

A Rough Gym Lighting Figure Becomes a Budget

At a facilities committee meeting, Marcus Bell asks Priya Nair, the cost estimator, a quick question: roughly what would new gym lighting cost? With no site visit and no design, Priya compares it with a past job and says: around $90,000. The minutes record the number, but not her caveat. A month later, the parents' newsletter calls it the project budget. Then the design is done, and Priya's detailed estimate comes to $118,000, because the high ceiling needs special access equipment and the electrical panel needs an upgrade. So was her first number a mistake? And how should a cost be estimated and reported, so this doesn't happen again?

Four Processes

Plan, Estimate, Budget, and Control Costs

Project cost management is the set of processes that plan, predict, approve and watch the money a project uses. There are four. Plan cost management sets the rules for estimating, budgeting and controlling cost, and writes them in a document. Estimate costs predicts the cost of the work. Determine budget combines the estimates into an approved, time-phased amount. Control costs compares actual spending with that budget, and manages changes. The order matters. An estimate made before the rules exist can't be judged, and a budget never built from documented estimates can't be controlled.

Cost Management Plan

Six Headings and Precision Versus Accuracy

The cost management plan states the rules for one project, under six headings. Units of measure: dollars for money, hours or days for labor. Level of precision: how finely figures are rounded, say to the nearest hundred dollars. Level of accuracy: how far an estimate may sit from the final cost and still be acceptable, as a range. Control thresholds: the variance levels at which someone must be told, or must act. Reporting formats: what cost reports look like, and how often. And measurement rules, so two people reading the same report reach the same figure. Precision and accuracy differ. Sixty-one thousand four hundred thirty-seven dollars is very precise. At the concept stage, it may not be accurate within thirty percent, and its false exactness misleads.

Estimate Inputs

WBS, Resources, Schedule, and Risk Register

An estimate is only as sound as its inputs. The WBS and its dictionary list every work package to price, so nothing is counted twice, or left out. The resource plan says which people, materials and equipment each package needs. The schedule says how long, and when, which drives labor hours, hire periods and price changes. And the risk register shows where an estimate needs more allowance, or a wider range. A weak input passes straight into the estimate. A WBS with vague packages makes a precise bottom-up estimate impossible.

Key Terms

Estimate, Budget, and Price Differ

An estimate is a prediction of what work will cost, made before it's done, so it's always uncertain. It's properly a figure with a range. Two nearby words differ. A budget is the approved, time-phased amount assigned to the project, including reserves: a commitment of funds, not a prediction. A price is what a seller charges. It starts from cost, but adds profit and any allowance for risk. So one project can have an estimate, a larger budget with reserves, and a still larger price with the seller's margin. How to report an estimate is disputed. One side says decision-makers need a single figure, labeled with its stage. The other says a lone figure invites anchoring: people hold on to the first number they hear. Anchoring is well supported in general research. Whether ranges change project decisions is less settled. How much uncertainty to put on the reader is a question of values.

Estimating Techniques

Analogous, Parametric, and Bottom-Up

Three estimating techniques differ in how much they lean on history and how much on detail. Analogous estimating scales the known cost of a similar past project by a size factor. It's fast and needs little information, but it's only as good as the comparison. Parametric estimating multiplies a unit rate, a cost per measurable unit, by the quantity. Quick and repeatable, if the rate suits the work; a rate from other work gives a confident wrong answer. Bottom-up estimating prices every work package and adds them up. It's the most accurate when the work is well defined, but takes the most effort, and needs the WBS first.

Worked Example

Relighting a 5,000 Square Foot Hall

Here's one smaller job, estimated three ways: relighting the community sports hall, 5,000 square feet. Analogous: a similar hall of 4,000 square feet cost $48,000. The size factor is 5,000 over 4,000, or 1.25. The estimate: $60,000. Parametric: a suitable rate for this lighting work is $11 per square foot installed. Times 5,000: $55,000. Bottom-up: design 4,500, fixtures 24,000, wiring materials 6,500, labor 14,000, lift hire 2,500, disposal and testing 3,000. Total: $54,500. The analogous figure is $5,500 higher, about 10 percent of the bottom-up total, because the past hall had features this one doesn't need. Parametric and bottom-up agree closely. That raises confidence, but doesn't prove either right, since both could share a wrong assumption. So estimators often start with a quick method, then compare it with bottom-up once the work is defined, as a reasonableness check.

Quick Check

Scaling a Past Library Wing

Quick check. A past library wing of 3,000 square feet cost $210,000. The new wing will be 4,500 square feet. What's the analogous estimate? Pause, and decide. Three hundred fifteen thousand. The size factor is forty-five hundred over three thousand, or one and a half, and one and a half times two hundred ten thousand is three hundred fifteen thousand. And it's only as good as the comparison: if the old wing had features the new one lacks, the estimate runs high.

Expert Estimating

Structured Judgment and the Delphi Technique

A fourth approach is expert estimating: the structured judgment of people who've done similar work. It's the usual choice when the work is new, with no history and no unit rate. Its weakness is bias: overconfidence, the loudest voice, or repeating the first figure heard. The Delphi technique counters this with anonymous rounds that converge, so no one's status shapes the result. Expert judgment is strongest when its reasoning is recorded, because an unexplained figure can't be checked. Each method rests on different evidence, so it suits a different stage. Analogous at concept, parametric from feasibility, bottom-up in detailed planning, and expert at any stage, especially for novel work.

Estimate Classes

Accuracy Depends on Definition

An estimate class labels an estimate by how mature the project definition was when it was made. Many industries use about five, from a rough concept figure to one built from complete detail. The central idea: accuracy depends on definition. The less that's designed, the wider the plausible range, and it narrows as definition improves. The exact percentages differ by industry and standard, so treat any chart of them as illustrative. Each step toward a narrow range costs real design work, so at each gate, the organization decides whether more certainty is worth the effort. A concept-stage figure can be off by a wide margin without anyone having made a mistake.

Basis of Estimate

A Record Someone Else Could Reproduce

Every estimate should come with a basis of estimate: the record of how it was produced, so someone else could reproduce it. It states the scope covered and excluded, the method, the assumptions, the constraints, the range and confidence, and the inputs and sources. For the sports hall: fixtures, wiring, controls and disposal for 5,000 square feet; bottom-up from six packages; ceiling access by a hired lift; no electrical panel replacement; plus or minus ten percent. If the panel later needs replacing, the record shows exactly which assumption failed. Without it, an estimate is an unexplained number, and the knowledge leaves with the estimator.

Quick Check

Floor Area and a Tested Unit Rate

Quick check. Early in feasibility work, a team has only the planned floor area, and a well-tested cost per square foot for exactly this kind of building. Which technique fits best? Pause, and decide. Parametric. A suitable unit rate times a measured quantity is quick and repeatable, and here the rate matches the work. Bottom-up needs a WBS that doesn't exist yet, and expert judgment is for work with no history or rate.

Back to the Gym

The Number Needed Its Range

Back to the gym lighting. The detailed figure, $118,000, is $28,000 above the early one: about 31 percent higher. But at the concept stage, an illustrative range might run from 30 percent below to 50 percent above: $63,000 to $135,000. The detailed figure sits inside it. So the number wasn't a mistake. Reporting it without its range and class was. From now on, Priya presents every figure as a range, with its class and a one-page basis of estimate. It's less tidy, and some members are impatient, but expectations now match the stage.

Key Takeaways

Processes, Methods, Classes, and Basis

To recap. Cost management runs through four processes, and the plan's rules come first. An estimate is a prediction with a range, distinct from a budget and a price. Analogous, parametric, bottom-up and expert methods suit different stages, and accuracy grows with definition. And every figure needs a basis of estimate, so it can be checked and reproduced.

About Project Management at UPI Study

Project Management (Business 230) is a self-paced online course of 73 video lessons in 12 chapters, from starting and defining a project to planning, budgets, scheduling tools, proposals, contracts, execution, monitoring, closure, teams and certification. It carries a NCCRS credit recommendation for 3 semester credits.

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Why students take Project Management with UPI Study

How projects are planned, run and closedProject Management teaches how to deliver work on time and on budget: scope, schedules, the critical path, budgets and earned value, risk, contracts, monitoring and closing a project, and leading the team. It is a common course in business, management and engineering degrees.
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130,000+students helped with college creditsACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.

Where the credit goes

Universities that work with NCCRS

Project Management carries a NCCRS credit recommendation. These universities work with NCCRS; some are UPI Study's signed partners. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.

Thomas Edison State UniversityThomas Edison State UniversitySigned partnerUniversity of the PeopleUniversity of the PeopleSigned partnerCharter Oak State CollegeCharter Oak State CollegeSigned partnerStrayer UniversityStrayer UniversitySigned partnerColumbia Southern UniversityColumbia Southern UniversitySigned partnerIndiana TechIndiana TechSigned partnerPenn StatePenn StateWorks with NCCRSSouthern New Hampshire UniversitySouthern New Hampshire UniversityWorks with NCCRSSUNYSUNYWorks with NCCRS +many more cooperating universitiesFind my college →

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FAQ

Questions students ask us

About Cost Management Frameworks and Estimation Methods

What is the difference between analogous, parametric, and bottom-up estimating?
Analogous estimating scales a similar past project's cost, parametric multiplies a unit rate by a quantity, and bottom-up prices every work package and adds them. For a 5,000 square foot hall, scaling a $48,000 job of 4,000 square feet gives $60,000, and $11 per square foot gives $55,000. Bottom-up is usually most accurate once the work is well defined, but it needs a WBS first.
What is the difference between a cost estimate, a budget, and a price?
A cost estimate predicts what work will cost, a budget is the approved, time-phased amount including reserves, and a price is what a seller charges. A budget is a commitment of funds rather than a prediction. A price starts from cost but adds profit and any allowance for risk, so one project can have an estimate, a larger budget, and a still larger price.
Why should an early project cost estimate be reported as a range?
An early estimate is made before the work is designed, so its plausible range is wide and a single figure misleads. A concept-stage figure of $90,000 with an illustrative range of 30 percent below to 50 percent above covers $63,000 to $135,000. A later detailed estimate of $118,000 falls inside that range, so the early figure was not wrong, only reported without its range.
What is a basis of estimate in project cost management?
A basis of estimate is the written record of how an estimate was produced, detailed enough that someone else could reproduce it. It states the scope covered and excluded, the method, assumptions, constraints, range and confidence, and the inputs and sources. If an assumption such as no electrical panel replacement later fails, the record shows exactly what changed and why the cost moved.

About the Project Management course

How many college credits is Project Management?
Project Management (Business 230) carries a NCCRS credit recommendation for 3 semester credits. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities.
How much does Project Management cost and what is included?
$250, paid once, with lifetime access: all 73 video lessons, a practice quiz after each, the graded work and final exam, and an official transcript when you finish. Students who want several courses choose UPI Study PRO instead.
Which universities accept UPI Study credits?
UPI Study has signed partner agreements with universities such as Thomas Edison State University, University of the People and Charter Oak State College, and works with universities such as Penn State, SNHU and SUNY. ACE and NCCRS have over 2,100 cooperating colleges that will consider accepting credits; the final decision is with the universities. Use "Find my college" on this page to check yours.
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It is self-paced with no deadlines. The 73 lessons total about 15 hours of video; most students add reading and practice time and finish in a few weeks to a few months, on their own schedule.
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Quizzes and assignments are online in the course. The final exam is taken online with proctoring; a person on the UPI Study team checks assignments, usually within two days.
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