**5.1 Cost estimating**

To estimate cost for a work element, we need the following information:


Duration may not be relevant for materials, which are absorbed for completing the work. Number of resources for each resource multiplied by its duration and the rate will provide an estimate of that resource cost. Adding all the resource costs will give you an estimate of the activity cost. We sum up all these activity costs of the project to determine the total estimated project cost. These costs must then be managed and controlled along with the schedule throughout the project execution phase.

The most accurate and most reliable estimate for a project can be developed when all of the elements of the WBS have been identified with a reasonable degree of reliability and when the resource breakdown structure (RBS) has been defined with the desired degree of certainty [2]. This estimate is referred to as the bottom-up estimate and it is derived from detailed information that is contained in the WBS and RBS at the time of the estimate. Resource Breakdown Structure (RBS) is similar to WBS. By resources we mean everything that will cost money to obtain and are necessary for the completion of the project (labor, materials, equipment, licenses, taxes). RBS follows the WBS structure of hierarchy and we can classify resources into major categories such as:


To be useful, RBS should be accurate and reliable, so it needs to be updated periodically. An example of RBS is provided below (**Figure 2**).


#### **Figure 2.**

*RBS sample.*

Detailed and accurate estimates require substantial definitive information about the project. Further, they require a relatively large block of time and effort for the estimating task. Therefore, one needs to strike a balance between the time spent on estimating, the accuracy of the results, and the degree of accuracy required by the stakeholders at the point in the project life. Project management methodologies recognize various tools and strategies to support project cost estimating.

*Analogous estimating* is a top-down approach where managers create estimates based on expert judgment, data from similar projects, industry benchmarks, published or interpersonal research sources. This approach is typically less accurate than bottoms-up estimates, but it may be quicker and less costly to develop.

*Parametric estimating* uses mathematical models to predict costs. These methods may include specialized computerized estimating tools. Specific metrics may applicable to particular industry sector such as cost per line of code, and square footage construction cost.

*Bottoms-up estimating* is a method in which the people and other resources assigned to the activity create the cost and schedule estimates. This approach creates optimal commitment from the performing team, and is effective when the team contains appropriate subject matter expertise (domain specific knowledge) and adequate experience to accurately forecast duration estimates. Of all the estimates, this approach tends to be more accurate. An example of bottom-up estimate is shown below (**Figure 3**).

**223**

*Project Management Concepts*

**6. Time management**

**Figure 3.** *Bottom-up estimate.*

of project lifecycles:

relationships

resource information

• Milestone charts

• Flowcharts

In general, scheduling tools include:

needed

*DOI: http://dx.doi.org/10.5772/intechopen.93766*

Once the costs of all work packages have been estimated, supplementary information documented, and cost accounts assigned, then these costs are rolled up to highest level of the WBS to determine project cost. This is a process of progressively

Time Management is required to accomplish timely completion of the project and organizes it into six components, five of which occur during the planning phase

• *Activity Definition:* identify and document activities to produce the WBS elements

• *Activity Resource Estimating:* determine what and when resources quantities are

• *Activity Duration Estimating:* develop activity durations from scope and

• *Schedule Development:* determine start and finish dates for activities

• *Schedule Control:* manage and control changes to the schedule

• *Activity Sequencing:* identify and document interactive logical WBS

totaling the work package estimates to their higher levels of detail.

### *Project Management Concepts DOI: http://dx.doi.org/10.5772/intechopen.93766*


*Operations Management - Emerging Trend in the Digital Era*

periodically. An example of RBS is provided below (**Figure 2**).

To be useful, RBS should be accurate and reliable, so it needs to be updated

Detailed and accurate estimates require substantial definitive information about the project. Further, they require a relatively large block of time and effort for the estimating task. Therefore, one needs to strike a balance between the time spent on estimating, the accuracy of the results, and the degree of accuracy required by the stakeholders at the point in the project life. Project management methodologies recognize various tools and strategies to support project cost

*Analogous estimating* is a top-down approach where managers create estimates

*Parametric estimating* uses mathematical models to predict costs. These methods may include specialized computerized estimating tools. Specific metrics may applicable to particular industry sector such as cost per line of code, and square footage

*Bottoms-up estimating* is a method in which the people and other resources assigned to the activity create the cost and schedule estimates. This approach creates optimal commitment from the performing team, and is effective when the team contains appropriate subject matter expertise (domain specific knowledge) and adequate experience to accurately forecast duration estimates. Of all the estimates, this approach tends to be more accurate. An example of bottom-up estimate is

based on expert judgment, data from similar projects, industry benchmarks, published or interpersonal research sources. This approach is typically less accurate

than bottoms-up estimates, but it may be quicker and less costly to develop.

• Tools, machinery

• Fees, licenses

**222**

estimating.

**Figure 2.** *RBS sample.*

construction cost.

shown below (**Figure 3**).

Once the costs of all work packages have been estimated, supplementary information documented, and cost accounts assigned, then these costs are rolled up to highest level of the WBS to determine project cost. This is a process of progressively totaling the work package estimates to their higher levels of detail.
