Estimating in Project Management

Estimating

• Estimating involves determining the approximate cost or quantity of something before a project begins.
• It's crucial for budgeting and project planning.
• Types of estimates include:
  • Order-of-magnitude estimates: Provide rough approximations for preliminary planning.
  • Budgetary estimates: More precise, used for planning and budgeting.
  • Definitive estimates: Highly detailed, used for final project costing, often used for bids and contracts.
• Factors influencing estimate accuracy:
  • Complexity of the project: More complex projects usually result in less accurate estimates.
  • Availability of information: Limited or incomplete information hinders estimate precision.
  • Experience of the estimator: Experienced personnel usually produce more accurate estimates.
• Estimating methods:
  • Parametric estimating: Uses statistical relationships between project characteristics and cost.
  • Analogous estimating (or top-down estimating): Uses historical data from similar projects to estimate costs.
  • Bottom-up estimating: Breaks down a project into smaller components and estimates costs for each.
• Benefits of accurate estimates:
  • Better project planning.
  • Reduced risks.
  • Improved project control.
  • Realistic budgets.
  • Increased chances of project success.

Costing

• Costing is the process of determining the total cost of producing a product or service, which includes direct and indirect costs.
• Cost accounting plays a pivotal role in this process.
• Types of costing methods:
  • Job costing: Used for unique projects, tracking costs for each job or project individually.
  • Process costing: Used for mass production, averaging costs over a period of time and multiple units.
  • Activity-based costing (ABC): Assigns costs to activities and then to products or services based on the consumption of these activities.
• Cost elements:
  • Direct materials: Raw materials directly entering the production of a product.
  • Direct labor: Wages paid to workers directly involved in production.
  • Manufacturing overhead: Indirect costs of production (e.g., rent, utilities, supervisor salaries).
  • Administrative overhead: Costs of general management and administration.
  • Selling and distribution costs: Costs of marketing, sales, and distribution of the product.
• Costing objectives:
  • To determine the profitability of different products or services.
  • To identify areas of cost reduction.
  • To make informed pricing decisions.
  • To provide information for budgeting and financial management.
• Cost estimation techniques:
  • Historical data: Analyze previous projects or similar products to estimate future costs.
  • Market research: Analyze competitor's pricing, which may have bearing on costing.
  • Engineering estimations: Use design specifications or engineering data to estimate resource needs.
• Cost control:
  • Monitoring costs against estimates helps identify deviations and implement corrective actions early.
  • Implementing strategies to reduce costs without impacting quality or efficiency is important.
• Costing applications:
  • Manufacturing industries
  • Service sectors, e.g., consulting firms, law firms
  • Retail businesses, e.g., clothing stores
  • Government projects, e.g., roads and bridges

Relationship Between Estimating and Costing

• Estimating precedes costing in project implementation.
• A solid estimate provides a framework for the costing process.
• Costing refines the estimates through detailed analysis of various cost components.
• Estimates are often reviewed and adjusted as the project progresses, with costing providing an updated cost basis.
• Costing often uses techniques informed by the original estimates to calculate the final cost or price of a product or project.
• Accurate estimates are critical to preventing cost overruns and project failure.
• Continuous monitoring of costs provides feedback for improving both estimating and costing methods.