When facing a new project it is important to choose the correct estimating technique. There are several estimating techniques but the effectiveness of each of them depends on the type of project and in which phase the project is in. In this article we will discuss what the best options for each case are, but let’s first look at some basic definitions.

What is estimating?

Estimating is determining in advance the expected costs of labor, material, construction equipment and tools which are needed to complete a project. The first thing to do in order to create an estimate is to create an estimating plan, which should include:

  • Scope definition of the project, defining the boundaries.
  • Time plan

Project Life Cycle

The life cycle of a project consists of following phases:

  • Identification
  • Definition
  • Execution
  • Operation
  • Abandoning

The phase in which your project is will be decisive information to choose the right estimating technique.

Accuracy of an estimate

Every estimate is a prediction of the expected final cost of a project for a given scope of work. Every estimate is associated with uncertainty, and therefore is also associated with a probability of overrunning or underrunning the predicted cost. The estimate accuracy is an indication of the degree to which the final actual cost outcome for a given project varies from its estimated cost. 

It is important to understand that an estimate should never be regarded as a single point number (or cost) but as a range of potential cost outcomes and associated probabilities of occurrence. 

Once we know the scope of our project, the current phase of our project and the accuracy that we expect our estimate to have, we can decided on which estimating technique best fits the situation.

The most important estimate methodologies are factor estimating, parametric estimating and detailed estimating:

Factor estimating, also known as top-down estimating, is based on limited project scope. It is generally used in the identification phase. It uses rules of thumb, parametric models or historical databases to provide relevant cost data. 

Parametric estimating entails the analysis of costs and identification of cost drivers to develop cost models. The approach essentially correlates cost and manpower information with parameters describing the item to be costed. This process is used in the earlier phases of a project (identification and definition) when there is not much specific information about the project, but there is historical data from previous similar projects. 

Detail Estimating, also called bottom-up estimating, is used when the maturity level of project definition is high (execution and operational phase). Detailed estimates are made at relatively low levels in the work breakdown structure, typically at work package or task level. This approach is closely related to scheduling, planning and resource allocation and is both time-consuming and costly. It requires a good knowledge of the activity and also needs to have a reasonable level of definition. It also results in the most accurate estimates.

As an example of relations between level of project definition, expected accuracy of estimate and methodology used you can see the figure with the AACE Cost Estimate Classification System.

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