Cost Management Plan

 

Key Points:

1. Overview of Cost Estimation:

   • After creating the Cost Management Plan, the next step is to estimate the cost of individual activities.
   • Cost estimation involves determining the total cost for each activity, considering resources, time, and other associated factors.
   • Outputs include individual activity costs and a basis of the estimate (range and confidence level).

2. Factors Included in Cost Estimation:

   • Labor, materials, equipment, and services.
   • Facilities, inflation, financing costs, and contingencies.
   • Costs should account for all direct and indirect factors influencing activity execution.

3. Types of Estimates:

   • Definitive Estimate: High accuracy, variance of -5% to +10%.
   • Budget Estimate: Moderate accuracy, variance of -10% to +25%.
   • Rough Order of Magnitude (ROM): Low accuracy, variance of -25% to +75%.
   • As the project progresses, estimates become more precise (progressive elaboration).

4. Estimation Techniques:

   • Analogous (Top-Down) Estimation:
     • Quick but less detailed.
     • Based on historical data or expert judgment.
     • Example: A painter estimates $1,000 without inspecting the space.
   • Bottom-Up Estimation:
     • Detailed and highly accurate.
     • Breaks down work into smaller components and aggregates the costs.
     • Example: The painter inspects each wall and sums up the individual costs.
   • Parametric Estimation:
     • Uses calculations based on historical data.
     • Example: $1 per square foot for 200 square feet = $200.
   • Three-Point Estimation (PERT):
     • Considers optimistic, pessimistic, and most likely estimates.
   • Reserve Analysis:
     • Adds a buffer to account for unforeseen events.
     • Example: Increase the estimate by 10% for potential risks.

5. Cost of Quality:

   • High-quality processes (e.g., training, inspections) increase costs initially but reduce rework and external failures.
   • Poor quality leads to defective products, rework, warranty claims, and higher long-term costs.

6. Project Management Information Systems (PMIS):

   • Tools to track and manage costs efficiently.
   • Helps record estimates, calculate costs, and maintain transparency.

7. Outputs of Cost Estimation:

   • Individual Activity Costs: Includes labor, materials, equipment, and other associated costs.
   • Basis of the Estimate:
     • Range of accuracy (e.g., ±10% or ±15%).
     • Confidence level.
     • Explanation of how the estimate was derived, including data sources and rationale.

8. Next Steps:

   • Once individual activity costs are estimated, the next step is to aggregate these costs to form the project budget.

---

Summary:

Cost estimation assigns costs to individual activities by considering all associated factors, including labor, materials, equipment, inflation, and contingencies. Various estimation techniques, such as analogous, bottom-up, parametric, and reserve analysis, are employed depending on the project's needs and available data. Outputs include detailed activity costs and the basis of the estimate, providing a range and confidence level for each estimate. By refining estimates through progressive elaboration, the project moves closer to an accurate budget, setting the stage for budget creation and cost management.