Cost Estimating and Budgeting
Estimating a project involves predicting the amount and cost of resources required to successfully execute the project. Many approaches can be used to estimate. Because each approach has advantages and disadvantages, you might need to combine approaches to obtain the best estimate for the project. By using the estimate, you can develop a better understanding of the budget required.
Estimating is done as early in the project life cycle as possible and is normally repeated a number of times throughout the life of the project as changes in the project dictate. Estimating is initially done during the planning process after which a budget is agreed to as the baseline for the project plan. Estimates can be redone or refined throughout the project based on performance or on the need for redefining and replanning that results from project change requests.
Estimating is the process of identifying the "should cost" for each project task and activity. If estimating is performed at the higher levels in the WBS, this higher-level estimate must eventually be broken down to the task and activity level to effectively manage the project execution. These tasks and activities then combine to form the "should cost" for the project's life cycle. Although the estimate is not the project management schedule, it is used as input to the project management schedule when finalizing the project plan.
Budgeting is the allocation of the "should cost" over the time period required to do the work. The estimate provides the "should cost" for the task or activity, but further analysis is necessary to determine the specific time period needed to perform. Time periods can be hours, days, weeks, or months depending upon the complexity of the task, activity, or work product. After the "should costs" have been spread out over time according to when the work is to be performed, the project manager must develop a time-phased cost baseline that becomes the plan-of-record cost to a work package. It uses the estimate to determine how much money is allocated to each work package. This enables project managers to develop a financial measurement baseline that is then used to track and control the execution of the project.
Documenting your estimates and assumptions about the estimates is a very critical and mandatory part of the project. It is the sole responsibility of the project manager to ensure that it is done.
This module shows you how to use estimating within project management and provides the terms and formulas used within estimating. After you complete this module, you should be able to define what an estimate is, determine what should be estimated, recognize the difference between effort and duration, describe specific types and methods of estimating, discuss the estimating process, and describe what is involved in generating and validating an estimate.