1. Expert Judgment
Expert judgment implies consulting with experienced cost estimators or specialists in the field of your company’s performance. When predicting costs by using this technique, you rely on experts’ knowledge of the project’s contents and the general business environment. In return, you get meaningful, evidence-based assumptions and explanations of relational patterns between relevant cost variables.
Pro: While computerized cost estimation is widely considered to be the most accurate, results obtained with the help of digital analytics tools are still not always correct. To eliminate estimation errors and make common sense of the generated numbers, human insight is often required. Therefore, expert judgment is indispensable when you need to identify intricate correlations among different cost variables and project-related factors and verify the accuracy of computer-supported calculations.
Con: Regardless of how knowledgeable and skilled humans may be, they are prone to make mistakes, whereas their judgment is frequently influenced by emotion and prejudices. For this reason, cost estimates obtained through expert review can be subject to bias.
2. Bottom-up Estimation
In contrast to top-down estimation, the bottom-up approach starts the cost calculation process with the identification and evaluation of separate project components. The expenditures for every individual project task or a series of tasks are then summed up to arrive at the total project cost.
Pro: The bottom-up estimation technique can be very accurate in case a thorough and complete work breakdown structure is applied.
Con: The development of a work breakdown structure is usually time-consuming and requires much effort, especially if the project under consideration is a complex one.
3. Parametric Estimation
By using parametric estimation, the total project cost is calculated based on the number and price of the project’s sub-components, also known as work units. The project cost estimation process includes just 3 core steps:
- Identify relevant project units (i.e., number of peanut butter jars to be produced, square feet of pavement to be laid, lecture hours to be delivered, etc.);
- Estimate the cost of every unit by summing up the price of materials, labor, etc.;
- Use the following equation to form the overall picture of project expenses:
- Number of Work Units × Cost of a Single Unit
To define the cost of a single unit before administering the project, you may refer to historical data taken from previous projects or industry examples.
Pro: Parametric estimation allows obtaining very accurate cost forecasts in case the calculated single unit costs are correct and realistic.
Con: The method is suitable only for projects characterized by a high degree of task repeatability and cannot be applied to creative ones.
4. Estimation by Analogy
Analogous project cost estimation is the calculation of a new project’s costs by contrasting the knowledge of its contents and features with data obtained when administering a similar project in the past. This technique involves 3 key steps:
Determine a new project’s attributes,
- Locate any previous project with similar characteristics and retrieve all the information about its costs and financial performance,
- Develop original cost estimates based on the acquired historical data.
Pro: Estimation by analogy is relatively easy to carry out if you have experience in managing comparable projects and have kept their performance records. Moreover, since the results of your previous business endeavors are already known, you may adjust new cost estimates in a way that eliminates all the errors encountered before and leads to greater project success.
Con: Though analogous estimation may produce highly accurate forecasts, it is important to remember that data concerning past events does not always apply to the present-day business situation. Thus, to verify historical estimates and minimize the risk of errors, one needs to carry out an up-to-date environmental analysis as well.
As you can see, 4 techniques reviewed in this article produce cost estimates of different accuracy levels. However, if a project cost estimation method is associated with only vague and imprecise calculations, it does not mean it should be discarded right away.