Estimate Costs in 8 Steps
We’re always interested in the latest thinking and guidance when it comes to project management, and our eyes lit up when we saw the UK Government’s Infrastructure and Projects Authority (IPA) had released new guidance on cost estimating for infrastructure projects and programs. We couldn’t wait to dig in and see what the guidance said.
While this best practice approach won’t replace anything affecting businesses working with US government agencies where Earned Value Management is the core standard, cost estimates are a core part of being able to use EVM effectively. If your budget is riddled with forecasting errors, the chances of the team being able to produce any kind of reasonable EVM data is low.
How to Estimate Costs
So how do you get a great cost estimate? The IPA guidance sets out an 8-step process for estimating costs. Here’s how to do it.
Step 1: Establish the brief and engage the team
In this step, you set out the requirements for the estimate. The project brief, your contract, and conversations with key client stakeholders will help identify what needs to be done. You also create a timeline for building the estimate and set expectations about things like how the team will work together, what assurance is going to be needed, who is going to be involved and so on.
Engaging the team means finding experts with the right technical skills who have the ability to create the estimate. The technical specifications for the project will inform who needs to be involved, but it’s also worth making sure market specialists are on the estimating group, as market trends and the current climate can also influence the base cost. Finding the right estimator is one of the good rules for estimating that we subscribe to as well.
Step 2: Gather data and evidence
This is a crucial step before the team jumps into creating the evidence. At this point, the focus is on building a set of data around what influences the estimate. The key assumptions are documented.
The purpose of doing this is to make sure the data has integrity. The more data and evidence that supports the cost estimate, the more likely it is that the estimate is solid. The flimsier the evidence, the more inherent risk in the estimate.
It’s not always easy to get data, so this step could take a while as the team seek out industry sources of reliable information and gather information from lessons learned.
Step 3: Select cost estimating methodology
Here, the team selects an appropriate approach for estimating. If the chosen approach means the team needs more data, they loop back to Step 2 to collect what’s needed.
There are lots of different estimating techniques including:
- Parametric estimating
- Top down estimating
- Bottom up estimating
- Analogous estimating
- Expert opinion – useful when there truly isn’t any data to draw on because your project is so innovative
There are also a lot of methods that incorporate risk, such as Monte Carlo (which is also a useful tool for scheduling risk management and Deltek Acumen does that for you). The approach chosen could incorporate all of those things.
The important thing is that choosing an estimating method is a conscious decision, backed up by a clear rationale – don’t just default to estimating the same way you always have because it might not be appropriate for this particular task.
Step 4: Calculate base estimate, uncertainty, risk and opportunity
In this step, the team prepare the base estimate along with a range of potential values that reflect the uncertainty surrounding the estimate at this point. The base estimate is the anticipated cost, taking into account the estimating techniques used and all the data that has fed the process so far.
There might be several different potential estimates depending on the risk level. Should risks be realized, the budget needed could rise substantively. This step provides a place to think about the impact of risk (positive and negative) on the project and how that could affect the cost. There’s a lot that goes into this step as it draws together everything the team has prepared.
Step 5: Produce cost estimate report
We have to wait until Step 5 before a formal report is produced – as you can see, there is plenty of emphasis in the IPA process for thoughtful reflection and data analysis before a cost estimate report is generated.
The report includes everything you would expect: the methodology, assumptions and a summary of the evidence used to inform the numbers. The IPA also recommends that the report include a set of priority areas to work on that would reduce uncertainty and firm up the estimate. This is really insightful because if you can work as a team to reduce risk or define uncertainty, all your estimates are going to be much more realistic.
Step 6: Review and assure
Before we get to sign off stage, the estimate is reviewed by the assurance team. You will need to decide on what is the right type of review to assure the estimate. Once the assurance team has approved the calculations, you can move to the next step.
However, this isn’t just a simple ‘will you check my formulas?’ type review. It should be a thorough, independent review that seeks to remove any ambiguity and check the thought process that has gone into the report.
Step 7: Project leadership sign off
At this point, the focus is on making sure that the executives leading the project understand how the estimate has been created and any inherent risk or ranges associated with it. They need to accept ownership of the estimate, so they need to have full confidence in the process and the team.
This step should be more than simply an exec signing off a document by email. It should give the project leadership team the chance to challenge the estimate and the team that produced it. The goal is not only that they understand how the numbers have been calculated, but also that they can link this data to what is going on in the rest of the project such as the commercial strategy for the work.
Step 8: Use the estimate to support decisions
Finally, after all that work, the estimate costs are put to use. It can then be used for scheduling, planning and risk management.
This seems like a process that could be adapted for any organization needing to improve how they How to estimate costs as part of a robust approach to project performance and monitoring – if you are embarking on an earned value management implementation, then establishing how to do cost estimating should definitely be on your radar!