Exam 7: Project Cost Management

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Several tools and techniques can be used to create a cost estimate. Three of such tools are as follows:
(1) Analogous estimates: They use the actual cost of a previous, similar project as the basis for estimating the cost of the current project. This technique requires a good deal of expert judgment and is generally less costly than other techniques, but it is also less accurate. Analogous estimates are most reliable when the previous projects are similar in fact, not just in appearance. In addition, the groups preparing cost estimates must have the needed expertise to determine whether certain parts of the project will be more or less expensive than analogous projects.
(2) Bottom-up estimates: They involve estimating the costs of individual work items or activities and summing them to get a project total. This approach is sometimes referred to as activity-based costing. The size of the individual work items and the experience of the estimators drive the accuracy of the estimates. Using smaller work items increases the accuracy of the cost estimate because the people assigned to do the work develop the cost estimate instead of someone unfamiliar with the work. The drawback with bottom-up estimates is that they are usually time-intensive and therefore expensive to develop.
(3) Parametric estimating: They use project characteristics (parameters) in a mathematical model to estimate project costs. Parametric models are most reliable when the historical information used to create the model is accurate, the parameters are readily quantifiable, and the model is flexible in terms of the project's size.