Cost Estimating – Part 1
The seventh principle of Project Management is “Minimize total cost, not the price of resources”. We need to discuss the total cost if we are to adhere to this principle. Although there is wonderful guidance in the PMBOK® Guide, the best practices for a Federal environment come from the GAO Cost Estimating and Assessment Guide. In this blog I will refer to this as “the Cost Estimating Guide”.
When it comes to estimating, we want to answer the question, “Where did you get those numbers?” with defensible accuracy. The Cost Estimating Guide suggests that there are nine characteristics to any credible cost estimate. Let’s look at each individually.
- Clear identification of task – The estimator must be provided with the system description, ground rules and assumptions, and technical and performance characteristics. The estimate’s constraints and conditions must be clearly identified to ensure the preparation of a well-documented estimate.
- Broad participation in preparing estimates – All stakeholders should be involved in deciding mission need and requirements and in defining system parameters and other characteristics. Data should be independently verified for accuracy, completeness, and reliability.
- Availability of valid data – Numerous sources of suitable, relevant, and available data should be used. Relevant, historical data should be used from similar systems to project costs of new systems; these data should be directly related to the system’s performance characteristics.
- Standardized structure for the estimate – A standard work breakdown structure, as detailed as possible, should be used, refining it as the cost estimate matures and the system becomes more defined. The work breakdown structure ensures that no portions of the estimate are omitted and makes it easier to make comparisons to similar systems and programs.
- Provision for program uncertainties – Uncertainties should be identified and allowance developed to cover the cost effect. Known costs should be included and unknown costs should be allowed for.
- Recognition of inflation – The estimator should ensure that economic changes, such as inflation, are properly and realistically reflected in the life-cycle cost estimate.
- Recognition of excluded costs – All costs associated with a system should be included; any excluded costs should be disclosed and given a rationale.
- Independent review of estimates – Conducting an independent review of an estimate is crucial to establishing confidence in the estimate. The independent reviewer should verify, modify, and correct an estimate to ensure realism, completeness, and consistency.
- Revision of estimates for significant program changes – Estimates should be updated to reflect changes in a system’s design requirements. Large changes that affect costs can significantly influence program decisions.
If we stop here and review the previous Principles, we discover that WBS is crucial to cost estimate accuracy. So is the process of scheduling which allows us to understand the task and it’s association with other work in the project. We see the communications plan come into play and the process of team selection and development. All of our planning efforts coalesce into the best cost estimates possible at this juncture in the project. We begin to consider risk and external factors which will affect the cost estimates over time.
I hope you are beginning to see that the Principles are interactive, interdependent, and the order of practice is important. Now that we know the characteristics of credible cost estimates, what process should we use to complete the process?
Cost Estimating Process is Part 2.