COST PLANNING

The cost planning and analysis may include a comprehensive cost-benefit analysis or cost-effectiveness analysis for the preferred option.

Throughout the life of a project; project objectives, client requirements or social, economic and environmental conditions may change. This can affect the budget and costs of the identified delivery options. If there is significant change to the service plan, asset and property configurations or similar, that impact on the preferred option(s), consideration should be given to reworking the options analysis process.

Accurately forecasting the cost of future projects is vital to the survival of any business or organization contemplating future construction. Cost estimators develop the cost information that business owners or managers, professional design team members, and construction contractors need to make budgetary and feasibility determinations. From an Owner's perspective the cost estimate may be used to determine the project scope or whether the project should proceed.

Benefits:

1. More satisfaction with end results.

2. Better value for money.

3. Improve quality and performance.

4. Budget and value accountability.

5. Improve relationships between all projects participants.

6. Early identification of high-cost elements.

PROJECT COST ESTIMATES

• A cost estimate for a project is a calculation of all (monetary and time) resources necessary to perform and deliver the project. It is used to calculate and compare resources.

• Project cost estimates generally show an amount of some currency units as well as an amount of working hours or total working time required to complete the project.

Techniques• Expert Judgment• Analogous Estimating• Parametric Estimating

• Bottom-Up Estimating• Top-Down Estimating• Three-Point Estimates• Reserve Analysis• Published Data Estimating• Vendor Bid Analysis

EXPERT JUDGEMENT

Expert judgments technique uses the experience and knowledge of experts to estimate the cost of the project.

• Advantages-

it is quick & most accurate estimate.

The expert have a much better understanding of the risks, issues, constraints and assumptions to be faced and will provide precise estimates.

Disadvantages-

There may not be an expert available and even if it is, the expert often can provide no solid rationale for their estimate.

It can also be biased.

ANALOGOUS TECHNIQUE

This technique uses the experience from previous projects and extrapolates that onto the current project. This technique is appropriate for those cases where the type of work is similar and the resources doing the work are the same between projects. This type of estimate is usually used in the early phases of a project.

• Advantages-

it is quick & when the conditions are appropriate, it is usually fairly accurate.

• Disadvantages-

Organization must have similar projects for comparison

Parametric model estimating uses statistical modeling to develop a cost estimate. A formula is developed for estimating the time or resources needed to perform a project activity. The formula is usually based upon a great deal of historical experience. For example, square footage is used in some construction projects.

• Advantage- it is quick & accurate.

Disadvantage- Models don't exist for activities until there is a large experience base for the activity.

A Bottom Up analysis is a technique to improve the accuracy of the overall project estimate. This technique requires the project team to decompose the work into very small work packages. The smaller the work package, the easier it is to estimate because the work scope is very small. All of these estimates of small work packages are added up into subgroups and finally into the project total.

• Advantage- The estimate is usually more accurate since the work is better understood.

• Disadvantages- It is very time consuming, and it may be impossible for activities that cannot be easily defined.

TOP DOWN COST ESTIMATING

This technique is opposite to Bottom-up Cost Estimating method. The technique assumes that the total project budget is determined at the project’s beginning and the estimating team needs to identify the costs of each project work item (task or job).This method allows determining the number of required activities and tasks referring to the WBS. By using the WBS, the team can determine the quantity of the work items that can be delivered within the fix project budget. The team may decide to add or remove certain items in the WBS in order to fit the fix project budget.

• Disadvantage:- It takes more work to do

REVERSE ANALYSIS

This technique considers the level of uncertainty and risk in the project and establishes a reserve pool of time, resources, or possibly performance that can be drawn upon to offset the unestimated issues that arise. Thus, it is used to determine how much contingency reserve, if any, should be allocated to the project. This funding is used to account for cost uncertainty.

• Disadvantage- It is a guess on the part of the project manager and stakeholders. If the organization has policies regarding reserves, than it should be used.

PUBLISHED DATA ESTIMATING

It is an excellent technique for those activities for which there is published data. In this technique, the activity is compared to the activities for which data exists and the closest

comparable activity is selected from the data. The publication includes cost and resource estimates for that activity that are then used by the project team.

• Advantage- it is very accurate.

• Disadvantages-

Data does not exist for many activities.

The published data that does exist is based upon the characteristics of the organizations who compiled and published the data - which may not correspond with your organization's characteristics.

VENDOR BID ANALYSIS

This technique is used when working with suppliers on uncertain activities. The analysis considers the assumptions the vendor worked with and does a sensitivity assessment on those assumptions. In addition, for effort that the buying organization does not have experience with, they can contract with a consulting firm that has experience to do a "Should Cost" analysis. This "Should Cost" is compared to the suppliers quote to identify any shortcomings. Thus, it estimates what the project should cost by comparing the bids submitted by multiple vendors.

• Advantages- It exposes supplier risk that can be accounted in the reserve analysis and it increases the confidence in the supplier's approach.

Disadvantages- This can take a fair amount of time and if a consultant is used to create a "Should Cost" it adds to the cost of the project