COST ESTIMATION

The disciplines of cost estimating and cost planning are not well understood.

There’s confusion about whether cost estimates and cost plans are the same thing.

They’re not!

And if you’re a project manager or technical expert, you might be uncomfortable coming to
terms with the commercial aspects of your profession. That’s understandable — your core
competency is managing or designing, not accounting.

But as a project manager or technical expert, you need to be comfortable making cost estimates
and developing cost plans. So let’s see if I can help ease your discomfort …

What’s the difference between a cost estimate

and a cost plan?
Here are the basic (but not the only) differences between cost estimates and cost plans:

A cost estimate is an assessment or approximation of the likely costs of an initiative with an

indication as to the degree of accuracy, usually +/- percent.

In the construction industry — a good example of project management — a cost estimate is a

prediction of the costs of construction.

A cost plan determines the fiscal feasibility of an initiative. This is done by setting the lifecycle
budgets and cost controls to manage the delivery and quality of the initiative’s outcomes over a
set timeframe.

In the construction industry, a cost plan is used as a way of controlling the estimated costs during
the design and construction phases of a project.
 That means that cost plans are living artefacts, just like project management plans. They must be
managed throughout the lifecycle of any initiative in any industry.

The art, or for that matter the science, of where cost estimation migrates into cost planning, relies
on sound commercial principles. It requires the right modelling tools and a good dose of
experience.

Some guiding principles

The guiding principles to cost estimating and cost planning are:

1. Time is money.

2. Risk and reward are opposites. The higher the risk, the greater potential for reward. If the
risk is unsustainable, there’ll be no reward.

3. Appropriate controls to develop, implement and manage cost estimates and cost plans are
the key to repeatable quality outcomes and commercial success.

Cost estimating and cost planning outcomes provide the framework for cost control through the
lifecycle of any initiative. Cost control is making sure you stay within the budget set during the
cost estimating and cost planning processes.

The execution or implementation of guiding principles comes in many forms and permutations.
Most project management knowledge has a chapter on cost estimating and cost planning, and the
need to control this scarce resource.

Managing cost sits at the top of project management criteria, along with managing scope, time
and quality. I could argue that if costs are not managed then it’s likely the other three are not
under control either.

So, the capability to develop such financial models is dependent on your commercial intellect
and your relevant industry experience.
An experienced cost estimator/cost planner must have a multi-disciplined capability to visualise,
over time, the cost of designs, materials, effort, risk etc., and apply commercial strategies to
present the plan in a logical and structured manner.

A look at cost estimating

The notion that cost estimates don’t need to be that accurate — since by definition, they predict
the future — is a fallacy.

It’s true that cost estimates are a rough order-of-magnitude figure. And, yes, the basis for the
estimates is in the assumptions, constraints, limitations, etc.

But in business, we can’t plan for and bid for work without estimates.

The trick is to ensure that the numbers, and the strategies to support the numbers, have
substance. The difference between a good estimate and a bad estimate can result in not winning
work, or in winning the work but losing money.

Types of cost estimates and tolerances

Here are the most commonly named estimates I’ve come across:

 Ballpark estimates (BPE). These generally have a +/- 50% tolerance. They can range up
to 100%.

 High-level estimates (HLE). These have tolerances of +/- 30% up to 50%.

 Detailed estimates (DE). These have the least tolerance with about +/- 10% to 20%.

Obviously, as the level of detail and knowledge of an initiative increases, the level of tolerance
required of the estimate decreases.