Cost Estimate: Top 3 budgeting approaches for project managers

In any project – and in any field – project managers should provide the cost estimate to stakeholders, specially if this project will be managed through Agile based methodology. It is important that estimate to be as accurate as possible; because if it was estimated much more than the actual cost, this is going to harm the project manager reputation, and if it was far below the actual cost, this probably will cause the project to fail. In this post, I am going to share 4 of the budgeting methodologies which I’ve personally used.

Parametric method (Prediction based on volume and statistics database)

As statistical method, parametric requires a database of statistics to compare the value of the new project to these data. It takes cost estimating relationships between system attributes and the cost of the system, then it predicts what the new system is going to cost. A clear example would be the COCOMO application.

As a matter of fact, I’ve used COCOMO the last week to figure out if this kind of parametric-based estimate applications really work. The way I decided to test it was to reverse engineer an existing project: Ordenaline, a cloud service that we provide for restaurants and cafes. I’ve placed the system modules and defined the volume of each characteristic into COCOMO, and I was amazed that the system suggested a cost estimate that was almost identical to the real one.

Analogy (easy and quickly measure by similarity)

Also called top-down estimates ‘use the actual cost of a previous, similar project as the basis for estimating the cost of the current project. ’(Schwalbe, 2016, p. 273). When receiving a new Request for Proposal from a potential client, one of the very first steps that we do in our firm is to determine the first impressions: what does the new system cost based on similar ones?

As can be recognized, this approach is very easy, quick and inexpensive. It is good for estimates when little data available. The question is: is this approach good enough?

From my experience, analogy estimation is good for rough estimates and for initial business case studies. But when making a formal budget estimation, this methodology is far from being relied on; because it is:

1- Subjective methodology

2- Difficult to change estimates based on system design modification.

I use analogy estimate exclusively for early stages of incoming projects, to make a brainstorming for possible alternatives and to raise a go/no go sign at little time and cost.

Bottom up (details first)

Based on work breakdown structure, project manager can take every work item, or hand it over to the team members, in order to estimate the work for it, then going up in the breakdown structure and summing all work items estimates to make the entire project estimate. ‘We begin at the lowest level of the WBS, which we denote Level N. Here we calculate the cost of each element … One could find the total cost of the project by adding all these costs together’. (Rad and Cioffi, 2000, pp. 19-20)

I believe that the bottom up module is the one to choose, as it provides:

• High accuracy
• Visible cost drivers
• Design can change and Cost can change accordingly

To avoid its main disadvantage (high time consumption), a quick Analogy estimate should take place first, and based on it, project manager can share the rough cost estimate with senior management to decide whether or not to continue in the bottom up estimate.

Conclusion

One or more budgeting approaches may be used for more accurate results. Regardless the chosen approach, one must check the estimate against experiential data and the subjective knowledge of management professionals.