Project cost terms

Cost projection. The financial consideration is crucial when a business or entrepreneur plans to perform a project. As a foundation for the project's implementation and success, a predicted budget must be created. Cost estimation is the procedure for roughly estimating the project's financial value. Creating a thorough document with all the resources anticipated to be needed during the implementation process and their monetary value is known as cost estimation. A general understanding of what the project will use is necessary for the project manager and his or her team. With such information, the team will then proceed and develop estimates of each asset they intend to put to use. Apart from the monetary value, a cost estimation also includes other aspects of the project like its scope, quality, duration, and other management factors. A successful plan allocates adequate time and resources for cost estimation as it predetermines the likelihood of its success.

Uncertainty analysis

The analysis is a technique that is used to perform a thorough examination of a situation or activity to understand it further and acquire sufficient details on the same. In project management, uncertainty analysis aims at investigating the project’s possible outcomes. The review assesses the probable results of the project in the face of inevitable uncertainties and compares it with the predicted results at the absent of the risks. This method uses models and theories to arrive at its prediction.

Risk

A risk is an uncertain event which is capable of either benefiting or affecting the project upon its occurrence.

Uncertainty

Uncertainty is when future events are unclear and unknown. In this case, uncertainty represents situations in which the consequences, extent, or probable outcome of the condition is unknown.

Group process

It refers to teamwork. Group process defines how employees associate with each other in getting things done in an organization.

Estimating techniques

The analogous estimating method uses an analogy approach to approximate cost of a project. It employs the use details from a past similar project to produce estimates of the current project (Kim & Reinschmidt, 2011). This method is also known as “top-down” and is preferably used when the project in question has limited information. The strategy is, however, less accurate as compared to other estimating methods. Parametric estimating method on its part is perhaps the second accurate cost and duration estimating techniques. The method utilizes the relationship between specific variables to estimate cost. In essence, it explores the available unit cost and the unit cost required to complete the project. The values and variables are acquired from outside sources. On the other hand, “bottom-up” estimating strategy is the most accurate approach to calculating the cost. The technique gives a chance to every member who is part of the team to participate in the estimation process. After work breakdown structure is developed, the project manager will allow members working at each task level to establish a cost estimate at that specific level then compiles them to produce the total project cost estimates. It is accurate because it involves every team member and the division of forecasts to work levels makes it more efficient.

The three methods share a common similarity. They can all be used to estimate both cost and duration of the project (Kim & Reinschmidt, 2011). Apart from the bottom-up approach, the other two uses past histories to determine values. The analogous method uses previous but similar project information while parametric estimation uses expert judgments and decisions (Kim & Reinschmidt, 2011). The difference between the trios is mostly on how accurate they are. Bottom-up method is the most precise strategy while analogous is the least reliable. Bottom-up estimating make use of current and more accurate information to predict the cost and duration while both analogous and parametric uses analogies and variables respectively.

Issues in project cost estimation

Project managers might find themselves in dilemmas long after the project implementation is initiated. The project team can overestimate the cost of the project, and when the project is at the execution period, the manager realizes that a lot of money will remain after completion. Such a situation mostly happens when the team does not want blames for overspending and as a result, commit a large contingency budget in the estimation process. Whereas this might seem a good occasion, some organizations are not amused when money remains. The possible reason for such scenarios is that the team underran the project and some events might have been omitted.

Another issue in project cost estimation is underestimating. The project team might estimate the cost of the project way below the ideal budget that can deliver outcomes. Once the implementation is initiated, and the team realizes that the budget is not enough to complete the project, it then becomes a challenge to them not knowing whether to go back to the sponsors or abandon the project uncompleted. The best ways to deal with these shortcomings in project cost estimation includes training and skilling project managers and their team before the evaluation begins. The project team members need to be taught how the different types of estimation methods operate. Secondly, the team must employ the right tools and strategies while predicting costs. Each tool selected must be suitable for that particular project in mind. Lastly, the organization and its management should exhibit a mature approach to the issues. Instead of castigating the outcome, the agency must be ready to listen and understand why the problem aroused.

Earned value management terms

Forecasting

Forecasting is the analysis of data obtained either from an active project, past similar project or experts’ data to give an insight into the project outcome. Project managers use project forecasting to predict profitable margins of the project (Torp & Klakegg, 2016).

Costs

These are monetary values of the resources that will be used in the project

Value engineering

Value engineering is the process of examining new or existing resources with an aim of coming up with the most cost-effective resources for the project. Usually done during the design phase

Project management

This is a general term that describe the process of organizing knowledge skills, resources and strategies in order to initiate and complete a project.

Project controls

Project controls are tools used to gather, manage and analyze data with the sole purpose of understanding and influencing the cost and time deliverables of a project. Managers use information provided by project controls in decision making during project implementation (Torp & Klakegg, 2016).

References

Kim, B., & Reinschmidt, K. (2011). Combination of Project Cost Forecasts in Earned Value Management. Journal Of Construction Engineering And Management, 137(11), 958-966. http://dx.doi.org/10.1061/(asce)co.1943-7862.0000352

Torp, O., & Klakegg, O. (2016). Challenges in Cost Estimation under Uncertainty—A Case Study of the Decommissioning of Barsebäck Nuclear Power Plant. Administrative Sciences, 6(4), 14. http://dx.doi.org/10.3390/admsci6040014