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In project management, cost estimation can be defined as a procedure that is used to predict the resources and finances needed for a specific project. When estimating the cost of a project, all the elements required for the project are considered. These elements include labor and all the material required and the project’s budget is determined (Adnan, et al., 2005). The organization determines if the project has a future depending on the initial cost estimate and if the value is too high the organization opts for a more affordable project. The initial cost estimate is also used to determine the scope of the project.
Cost Estimation Problems.
Deadlines- one of the biggest challenges for any project’s cost estimation is meeting the set deadlines. The project manager is usually under pressure to know what to prioritize to deliver the estimation in time.
Changes in project specifics- the project is always evolving and the project methods and specifics are likely to change at any time. The estimator is likely to have a very hard time factoring those changes in the estimate.
New changes in contract procurement methods- many organizations have been moving from the traditional project management, planning, control systems, and budgeting. The estimator needs to be at per with these methods.
Technology- technology is a very great tool for helping estimators in turnover of deliverables but the estimator has to adapt and learn how to use it.
I work in a construction company and the following are the frequent problems I encounter while estimating cost;
- I am required to prepare budget estimates with minimum details
- It is challenging for me to know the pulse of the market and produce a competitive bid.
- Sometimes I have to meet hard deadlines with a lot of research to do and very little information provided.
- It is also very hard for me to estimate all costs when working on new types of projects.
- Sometimes I am forced to play changed roles according to procurement methods and it is very challenging.
- Another problem that I face in cost estimation is the use of technology for quantity take-offs and estimating and catching up with the various advancements in BIM (Building Information Modelling).
Risk analysis involves detecting and evaluating issues that could potentially impact projects and major business initiatives so that the risks can be avoided or alleviated. The analysis precisely focuses on the potential risky events caused by human activities or those that occur naturally (Vose & David, 2008). Most of the risks that a project is likely to face are anthropogenic and not natural.
Analyzing of risk is a very good idea that every project manager utilizes for the project to be successful. It is a very key component for achieving successful project deliverables, but it all goes wrong when the project team tasked with risk management over relies on the risk factor of the project. If risk analysis becomes the main drive for the development of the project it becomes overkill and becomes a problem. Most of the organizations with risk-averse cultures forget that risk analysis is not the only issue to deal with in a project.
The current business environment is crowded with uncertainty and it is understandable if the organizations tend to naturally feel the need to use more risk-averse criteria. But some levels of risk-averseness are likely to threaten the viability of the project through overcompensation and introduction of unnecessary costs. Many researchers may be cause of the increasing cases of risk analysis overkill in risk management (Vose & David, 2008). The reason for this sentiment is because they have concentrated on studying the pitfalls of not identifying and managing risks. This has left no information available to enlighten project managers on the possibility of overzealous risk analysis.
How to Counter the Overkill
- Concentrating on tangible risk-reducing actions
- Fitting in risk analysis controls in daily activities
- Identifying and assessing risks systematically
- Finding scrutiny measures that are proportional to the risk
- Active engagement with key project players.
Bottom up is a budgeting process that begins at the low-end side of the organization usually from the smaller projects, to the higher end of the organization. It incorporates the building of smaller departmental budgets which are put together to form the budget of the organization.
- The resulting budget is usually very accurate since the departments use their vast knowledge to include everything in the budget.
- When the budget process starts from the bottom, the management is also able to understand deeply the goals of the company.
- This approach also brings about departmental communication since some departments have interdependent budgets and have to team up in developing their budgets.
- This approach also involves the entire team in formulating the budget hence improving their morale in implementing it.
- Department can become too involved in budgeting for every item and end up over budgeting.
- The department managers may end up allocating unnecessary funds on their departments to add some cushion in case of their budget numbers having troubles
- The budgeting process involves many people and is therefore bound to take longer.
This approach to budgeting starts with estimating the budget for higher level tasks and then goes down to the lower level tasks. All the budgeting is done by top level management and lower-level staff have no inputs.
- The senior management is concerned with the overall growth of the organization and therefore they will feature every function of the organization in the budget.
- This approach also saves time for the departmental managers since they only implement an already-formulated budget.
- The budgeting approach is less tedious since only one budget is created at a time rather than combining many departmental budgets.
- The departmental managers lack incentive to implementing the budget since they did not prepare it.
- The senior managers may make mistakes since they do not have insight on expenses for each department.
- Departments may retaliate by underperforming if they are underfunded.
Definition of PERT
PERT is an abbreviation that stands for Project Evaluation Review Technique. The term was coined by a submarine research team that was creating a nuclear weapons program in 1959. This process has since then been adopted by industries in managing their marketing strategies. It can also be employed in other activities in an organization including operative and business projects. Theoretically, PERT can be applied in almost any operation (Cottrell & Wayne, 1999). The PERT chart can be applied in any project and it maps it from the beginning to the end. This chart helps in identifying the tailbacks and makes it possible for them to be addressed instead of wasting time waiting for the problems to come up.
- It provides the answers to the what-if questions that arise in the course of the project. It answers these questions by enabling the project manager to create a milestone for the project. The PERT chart can be used to predict all the outcomes that may cause hinderances to the project (Cottrell & Wayne, 1999). The outcomes of the prediction can be used in preparing on how to address the problems and keep the project on track.
- PERT chart also makes management of the project easier especially in relation to allocation of resources and budget. It supports by management through enabling anyone who wants to know the progress and the stage at which the project is to get that information.
- A PERT chart requires very heavy resources which can be used in other areas of the project. PERT chart consumes a lot of time and effort to create, develop, and maintain. It consumes a lot of time because it needs input from many people and organizations.
- PERT chart uses beta distribution to estimate time and therefore the estimate may be correct while the distribution is wrong.
Parametric estimating is a technique used to determine the most accurate duration and cost of a project. This estimating technique is very easy to implement. It starts by defining the specifications of every unit of the deliverable and then goes to researching the available information the cost of each unit and the hours of work (Han et al., 1990). The parametric estimating technique requires published rates.
I was estimating the cost of building a high-rise office building. In this kind of case, I had to use published rates and therefore I consulted with an estimating publication. The kind of office I want to build will include luxurious finish, and stressed concrete and other specifications and will cost $175 per square foot. The estimated cost is calculated by multiplying the number of square feet with appropriate rate. If the published rates were provided, an estimate of the hours required to paint one office can be calculated using parametric estimating. I looked up the specifications of the office to be painted which has 12-foot ceilings. I then put down a primer and used latex paint to paint the office. I then looked up the published estimate and found that it took 0.25 hours to paint one linear foot.
So, if 1 linear foot= 0.25 hours
And the office has 2, 000 linear feet
Then, estimate = 2, 000 * 0.25 = 500 hours.
Parametric estimation usually works in tasks that are repetitive, such as building of a six-story building and painting its walls. These tasks have a lot of data available because they are common. This data is very useful and therefore various industries are encouraged to compile and publish this kind of data so that it can be applied in parametric estimating. Parametric estimates are more accurate and credible as compared to other estimating techniques.
Adnan, et al. “Product cost estimation: Technique classification and methodology review.” (2005): 563-575.
Cottrell, Wayne D. “Simplified program evaluation and review technique (PERT).” Journal of construction Engineering and Management 125.1 (1999): 16-22.
Han, Aaron, and Jerry A. Hausman. “Flexible parametric estimation of duration and competing risk models.” Journal of applied Econometrics 5.1 (1990): 1-28.
Vose, David. Risk analysis: a quantitative guide. John Wiley & Sons, 2008.