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Estimating Project Costs
The Wideman Comparative Glossary of Common Project Management Terms 
describes estimating cost as "The process of forecasting a future result in terms of cost, based upon information available at the time."
Trevor L Young in his book How to be a Better Project Manager defines estimating as "A decision about how much time and resource are required to carry out a piece of work to acceptable standards of performance."
Many techniques, books and software packages exist to help with estimating project costs. A few basic rules will also help ensure that an accurate and realistic estimate is produced.
- Assume that resources will only be productive for 80 percent of their time.
- Resources working on multiple projects take longer to complete tasks because of time lost switching between them.
- People are generally optimistic and often underestimate how long tasks will take.
- Make use of other people's experiences and your own.
- Obtain an expert view.
- Include management time in any estimate.
- Always build in contingency for problem solving, meetings and other unexpected events.
- Cost each task in the Work Breakdown Structure to arrive at a total, rather than trying to cost the project as a whole.
- Agree a tolerance with your customer for additional work that is not yet defined.
- Communicate any assumptions, exclusions or constraints you have to your customer.
- Provide regular budget statements to your customer, copying your team, so that they are always aware of the current position.
Much data exists about the length of time particular items of work take, especially in the construction industry. A useful database of production rates can be found at Planning Planet
Common Mistakes
These are some of the common mistakes that can lead to inaccurate estimates.
- Not understanding what is involved to complete an item of work.
- Starting with an amount of money and making the project cost fit it.
- Assigning resources at more than 80 percent utilisation.
- Failing to build in contingency.
- Failing to adjust the estimate in accordance with changes in scope.
- Dividing tasks between more than one resource.
- Providing estimates under pressure in project meetings.
- Giving single-data-point estimates rather than range estimates.
Three Point Estimating
Three point estimating is a technique that helps project managers produce better estimates. Rather than a ballpark estimate, project managers can use three point estimating to gain a greater degree of control over how the end value is calculated. The end value is the weighted average of three estimates.
To do three point estimating for a particular task or activity, ask the resource for their best case, most likely and worst case estimates. Add the best case estimate to four times the most likely, then the worst case and divide by six. This gives you your estimate (E value) which is a slightly more balanced view of how long the task or activity is likely to take.
The formula can be expressed as:
E = (B + 4 M + W)/6
- B = best case (1/6)
- M = most likely (4/6)
- W = worst case (1/6)
Monte Carlo Simulation in MS Excel
The Monte Carlo method of estimating project cost is based on the generation of multiple trials to determine the expected value of a random variable. There are a number of commercial packages that run Monte Carlo simulation; however a basic spreadsheet such as Microsoft Excel can be used to run a simulation.
Monte Carlo Simulation in MS Excel
Project Management Proverb
The same work under the same conditions will be estimated differently by ten different estimators or by one estimator at ten different times.
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The accuracy of the estimate should be based on statistical information for that particular area and an associated confidence level. For example, I use 60 past projects and an 90% confidence level to come up with my all-in of $50/hour +/-$5/hour.
I think the 547 is a mistake.
What more does this give me besides a slightly complicated spreadsheet that calculates the mean? I could have just averaged them to get the same result. If there is no way to skew the number generation based on statistical sampling, this just give you the mean or average with everyincreasing accuracy.
Please help me to understand what this does for me without statistical distriubtion data. Not trying to be smart ass, I really want to understand.
If this is the case, the Expected project cost = AVERAGE(H4:H365) to have 362 rows (row 4 through 365 inclusive).
However, the PDF uses AVERAGE(H4:H547) instead.
How H547 was derived there?
The main thing is to always remember it is an ESTIMATE not a QUOTE as some stakeholders seem to get this mixed up.