PMP Project Management Professional Study Guide, Third Edition (Certification Press)

The output of cost estimating is the actual cost estimates of the resources required to the complete the project work. The estimate is typically quantitative and can be presented in detail against the WBS components or summarized in terms of a grand total, by phases of the project, or by major deliverables. Each resource in the project must be accounted for and assigned to a cost category. Categories include the following:

• Labor costs

• Material costs

• Travel costs

• Supplies

• Hardware costs

• Software costs

• Special categories (inflation, cost reserve, and so on)

The cost of the project is expressed in monetary terms, such as dollars, euros, or yen, so management can compare projects based on costs. It may be acceptable, depending on the demands of the performing organization, to provide estimates in staffing hours or days of work to complete the project along with the estimated costs.

As projects have risks, the cost of the risks should be identified along with the cost of the risk responses. The project manager should list the risks, their expected risk event value, and the response to the risk should it come into play. We’ll cover risk management in detail in Chapter 11.

Refining the Cost Estimates

Cost estimates can also pass through progress elaboration. As more details are acquired as the project progresses, the estimates are refined. Industry guidelines and organizational policies may define how the estimates are refined, but there are three generally accepted categories of estimating accuracy:

• Rough order of magnitude This estimate is “rough” and is used during the Initiating processes and in top-down estimates. The range of variance for the estimate can be –25 percent to +75 percent.

• Budget estimate This estimate is also somewhat broad and is used early in the planning processes and also in top-down estimates. The range of variance for the estimate can be –10 percent to +25 percent.

• Definitive estimates This estimate type is one of the most accurate. It is used late in the planning processes and is associated with bottom-up estimating. The range of variance for the estimate can be –5 percent to +10 percent.

Considering the Supporting Detail

Once the estimates have been completed, supporting detail must be organized and documented to show how the estimates were created. This material, even the notes that contributed to the estimates, may provide valuable information later in the project. Specifically, the supporting detail includes the following:

• Information on the project scope work This may be provided by referencing the WBS.

• Information on the approach used in developing the cost estimates This can include how the estimate was accomplished and the parties involved with the estimate.

• Information on the range of variance in the estimate For example, based on the estimating method used, the project cost may be $220,000 ± $15,000. This project cost may be as low as $205,000 or as high as $235,000.

Developing the Cost Management Plan

The cost management plan details how variances from the project costs will be managed. The performing organization may have policies and procedures on the expected reactions to cost variances within the project. For example, variances over a set dollar amount may prompt the project manager to create a Variance Report, meet with management, or even initiate an audit.