I talked a little bit in a previous post about Calculating Opportunity Costs.
If you are asked to put together more numbers, there are a few techniques available out of the Project Management Body of Knowledge (fondly known as the PMBOK) that you may find useful.
Using the cost of similar projects to estimate the cost of the current project. Most useful when you and your organization has done this before. The more similar the projects being compared, the more accurate the estimate. I often use this as a “first draft” of potential costs.
This is best done once you have put together a detailed list of activities for your project. You then estimate the cost of each activity. You then sum up the estimated cost of each work activity in the project.
It would be nice if we knew EXACTLY how much stuff costs before we do it – but life doesn’t work that way….
Use this to help with creating the range and probability of how much an activity will cost.
I would use this as I put together my bottom-up estimates.
Step 1: Create 3 estimates
– Most likely (cM) – The cost of the activity based on realistic effort assessment for the required work and predicted expenses. Even if you are doing everything in-house, stick an hourly number on the labor. It’s eye-opening 🙂
– Optimistic (cO) – The activity cost based on best-case scenario.
– Pessimistic (cP) – The activity costs based on everything going horrifically wrong.
Step 2: Plug resulting numbers into formulas
There are two ways to calculate expected costs.
Depending on your organization, they may want to see one or both calculations.
cE = Expected cost
– Triangular Distribution. The average of the most likely, optimistic and pessimistic cost scenarios.
cE = (cM + cO + cP) / 3
– Beta Distribution. This uses the PERT (Program Evaluation and Review Technique) technique to get a weighted estimate between optimistic, pessimistic and most likely scenarios. The assumption is that the most likely scenario is 4x more likely to happen than either the optimistic or pessimistic scenarios.
cE = (4cM + cO +cP) / 6
I find this exercise helps me also determine how much to ask for in a contingency reserve.
Hopefully, you won’t need this.
By definition, we can only account for the stuff we think can go wrong when we put together our pessimistic estimates. The “known-unknowns”.
There is another type of reserve called a management reserve that helps to address the “unknown unknowns” that can impact a project. I would have a sit-down with someone in the organization to ask how they typically handle these types of issues when they appear in other projects and whether there is a standard percentage or fixed allocation for each project.
Having an opportunity to run your numbers by another member of the organization at this early estimation stage is a good idea anyway.