Estimating Project Costs

Establishing a project budget can be as simple as calculating what it will cost to perform each task in the work breakdown structure and adding them to get a total budget. However, as any project manager who has created a project budget knows, creating a project budget is rarely simple or straightforward (and usually not totally in your control!).

The complicating factors include clients who want as much functionality as possible for the lowest cost, business development and sales staff who wants to win contracts, and senior managers who want to maximize profits. In addition, everyone wants the product to work well and be easy to use. The person in the middle of this vested-interest conflict is the project manager.

And for those certified PMPs, there is a whole section in the PMBOK® that talks about this topic.  Planning in chapter 3 talks about estimating costs and then budget as a part of the planning process and then chapter 7 “Project Cost Management” discusses the techniques and best practices for preparing budgets and managing the costs.

Just because creating an acceptable project budget is not simple does not mean you will not have to do it. So, how can a project manager protect the hoped for success of the project and manage risks by not agreeing to do more than can be done?

Not the Dilbert way – of course. Checking out PMBOK, Chapter 7, they suggest beginning with project scope, which may require the addition of design detail to create defendable cost numbers. You also need the project schedule and information on staff availability. Once you know what needs to be done, how quickly and by whom, cost estimating can begin.

PMBOK lists several cost estimating methods that may be done alone or in complementary fashion.

  • Expert judgment – your experience on similar tasks and projects, input from consultants
  • Analogous estimating – other similar organization projects cost history data
  • Parametric estimating – Parametric Cost Estimating Handbook from NASA offers guidance, though somewhat dated. COCOMO II is used in traditional waterfall style software development. According to S. Chandrasekaran from St.Joseph’s College of Engineering, Agile software development requires a different cost estimating model which he describes in his paper, “Multi-criteria Approach for Agile Software Cost Estimating Model,” which can be found with other cost estimating articles at 2Dix.
  • Bottom up
  • Three point estimating – most likely, optimistic, pessimistic
  • Reserve analysis – with a contingency fund to cover uncertainty in estimates
  • Cost of quality – add in

My advice to you is “back up your estimates with data”. Be prepared to justify costs and explain risks – in non-technical terms — of making too optimistic assumptions. Try to achieve reduction in scope commensurate with lowered budgets. Do not feel too badly if you lose some of the cost estimating battles.  The real key is to document your assumptions (like there are 7 modules to design, or we will perform 2 week long tests).

What has been your experience with cost estimating software projects in the real world? Do you pad your estimates knowing you may have to settle for less?  Or do you just add some contingency to duration and costs?

Leave a comment and share your experience!

Knowledge Management is not an Oxymoron

As a project manager, you may be too busy putting out new releases and fires to think much about knowledge management. I get it. However, from an organizational perspective, effectively managing the critical resource called, “knowledge” can make the difference between winning and losing in a competitive marketplace.

Serious thinkers have offered insight into the essence of knowledge over the centuries. For project management though, I particularly like this observation from Mark Twain, “A man who carries a cat by the tail learns something he can learn in no other way.” Not quite true, Mr. Twain. Knowledge management processes help you learn without trial and error as your only guide.

Think of knowledge as data enhanced with context. For example, the values 35, 57, 25, and 10 are bits of data that are not particularly useful by themselves. However, when placed in a table called, “monthly number of user complaints,” with columns labeled, “January”, “February”, “March” and “April,” you have information. Correlate the table with another piece of information – that there was a new software version released in March — and you have some useful knowledge or at least a potentially significant correlation.








Why Knowledge Management

  • Shorten the time from needing information to finding it—for example, most knowledge workers spend from 15% to 35% (or an average of 25%) of their work time searching for information
  • Reduce the duplication of existing information—for example, in most organizations we spend 10-15% of our time duplicating existing information (that we don’t know already exists)Make training more relevant—experts believe that 80% of what people actually learn today is informal—collaborative, “water cooler” discussions, from a mentor, or from a work group
  • Identifying commonalities in failures and successes
  • Developing realistic costs based on experience
  • Improve customer service and help desk response times by tracking previous problems and resolutions for reuse
  • Recognize the value of employee’s knowledge by providing  tools such as My Sites that enable rich profile sharing, discussion groups, and internal blogs
  • Improve decision making by using accurate, timely information, as well as the wisdom of others
  • Transfer existing knowledge to other parts of the organization by making it more readily available and organizing it for easy access and reuse
  • Facilitate interaction with remote team members through collaborative portals and tools like discussion groups, forums, and blogs

Project Manager KM Support Activities

  1. Investigate knowledge management basic principles and techniques (see some resource links below).
  2. Take advantage of the expertise of a KM professional. Areas where a professional helps establish a useful knowledge management system include knowledge acquisition, adding context to documents, retrieving knowledge through queries, tool selection and training.
  3. Brainstorm with your team about concepts, information and data that help them do their jobs. Extract from this discussion key words and concepts to represent within the KM document index.
  4. Work with any internal KM initiatives to ensure that information relevant to project management is captured. Offer to help in adding context information that project managers need.
  5. Evaluate tools to facilitate KM tasks — creating, capturing, refining, storing, managing and disseminating — information. Many helpful tools may already be part of your existing tool base.
  6. Create a common schema for tagging document content to improve search and retrieval by adding context and relationship information. (Context information typically provides answers to the questions: who, what, when and where. Relationship tags may include qualifiers such as how much, how long, part of, similar to, owned by, causes and categorization.)
  7. Build or use a smart search capability that is able to use the context and relationship information stored with the documents. You can find tool options by searching the web for tools that claim, “intelligent search”, “smart search”, “ontology-based search”, “enterprise knowledge management.” Or, better yet, ask your KM consultant.
  8. Practice.


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