Cost Estimating

Cost types

• Direct costs — attributable to the project: labour, materials, equipment, subcontractors, travel, licences.
• Indirect costs — overheads apportioned to the project.
• Fixed and variable — whether the cost changes with the quantity of work.
• Capital and operating — an accounting distinction with real consequences, because organisations often approve them through different routes and against different budgets.
• Sunk costs — already spent and irrecoverable. They should not influence any forward decision, and they routinely do.

Estimate classes

Estimates improve as definition improves, and mature practice states the accuracy range explicitly:

• Order of magnitude — early concept, based on analogy or capacity factors. A range of perhaps minus twenty-five to plus seventy-five per cent.
• Budget estimate — preliminary design, sufficient for funding approval, with a narrower range.
• Definitive estimate — detailed design and firm quotations, with a tight range.

The critical discipline is to state the class and the range. A concept-stage number quoted as a single figure becomes the remembered budget, and every subsequent increase is reported as an overrun against a number that was never a budget.

Techniques

• Analogous — scaled from a comparable past project.
• Parametric — a rate per unit of output, calibrated from historical data.
• Bottom-up — priced from the work breakdown structure. The most accurate and the most effort.
• Vendor quotations for procured items, distinguishing firm prices from budgetary indications.
• Three-point estimating to express uncertainty.

What is routinely omitted

• Internal staff time, which is often excluded because it is "already paid for" — it is a real cost and its omission understates the project substantially.
• Project management and support effort.
• Testing, rework and defect correction.
• Training, documentation and handover.
• Data migration and cleansing.
• Licences, subscriptions and ongoing running costs after handover.
• Decommissioning or disposal of what is being replaced.
• Inflation and currency movement on multi-year projects.
• Contingency.

Whole life cost

The project budget is not the cost of the decision. Whole life cost includes operation, maintenance, support, upgrade and eventual disposal, and for most assets these exceed the acquisition cost substantially. Business cases evaluated on project cost alone systematically favour options that are cheap to build and expensive to own.