The goal of each cost estimation method is to estimate fixed and variable costs and to describe this estimate in the form of Y = f + vX. That is, Total mixed cost = Total fixed cost + (Unit variable cost × Number of units).X variable: 53.42
What are the 3 main methods of cost estimating?
2) Analogous Estimating Method.
3) Parametric Estimating Method.
What is the best method for cost estimation?
Analogous: An analogy is a technique used to estimate a cost based on historical data for an analogous system or subsystem. In this technique, a currently fielded system, similar in design and operation to the proposed system, is used as a basis for the analogy. The cost of the proposed system is then estimated by adjusting the historical cost of the current system to account for differences (between the proposed and current systems). Such adjustments can be made through the use of factors (sometimes called scaling parameters) that represent differences in size, performance, technology, and/or complexity. Adjustment factors based on quantitative data are usually preferable to adjustment factors based on judgments from subject-matter experts
Parametric: The parametric technique uses regression or other statistical methods to develop Cost Estimating Relationships (CERs). A CER is an equation used to estimate a given cost element using an established relationship with one or more independent variables. The relationship may be mathematically simple or it may involve a complex equation (often derived from regression analysis of historical systems or subsystems). CERs should be current, applicable to the system or subsystem in question, and appropriate for the range of data being considered.
A more granular approach is bottom-up estimating, which uses estimates of individual tasks and then adds those up to determine the overall cost of the project. This cost estimating method is even more detailed than parametric estimating and is used in complex projects with lots of variables such as software development or construction projects.
Another approach is the three-point estimate, which comes up with three scenarios: most likely, optimistic and pessimistic ranges. These are then put into an equation to develop an estimation.
Reserve analysis determines how much contingency reserve must be allocated. This approach tries to wrangle uncertainty.
How does cost estimating work?
6 steps to learn
- Agree on estimating basis.
- Collect scope documentation.
- Estimate direct cost.
- Estimate other costs and apply factors, indexation and escalation.
- Peer review.
- Finalize basis of estimate report and send estimate for approval.
Types of Costs
- Fixed Costs (FC) The costs which don’t vary with changing output. …
- Variable Costs (VC) Costs which depend on the output produced. …
- Semi-Variable Cost. …
- Total Costs (TC) = Fixed + Variable Costs.
- Marginal Costs – Marginal cost is the cost of producing an extra unit
Cost Estimation Importance
Cost estimation and cost management are an essential part of project management. The project manager is responsible for making the most accurate project budget possible by using a work breakdown structure (WBS) and cost estimation techniques to visualize the project scope and then assign costs to each project task. Knowing the project scope will help not only in the planning phase but throughout the project life cycle, especially during executing, monitoring and controlling a project.
Having a cost estimation process is how project managers are able to achieve the goals and objectives of the project set forth by executives and project stakeholders.
U.S. Government Accountability Office (GAO) 12-step process: The GAO recommends a 12-step process for creating high-quality cost estimates. Essentially a deterministic estimating technique, the 12-step process is a systematic approach where estimators select an appropriate estimating technique for each component of a work breakdown structure, fully identify the assumptions underlying estimates, and conduct risk and uncertainty analyses for estimates.
Cost accounting is a process of assigning costs to cost objects that typically include a company’s products, services, and any other activities that involve the company. Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost.
A cost sheet is a statement that shows the various components of total cost for a product and shows previous data for comparison. You can deduce the ideal selling price of a product based on the cost sheet. A cost sheet document can be prepared either by using historical cost or by referring to estimated costs.