The project subject to this week discussion is a construction of commercial building. The organization has a historical data for such projects. However, the original cost estimation for the previous project has errors which shown in cost overrun. From my experience, bidding on construction projects usually associated with Bill Of Quantities (B.O.Q) provided by the client which indicate the project activities along with contractual quantities.
What are the cost estimation techniques?
Reference to (Project Management Institute, 2008, p169), there are nine tools and techniques used to estimate the cost. (Sanghera 2010) discussed these tools as per the following:
1- Expert judgment: this technique usually used as a part of other one. For example, expert judgment could recommend the percentage should be used as a contingency reserve. However, expert judgment could be used to estimate the whole cost of an activity whenever there is no enough information.
2- Analogous estimating: this method uses the historical date for old projects executed to estimate the cost for similar new projects. The historical data used on this method is not detailed, such as project square meter cost or task cost without breakdown of the task components.
3- Parametric estimating: this is a technique that use some parametric and information from historical data such as unit rate and actual quantities, which can be applied for similar projects with higher rate of accuracy.
4-Bottom-up estimating: this technique involves the estimation of the activity components and parts costs to calculate overall cost for the activities and accordingly the project.
5- Three-point estimates: this technique is used to increase the accuracy of tasks estimation where there is limited information. It is common to estimate tasks duration with this technique, however, it is applies in cost estimate as well.
6- Reserve analysis: This technique adds some additional units (money, labor, time, etc.) to the calculated units to reduce the risks associated with this task.
7- Cost of quality: this is the cost of: “implementing conformance to the requirements” and avoid additional cost and rework due to poor quality.
8- Project management estimating software: this is not a technique by itself. Project management software could help to facilitate the time and increase the accuracy of estimating quantities to be implemented in a technique such as Bottom-up estimating.
9- Vendor bid analysis: I would call this technique “get the information from the source.” It is common used in construction projects to contact the vendors of main tasks involves on the project during the bidding stage to get a quotation of the latest prices.
Which cost estimation technique?
I would choose a combination between parametric estimating and vendor bid analysis techniques. For this stage of the project “bidding”, it is not feasible to perform very detailed calculations where most likely there are time and cost restrictions. For the equipment’s and main items, I would use the vendor bid analysis technique to collect accurate prices from the source. For other activities, I would use the historical actual rate per unit and apply these rates to the new project B.O.Q.
Advantages and disadvantages of your chosen technique
- Acceptable accuracy for the project stage “bidding”.
- Less time and cost to finish the cost estimation comparing to bottom-up estimating.
- This estimation could be used as a starting document in planning process group if the project awarded to the company.
- Could reduce the risks by adding Risk Analysis and Contingency (Hollmann 2009)
- Vendor’s response time not in full control to fulfill the bidding date.
- If the contract is a lump sum contract, any mistakes in the B.O.Q quantities could affect the project-estimated costs (negative or positive).
If the historical data is not accurate, this could lead to wrong cost estimation.
HOLLMANN, J.K., 2009. Recommended Practices for Risk Analysis and Cost Contingency Estimating. AACE International Transactions, , pp. RISK.01.1-RISK.01.14.
PROJECT MANAGEMENT INSTITUTE, 2008. A guide to the project management body of knowledge (PMBOK guide). 4th edn. Newtown Square, Pa.: Project Management Institute.
SANGHERA, P., 2010. PMP in depth, second edition : project management professional study guide for the PMP exam / Paul Sanghera. Australia ; Course Technology/Cengage Learning, 2010; 2nd ed.