As we have learned in the past
courses, there are four ways in which we can calculate cost estimates
identified as the following:

Analogous
Estimation – Also known as the Top Down method. This estimating technique
offers quick results and is relatively inexpensive to calculate. It is based on
the historical data gathered from a comparative project. I use this technique
often when I have projects that are in the production line assembly. When I
estimate a building to be $80,000, it is because I have already completed so
many that are similar, that I can accurately draw a baseline estimation. When
inquiries are presented by customers regarding a 400sqft office building, I can
quickly and accurately produce a quote within seconds.

Parametric
Estimation – This estimation is like the Analogous method but also considers
other parameters that affect the project. For example, just recently I had to
close out a project that had a few change orders involved. I just had a project
kickoff with another one that was similar. When I estimated the project
duration, I reviewed the impact to the schedule caused by the change order and
adjusted accordingly. With this, I was also able to factor in the cost
estimation for the resources required and finalize a more accurate cost and
duration proposal.

Three Point
Estimation – Three-point Estimation method takes factors like most likely (ML),
pessimistic (PT) and optimistic (OP). The formula is ((OT+4(ML)+PT)/6). When we
delve deeper into the meaning of this and why we use it, we can see that the
output is the average of all the possibilities. I use this to generate a task
duration when I know that there are uncertainties which makes my estimations
more accurate and provides room for “Total Float,” when performing the CPM.
This is how I get a better estimation for cost and duration.

Bottoms up
Estimation -Very accurate estimating method but takes a lot of time and
involves higher cost. Also known as the “Definitive Technique” where “The cost
of every single activity is determined at the Lowest level of the WBS, and then
rolls up to calculate the total project cost” (Usmani, 4 Tools to Estimate Costs in the Project Management, 2019). As stated, this
requires the breakdown of each work package to the individual task level. I
personally have never used this in my current PM Position unless it is to
identify a change order. The way I understand it would be to breakdown the WBS
and assign resources, hours, equipment costs etc. Then, I would add these up
into the assigned work package and all the way up to the highest WBS level. We
would want to use this method when the WBS is highly detailed.

Within
project management there are contingency reserves and there are management
reserves. Contingency reserves are managed and controlled by the project
manager, whereas the management reserve is managed and controlled at the
organizational level. To determine the amount allotted as a contingency
reserve, we may consider calculations and diagrams to identify low level
requirements. These would include the percentage of the project costs, Expected
Monetary Value (EVM), a Decision Tree analysis and/or a Monte Carlo Simulation.
The output to these methods would be a monetary value to set aside based on the
risk probability and the associated cost in resource allocation.

The Management reserve is much different. The
project manager must receive permission to use theses funds as they are usually
a percentage agreed upon to the total project budget. As stated by (Usmani, Contingency Reserve vs Management Reserve,
2019),
“Management reserve is not an estimated reserve; it is a figure which is
fashioned according to the organization’s policy.”

According
to (Matrix,
n.d.)
the purpose of the Resource Requirements Matrix (RRM), is that it “Reflects an
estimated total cost for implementing an activity or major project.” WBS work
packages are built to contain the low-level requirements that require work at
the task level. These task levels will then determine the resources and costs
required to complete the assigned tasks. The budget can be calculated by
assessing the matrix and ensuring any potential cost that could impact the
project. For example, orientation, team training, ongoing meetings, action
items, administrative support, engineering, product development etc. All of
these will have an associated cost involved and when we are able to break these
down into an RRM, we can easily determine where the costs are coming from and
work backwards from there to determine our total project budget.

Works Cited

Matrix, R. (n.d.). Tool 163: Resource Requirements
Matrix. Retrieved from Flylib: https://flylib.com/books/en/2.890.1.249/1/

Usmani, F. (2019, January 28). 4 Tools to Estimate
Costs in the Project Management. Retrieved from PM Study Circle:
https://pmstudycircle.com/2012/06/4-tools-to-estim…

Usmani, F. (2019, January 5). Contingency Reserve
vs Management Reserve. Retrieved from PM Study Circle:
https://pmstudycircle.com/2012/02/contingency-rese…