Understanding cost estimates

Question 1

Why is estimating project costs important?

Answer 1

Everyone wants to know the cost of a project, and accurate estimates help in planning and controlling project expenses.

balancing stakeholder expectations and the need for control

Question 2

What is the role of stakeholder expectations in estimation?

Answer 2

Stakeholder expectations should be folded into the project scope, and project managers must balance these expectations with the need for control over costs.

Question 3

What is a common challenge faced during cost estimation?

Answer 3

Dealing with uncertainty is a common challenge, as unexpected issues can arise that affect costs.

Question 4

How does a good estimate impact future cost tracking?

Answer 4

A better initial estimate allows for more effective tracking of expenses as the project progresses.

Question 5

What is the difference between estimation and tracking?

Answer 5

Estimation is done upfront to predict costs, while tracking is done during the project to monitor actual expenses against the estimate.

Question 6

Role of scope and WBS in estimation and tracking

Answer 6

Scope and WBS are the foundation for the estimate, and the estimate is the foundation for measuring progress from the baseline (cost baseline gathered from estimate).

Question 7

Cost estimation accuracy over time

Answer 7

1. Concept stage: At the beginning of a project, estimates are rough and not very accurate (more likely to estimate cost as low).
2. Planning stage: As the project moves into detailed planning, the accuracy of estimates improves.
3. Execution stage: During the actual execution of the project, estimates become even more precise. Estimation error decreases leading to accurate tracking of costs.
4. Completion stage: By the end of the project, the estimate should ideally have zero error (you know the exact cost of the project).

Question 8

What is a rough order of magnitude (ROM) estimate?

Answer 8

A ROM estimate is a preliminary estimate that can vary from -25% to +75% of the actual cost.

ROM for $100,000 is $75000 to $175000

Question 9

What is a definitive estimate?

Answer 9

A definitive estimate is a more accurate estimate that ranges from -5% to +10% of the actual cost.

Question 10

What is the difference between accuracy and precision?

Answer 10

Accuracy refers to how close a measurement is to the true value, while precision refers to how closely measurements cluster together.

Accuracy is how close you got to the actual number.
Precision is the clustering and decimals

Question 11

Goal of cost estimation

Answer 11

Create a number for the budget

Question 12

What is a budget?

Answer 12

The budget includes all funds required to execute the project

Question 13

What is a cost baseline?

Answer 13

The cost baseline is the approved time-phased budget, meaning it is not just a single number but a budget spread over time.

Question 14

Why is it important to emphasize the term “time-phased” in budgeting?

Answer 14

It is important because it helps project managers understand when cash is needed throughout the project, allowing for better financial management.

Budget needs not just end value but time phased values as well

Question 15

What happens when actual costs do not align with forecasted costs?

Answer 15

This situation creates budget variances, which occur when the actual and forecasted costs do not agree.

Question 16

Who should make the cost estimates for a project?

Answer 16

Cost estimates should be made by people familiar with the tasks involved, ideally those who have worked on similar projects in the past.

Question 17

Why is it beneficial to have several people make independent estimates?

Answer 17

It allows for cross-verification; if estimates are similar, confidence in the accuracy increases, and if they differ, discussions can lead to better insights.

Question 18

What conditions should be assumed when making estimates?

Answer 18

Estimates should be made under normal conditions, using efficient methods and normal resources, without accounting for potential issues or contingencies.

Question 19

What is the significance of using consistent units in cost estimation?

Answer 19

Using consistent units (e.g., all in dollars or all in hours) is crucial to avoid confusion and ensure accurate calculations.

Question 20

How should tasks be treated when estimating costs?

Answer 20

Each task or activity should be considered independent, and estimates should be made for each task separately.

Question 21

What is the difference between cost and price?

Answer 21

Cost refers to the money spent to acquire a product or service, while price is what you are willing to pay, which can include profit margins.

Question 22

Can the cost of a project change after it has been estimated?

Answer 22

No, the cost is fixed once estimated based on the tasks and resources required, while the price can vary based on market conditions and perceived value.

Factors like urgency, quality, and brand perception can influence the price, making it variable compared to the fixed cost.

Question 23

Why is it important to track budget variances?

Answer 23

Tracking budget variances helps project managers understand how well the project is performing financially and allows for timely adjustments.