Building an Estimate
In order to execute your project successfully, you will need to be able to estimate the cost to complete each of the activities as well as allowing for a sum to cater for additional costs which may arise due to the risks of taking on the work. It is important that you follow a clear process to calculate the well defined cost element, which we call the BASE ESTIMATE as well as the risk element, which we call the RISK PREMIUM or CONTINGENCY. Together the two make up the CONTROL ESTIMATE, that is, the amount of money we expect the project to cost and against which we will measure all our costs and assess whether we are executing to, above or below our estimate.
Let’s take a look at the process we will follow to build our estimate.
How to build your estimate
Take the resource loaded plan and assign the level of effort required for each WBS element as well as the associated unit cost (the example below measures in hours; this could also be days or perhaps a fixed cost depending on how the work is executed).
Now add the cost of the other resources required to execute each element of your project; for example, materials, or equipment, or facilities etc..
You now have a base estimate for your project. However, you have not made an allowance for the risks that you identified during the development of your scope document. We need to add some contingency to allow for these costs that may arise. In the nexr post we will now review how we add a contingency/risk premium to our base estimate to produce a control estimate for our project.