Effective cost estimation is a critical aspect of program management. Without accurate and reliable cost estimates, program managers may struggle to secure funding, allocate resources, and make informed decisions about program scope and objectives. In this blog, we will explore some effective cost estimation techniques for program management that can help program managers to improve their cost estimation processes and make more informed decisions.
Series
Over the next few weeks, I shall share a series of posts entitled “What Great looks like – Cost Management in Program Management”
Tools and Techniques: Effective Cost Estimation Techniques
Historical Data Analysis:
Historical data analysis involves examining the costs of similar programs or projects that have been completed in the past. By analyzing historical data, program managers can identify trends and patterns in costs and use this information to develop more accurate cost estimates for their current programs. This technique is particularly effective for programs that have well-defined deliverables and objectives.
Expert Opinion:
Expert opinion involves consulting with subject matter experts, such as engineers, contractors, or other professionals who have experience working on similar programs or projects. These experts can provide valuable insights into the costs of various program components and help program managers to develop more accurate cost estimates. However, it is important to ensure that the experts consulted have relevant experience and a track record of providing accurate cost estimates.
Parametric Estimating:
Parametric estimating involves using statistical models to estimate costs based on specific program parameters or variables, such as program size, complexity, or duration. This technique can be particularly effective for programs that involve repetitive tasks or processes, as it allows program managers to estimate costs based on established benchmarks and historical data.
Bottom-Up Estimating:
Bottom-up estimating involves breaking down the program into smaller components or tasks and estimating the costs of each individual component. By aggregating these individual cost estimates, program managers can develop a comprehensive cost estimate for the entire program. This technique is particularly effective for programs that involve complex or customized deliverables that may not have established benchmarks or historical data.
Three-Point Estimating:
Three-point estimating involves developing three cost estimates for each program component or task: a best-case estimate, a worst-case estimate, and a most likely estimate. By averaging these three estimates, program managers can develop a more accurate cost estimate that accounts for uncertainties and risks associated with the program. This technique is particularly effective for programs that involve significant uncertainties or risks.
Practice Makes Great (Not Perfect)
The aim of Cost Estimation is not to be perfect, rather after 30 years of Cost Estimating Projects, I have come to understand the substantial difference between Average, Good and Great. Now in the later stages of my career, I am so thankful for the very first 10, 20, 50, 100 projects that I estimated, as it has set me up for the next ~3,000 company budgets, departmental budgets, Program budgets, Program Audits, etc etc etc.
Effective cost estimation techniques are critical for program managers to develop accurate and reliable cost estimates. By using historical data analysis, expert opinion, parametric estimating, bottom-up estimating, and three-point estimating, program managers can improve their cost estimation processes and make more informed decisions about program scope, objectives, and resource allocation. By using these techniques, program managers can improve their ability to deliver high-quality programs that meet stakeholder needs and achieve strategic goals.
When it comes to effective cost estimation techniques for program management, there are several experts in the field who have contributed valuable insights and practices. Some of these experts include:
AACE International:
AACE International is a professional organization for cost engineers, estimators, and project managers. They have published several guidelines and recommended practices for cost estimating in project and program management.
PMI:
The Project Management Institute (PMI) is a global professional organization for project management practitioners. They have published the Practice Standard for Project Estimating, which provides guidance on best practices for project and program cost estimation. Section 4 of the PMBOK has a clinical deconstruction of the process.
NASA:
The National Aeronautics and Space Administration (NASA) is a federal agency responsible for space exploration and aeronautics research. They have developed several cost estimating models and tools, such as the NASA Cost Estimating Handbook, which provides guidance on cost estimation for space exploration programs.
US Department of Defense:
The US Department of Defense (DoD) is responsible for coordinating and supervising all agencies and functions of the government related directly to national security and the United States Armed Forces. The DoD has developed several cost-estimating tools and practices, such as the Defense Cost and Resource Center (DCARC) and the Defense Acquisition Guidebook (DAG), which guide cost estimation for defence programs.
So What does Separate Great from Good
What separates great cost estimators from good ones is their ability to effectively use these techniques in practice (including the selectivity of when to emphasise one over the other).
Great Estimators: Effective Cost Estimation Techniques
Great cost estimators have a deep understanding of the specific program and its requirements, as well as the industry and market trends that may affect costs.
They can gather and analyze relevant data to inform their cost estimates, and they use effective communication and collaboration skills to work with stakeholders and subject matter experts.
Great cost estimators also understand the importance of continuous improvement and are willing to adapt their practices as needed.
They may conduct post-program evaluations to analyze actual costs and compare them to estimated costs, to identify areas for improvement in their cost estimation processes.
Good Estimators: Effective Cost Estimation Techniques
In contrast, good cost estimators may have a fair understanding of cost estimation techniques but may lack the depth of knowledge or experience needed to effectively apply these techniques to complex programs. They may rely too heavily on historical data or expert opinion without properly considering other factors that may affect costs.
Competitive Difference: Effective Cost Estimation Techniques
Why this matters… It may sound silly, however, in a competitive world, your ability to be the best at Program Cost Management is crucial for beating your competitors time after time.
All too often, in competitive bids, the winning determination is not the accuracy of the best estimator to get the Costs ‘Right’, rather, you are competing with poor estimators who get Costs ‘Wrong’.
This is an epidemic in the Construction Industry, evidenced in part by the Zero Sum Game returns over the last 30 years of the industry’s current transformation.
Where I have seen outsized returns than my competitors over time, has been my ability to create a narrative around the estimate and align with the Customers’ Program Goals, taking a risk-based approach to that narrative.
Great cost estimators are those who have a deep understanding of the specific program, use effective cost estimation techniques, have a compelling narrative around their estimate and continuously seek to improve their processes through evaluation and adaptation.
