Estimating and Contingency Response Assignment

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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…

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