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Maturity of cost estimates?

In costing Finance and Accounting | 4 comments

the tolerance on a cost estimate (+/- 20%) is an indication of the accuracy, but how do you ensure that the cost estimate is a good quality?

Comments

  • Chris.Green_7983
    By Chris.Green_7983

    For non-labour, I would always back it off with a quote from a supplier. Most do this, but then quotes tend to expire and the non-validity of them then causes increases.

    For labour, I find the biggest increases come about as a result of the plan not being well thought through enough with all of the stakeholders.

  • Adrian Taggart
    By Adrian Taggart

    The jargon and parameters used to describe estimates is something that always confuses me. Perhaps someone can help me a little by clarifying exactly what the '(+/- 20%)' means. For instance does it define the limits within which you are say, 90% confident, that the final figure will lie? Thanks.

  • Mounir Ajam
    By Mounir Ajam

    It depends!

    It depends on the industry.

    I came from petrochemical background working for an organization with mature project management practices.

    The key principles for estimating are:
    1. Excellent historical data - organized for ease of estimation
    2. Proper processes and procedures
    3. Experiences professionals that can visualize what is not there

    Next

    On a give project we do not estimate once. For capital projects three estimates along the project life cycle is the norm, each with different accuracy and is based on varying level of details.

    In addition, the estimate must include all things beside work-hours and materials. For example, are you dealing with new technology - add a technology allowance (contingency) for the new tech item. Is your project a year in the future, consider escalation (expected inflation).

    Other questions or points to consider:
    Proper review by various stakeholders to ensure capturing requirements from all angles.

    Hope this help

  • Mounir Ajam
    By Mounir Ajam

    @Adrian

    Here again it depends. Some use +/-20% others may use +/-5 or 10% depend on the estimate.

    One approach to consider -
    1. Let us say your company wants to achieve 2 Sigma Process, which is about 95%.
    2. In this case +/-20% that the Std Deviation is 10% (2 sigma = 2 x std dev = 2 x 10%) = 20%.
    3. Blending the two together - we are looking at 95% of the projects in the organization to be complete between 80% and 120% of the base. In this case 5% will be higher than 120% or lower than 80% ....... assuming normal distribution.

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