What is cost estimation? We explain it to you in 4 steps

Cost estimation is the art of assigning value. It is also a science making use of a wide range of techniques to predict the costs of activities and assets. There exist a wide range of methods, applications and names for estimates. It might seem like a forest full of definitions out there. We will explain the principles of cost estimating for you in 4 easy steps:

1. Cost estimation is part of the cost engineering profession. It is used to predict the quantity, cost and price of the resources required by the scope of a project. A project might be any process that is started to perform work activities and/or create assets. The accuracy of the estimate depends heavily on the level of project scope definition: as the design and conditions of the project become better defined, so do the estimated values.

2. Cost estimation is needed to provide decision makers with the means to make investment decisions, choose between alternatives and to set up the budget during the front end of projects. For this, estimates made by vendors and contractors need to be validated by clients as well. In later phases of the project, the budget estimate is used as a baseline to assess the performance of a project. 

3. Estimating is done by breaking down the total scope of a project in manageable parts, to which resources can be assigned and costed. There are standardised ways of breaking down a project, like the Work Breakdown Structure (WBS) and the Cost Breakdown Structure (CBS), but depending on the needs of the project team and external parties multiple structures are often implemented to align reporting and sharing of cost data.

4. A cost estimate is more than a list of costs. It also includes a detailed Basis of Estimate (BOE) report that describes the assumptions, inclusions, exclusions, accuracy and other aspects that are needed to interpret the total project cost. Otherwise, it would be a meaningless number. The BOE is required to communicate the estimate to the various parties involved in the decision making, but is also handy during close out, when the performance of the project is compared with other projects. It is the vital part often overlooked, that allows you to learn from your experience and mistakes.

Keep these 4 steps in mind and you already have a framework to start making estimates. A solid, accuracte estimate will also help you during the execution phase of the project. Make sure to set up the estimate in a structured way to allow for an easy transition into project controls software.

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