Valuation [1] is an estimate of the probable cost of those resources that will be required to carry out the work stipulated by the project. Qualitative "cost estimates" of the project in the framework of project management necessarily take into account the production schedule of the project and the process of "cost estimation" is called costing , not "budgeting".
Cost estimates are calculated throughout the project. In order to give the project permission to start, you must first check the conceptual (pre-project) estimates of its value. At this stage, a preliminary assessment is used, the so-called “ order of magnitude estimate ”, which differs from the real value in the range from −25% to + 75%. As the project progresses, more accurate assessments are required. At the same time, budget estimates are determined with an accuracy of −10% to +25%. And finally, by the time the agreed project cost baseline is worked out, a definitive estimate should be made, the value of which should not be less than the real one by more than 5% and exceed it by more than 10%.
In the early stages of the project, the uncertainty in understanding the real scope of the project is still too great, and there is no point in the cost of efforts to make more accurate cost estimates at each stage of the project than is currently necessary.
There are several generally accepted methods for calculating valuations. Everyone can choose a method that provides the required accuracy of the assessment and corresponds to its capabilities in terms of money and labor costs for conducting the most valuation.
Content
Top-down Evaluation Method
The top down estimate method is used to estimate costs in the early stages of a project when project information is still very limited. The meaning of such an enlarged expert assessment is that it is carried out in a generalized manner and the project is evaluated as a whole by one indicator. Evaluation is convenient in that it does not require much effort and time. The disadvantage is not as high accuracy as it would be with a more detailed assessment.
Bottom Up Evaluation Method
The bottom-up assessment method is needed to develop an agreed base project price or a final project cost estimate. The name of the method reflects the method of calculating the cost estimate - the method provides for an assessment of costs at detailed levels of the project, and then summing up costs at higher levels of generalization to obtain an estimate of the cost (estimate) of the entire project. To implement such a "convolution" of costs, you can use the structure of the decomposition of work (SDR or WBS) of the project. The advantage of this method is the accuracy of the results, which in turn depends on the level of detail when evaluating costs at the lower levels of consideration. From mathematical statistics it is known that the more details are added to the consideration, the higher the accuracy of the estimate.
The disadvantage of this method is that the cost of funds and time to perform a detailed assessment is much higher.
“By analogy” evaluation method
The “by analogy ” assessment method is one of the varieties of the “top to bottom” assessment method. Its essence is that to predict the value of the evaluated project, actual data on the cost of previously completed projects are used. The basis of this method is the idea that all projects are somewhat similar to each other.
If the similarities between the peer project and the project being evaluated are large, then the results of the evaluation can be very accurate, otherwise the evaluation will be incorrect.
Suppose, for example, you want to develop a new software product, and its modules are similar to the modules of another, already developed product, but should contain more teams. By the nature of the work, the previous and upcoming projects are very similar. If the volume of work in the new project is 30% more than in the previous one, then the “by analogy” evaluation method allows us to assume that the cost of the new project will also be 30% higher than the cost of the previous one (of course, at a constant cost of resources).
Parametric Evaluation Methods
Methods of parametric estimates are similar to the method of evaluation "by analogy" and are also a variation of the method of "top down". Their inherent accuracy is neither better nor worse than the accuracy of the “by analogy” assessment method.
The parameter estimation process consists in finding such a project parameter, the change of which entails a proportional change in the project cost. Mathematically parametric model is based on one or more parameters. After entering the parameter values into the model as a result of the calculations, an estimate of the project cost is obtained.
If the parametric models of various projects are similar and the amount of costs and the values of the parameters themselves are easy to calculate, then the accuracy of the parametric evaluation of the upcoming project can be improved. If, for example, there are two completed projects, moreover, the cost of one of them is more than the cost of the project being evaluated, and the cost of the other is less, and the parametric model is valid for both completed projects, then the accuracy of the parametric estimation of the cost of the upcoming project and the reliability of using the parameter will be quite high.
Evaluation can also be done using a variety of parameters. In this case, a weight coefficient is assigned to each parameter, depending on its significance, and the cost is estimated according to the multi-parameter model.
Notes
- ↑ In the Russian literature on project management, the term English. Cost Estimating is often translated as “budgeting”, which is more suitable for construction projects, where the issues of estimated estimates, estimates of estimated cost and preparation of estimated documentation are deeply (including terminologically) worked out and are generally accepted. In IT projects, in our opinion, the term “ estimate ” and its derivatives are not used so widely and are not generally accepted, therefore, in this case, the term Cost Estimating can be more accurately translated as “cost estimate”, “cost estimate” or “valuation” costs. "