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APM – ACostEEstimating GuideFor Project, Programme and Portfolio Managers

ContentsTable of Figures vForeword viAcknowledgements viiPurpose and reason for this guide viiiEstimating framework x11112222566772Developing the estimating plan 1.1 Stakeholder engagement and mobilisation 1.1.1 Stakeholder commitment 1.1.2 Responsibility assignment matrix (RAM) 1.1.3 Interpretation of stakeholder objectives and targets 1.2 Understanding the estimate scope 1.2.1 Scoping the estimate 1.2.2 Understanding the estimate maturity requirements 1.3 Manage the information requirements 1.3.1 Identifying the information requirements 1.3.2 Storing information 1.3.3 Reviewing the maturity of the information available 1.3.4 Revising the ADORE in line with informationmaturity risk 1.3.5 Data normalisation 1.4 Prepare the estimating plan 1.4.1 Agreeing the estimating approach(es) to be used 1.4.2 Agreeing the competency requirements of the team 1.4.3 Agreeing the schedule of estimating activities andproject dependencies 1.4.4 Updating the estimating RAM 1.4.5 Defining the toolsets and information communicationmedia Creating the base estimate 2.1 Estimate management 88999910101111iii

Contents2.1.1 Iterative process 2.1.2 Configuration control 2.2 Estimating approach 2.2.1 Top-down approach 2.2.2 Bottom-up approach 2.2.3 Relying on the work of others – ‘ethereal’ approach 2.3 Estimating methods 2.3.1 Analogy 2.3.2 Parametric 2.3.3 Trusted source 2.4 Documenting the basis of estimate (BoE) 1111121214161719202021Risk, opportunity and uncertainty assessment 3.1 Assessing uncertainty in the baseline activities 3.2 Link to the risk management process 3.3 Link to schedule risk analysis 3.4 Holistic review of risk, opportunity and uncertainty 3.4.1 Top-down approach 3.4.2 Bottom-up approach – Monte Carlo simulation 3.4.3 Dealing with inherent optimism bias in risk andopportunity 3.4.4 Taking a balanced view of risk, opportunity anduncertainty 232324262727294Overall estimate validation, challenge and approval 4.1 Estimate maturity review 4.1.1 Maturity definition 4.1.2 Maturity assessment 4.1.3 Why is maturity assessment important? 4.1.4 Estimate review 4.1.5 Estimate approval 353636384141435Estimates to completion 5.1 EAC top-down approach 5.2 Bottom-up approach 5.3 Risk and opportunity management in EAC 444546466Ethics in estimation 4733233Glossary 49Acronyms and abbreviations 55References 56iv

Table of .73.83.94.14.24.34.45.1Estimating framework Top-down example Project life cycle Bottom-up example Potential suitable use of ethereal approach Estimating methods Example two-factor analogy Example parametric with two cost drivers Different types of distribution Schedule risk analysis Time phased cost profile Realistic distribution Monte Carlo Risk, opportunity and uncertainty evaluation Monte Carlo optimistically biased Comparison of bottom-up and top-down approaches torisk, opportunity and uncertainty Rolling wave estimating Example of maturity definition Example of estimate maturity assessment Example of maturity assessment Example of a maturity scale Earned value S-curve vx131415171819212427282930313133343738394044

ForewordEstimation and its diligent application within any project is one of the cornerstonesof successful project delivery. This guide has been created to assist the currentand next generation of project stakeholders to understand the core values,information sets and underpinning knowledge that, if applied diligently, willimprove the clarity and robustness of an estimate, informing the organisationwith transparency and clarity and supporting better decision making.The Association for Project Management (APM) and the Association of CostEngineers (ACostE) have collaborated to bring this guide to you. All thecollaborators have an excellent understanding of the challenges faced whengenerating an estimate that is fit for purpose, having had the experience of real-lifesituations where good estimates made the difference in delivering the project, anda burning desire to share their combined knowledge for the benefit of all.Professor Andy LangridgeDirector of business development, ARES Corporationvi

Purpose and reason forthis guideThe purpose of this guide is to provide a fundamental understanding of themethods of cost estimating and it explains a number of standard approachesavailable to promote good practice.Estimates are critical to the project manager as they are needed to makeinformed decisions about projects across the different stages of the whole projectlife cycle, hence the cooperation of the Association of Cost Engineers (ACostE)and the Association for Project Management (APM) in publishing this guide. Inproject management, effective monitoring of a project’s performance dependson having an appropriate, high-quality estimate against which progress can bemeasured.For instance:nnnnnInvestment committees require estimates in order to predict return oninvestment and hence determine whether to support project proposals andthe level of finance to invest in them.Cost estimates form part of option appraisals.Mature organisations often review projects at key stages and require them tomeet internal governance guidelines on cost-benefit-risk.Organisations that manage a portfolio of projects require credible costestimates in order to manage the spending profile of the portfolio.Good management practice needs to understand the impact of a projectchange, including risks and opportunities.There is long-standing evidence that underestimation of project costs is a keyreason for project failure. For instance, the National Audit Office’s 2001 reportModernising Construction (Comptroller and Auditor General, 2001) found thatlimited understanding of the true cost was one of the main reasons that 70 percent of public sector construction projects were delivered late or over budget.Industry surveys (KPMG, 2015) indicate that this is still the case. Academicshave collected evidence for overruns costing billions of pounds in majorviii

Purpose and reason for this guideinfrastructure projects worldwide (Flyvbjerg, 2003). More recent studies(Comptroller and Auditor General, January 2017) have shown that these errorswere often due to not taking estimating seriously enough, hampered by poorquality data and unrealistic assumptions (National Audit Office, December 2013).By their very nature estimates are speculative; the word estimating issynonymous with approximation and guessing, yet estimates are vital for sounddecision-making, planning and financial management.Different techniques may be appropriate at different stages in a project’sdevelopment. This guide will focus on cost estimating method and approaches.However, the advice in this guide is not limited to initial cost estimates; it is equallyapplicable to forecasting and to other forms of estimating, for example, time,schedule or performance.The guide is not limited to public sector construction, infrastructure or defenceprojects; it is equally applicable to the private sector and a wider range of projects,for example, if you are recruiting a new member of staff, or building the world’sfastest car, launching a new service, or licensing a new drug – every project needsa robust estimate.ix

Estimating frameworkFigure 0.1 Estimating frameworkEstimating consists of a number of activities, which provide a framework forgenerating and continuously improving an estimate. The diagram above shows atypical estimating framework, which includes the activities covered in the guide.A definition of the terms used in the diagram above can be found in theglossary and are explained throughout this guide.x

2Creating the baseestimate2.1 Estimate management2.1.1 Iterative processBefore starting any cost estimate, it is important to understand that it will be aniterative process. It is extremely unlikely that all information will be available atthe same level of maturity at the start of the project. This means that the estimatormust manage the estimating process as an iterative one. The estimator willprogress through the various stages of the estimating process (see Figure 0.1:Estimating framework), and at each stage the individual’s knowledge will developas more up-to-date information becomes available. If the estimator plans for aniterative process and operates configuration control, it will facilitate these changesin a controlled manner.2.1.2 Configuration controlA key principle of cost estimating is the ability to trace and document all aspects ofthe analysis, from raw data to final outputs. To achieve this, robust configurationcontrol is required. Considering that estimating is an iterative process, configurationcontrol will provide a method to ensure that the most current information is used.It is important to tailor the extent of configuration management required. For asimple project with a small number of data points, a simple naming conventioncould be sufficient to control the configuration (e.g. yyyy.mm.dd [name] v1.n).Whereas for more complex projects, full baseline management and change controlmay be required to ensure all information is configured appropriately. APMprovides comprehensive guidance on configuration management which can betailored to the needs of the estimating process; see APM Body of Knowledge 7thedition (APM, 2019).11

Estimating Guide2.2 Estimating approachAn estimating approach is the direction, or means of arriving at an estimate, andto some degree implies the level of detail at which the estimate is created. Withcomplex projects, it is often considered to be good practice to create an estimateusing more than one approach as a means of providing a greater level ofconfidence in the output advised, thereby testing the robustness andinterpretation of the data, the assumptions and the methodologies employed.2.2.1 Top-down approachIn a top-down approach to estimating, the estimator reviews the overall scope ofa project in order to identify the major elements of work and characteristics(drivers) that could be estimated separately from other elements. Typically, theestimator might consider a natural flow down through the work breakdownstructure (WBS), product breakdown structure (PBS) or service breakdownstructure (SBS).The estimate scope may be considered as a whole, or broken down to differenthigh levels of WBS as required (see Figure 2.1). The overall project scope mustbe covered by the range of non-overlapping work packages selected, althoughnot all work packages need to be estimated at the same level of WBS. This allowsthe estimator to use the maturity and/or uncertainty in the key informationavailable to produce the most appropriate level of estimate. The overall projectbase estimate would be created by summing these high level estimates. Thisshould not be confused with the bottom-up approach where all the lower levelswould be aggregated.Over the life of the estimate these higher-level work packages and theassociated higher-level estimates may be broken down into more detailed ormore refined elements, which ultimately will facilitate a bottom-up approach (seeFigure 2.2).A top-down approach is frequently used for creating rough order of magnitude(ROM) estimates, otherwise known as ball-park estimates, where the level ofdetail available is limited. As a general rule, a top-down estimate requires lesstime and effort to produce than one produced using a bottom-up approach.Top-down estimates are appropriate at the beginning of the life cycle when largenumbers of alternative options need to be estimated and considered. As thesolution matures and more information becomes available, there is an increasedopportunity to produce bottom-up figures. However, a top-down approach12