Cost estimation, typically filled with uncertainty, can be one of the most tedious parts for getting a project off the ground. But it's a job you don't want to skimp on. Unreliable estimates are among the largest reasons why projects don’t deliver their objectives.
We've all heard of projects that end up going way over their original estimates. It's a huge source of frustration for stakeholders and project managers alike. It can harm your company's credibility or even create a sense of distrust among management and project leaders.
The first step for successful cost estimating is finding the right person to take on the responsibility. Like with anything, experience matters. Less experienced planners tend to be overly optimistic and assume that everything will go right. More experienced managers, on the other hand, lean toward thinking everything will go wrong and include a larger gap.

Regardless, all project managers will follow similar plans to try and create the most reliable estimates. Here are three common methods used:

1. Parametric Estimation

This is one of simplest methods that estimates projects on a quantitative basis, such as dollars per square feet or number of installations per day. But not everything can be quantified, which leaves some gaping holes in your estimation

2. Analogous Estimation

This method is based on historical information of past projects. It's generally used early on when much is not known about a project. Analogous estimations will use time or cost in similar projects to create a new estimation. It's a quick and relatively easy method of estimating, although not the most accurate.

3. Bottom-up Estimation

This is the most accurate, but also the most time-consuming form of estimating since it requires breaking down each project task into smaller components, such as scope and deliverables. The estimates for the smaller chunks are combined to create a larger estimate for the entire task as a whole.

Bottom-up estimation is typically a three-part process. First you create a work breakdown structure, followed by a detailed work package.

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Project manager blog 4pm then suggests using a 3-point estimation formula where each team member provides their "pessimistic, optimistic and best guess estimates for the calculations for the specific scope and deliverable they're responsible for in a project."

Final Thoughts...

The smaller you can break down the scope of your program, the more accurate of an estimate you're going to churn out. It's also important to not just stick with one method, but use a couple to make sure you come out with the most definitive estimation in the end.
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