One key to a good and usable cost estimate is the estimate basis. In the last lesson, we studied different types of estimates and where they might be used. We discussed estimate accuracy at a high level. To achieve a certain estimate class in an industry, we'll have to base the estimate on a given level of engineering. In this lesson, we will examine what goes into a good estimate basis. We will also examine the scope and activities require to achieve, each of the five estimate classes. If you recall, a project cost assessment is part of the baseline for the project. It's one of the six key elements of the project plan or baseline that defines the project. For an estimate to make sense, we must define all of these parameters at some level. Obviously, the level of definition will be quite different for a class one estimate versus a class five estimate. In the class five estimate, we'll be able to define all of these parameters only to the level of the project charter. For a class one and a class two estimate, we should have full project plans complete. If you learn nothing else in this lesson, I want you to remember that an estimate does not make sense except in context. And the context for an estimate includes the project charter or contract. It's important that the estimate be based on the agreements we have with our stakeholders and that these be written down. These documents provide the key project requirements and scope. They define the legal framework or regulations that we must operate in. In the case of the contracts, it's important to understand any legal requirements that are specific to our execution of the project. Without these bases, we do not know what we have to estimate. The scope baseline for both services and product, the project scope, statement, or other definition of what is included in the project. And also what's not included in the project is critical to defining an estimate. Without a clear definition of the product or activities that we're estimating, the estimate cannot make sense. We also need the project management plan. We need to understand how we're going to execute the project. The execution plan will impact the cost estimate. Going back to our earlier example, developing a new salad dressing, and the lessons in the scope statement. If our plan is to develop the commercial kitchen ourselves, then the cost of the project will be higher, initially, than an approach of contracting with a co-packer, which will provide the dressing based on our recipe. In the second case, the ongoing operating cost may be higher, but the initial cost will be lower. The key learning here is that the way you will deliver the product and the services, will impact both the cost estimate and the actual project cost. To be accurate we must specify the execution basis for our estimate. The project schedule baseline. Schedule impacts the costs of the project, and when those costs will be incurred. An estimate for a project that will be delivered five years from now must consider changes in the costs of goods and services over that time. Projects that are completed in a hurry may cost more, because of the speed involved than the projects that had the luxury of optimizing their time in buying goods and services at the best price. All of these things impact the cost. We also must consider the risk. The risk register provides the impacts on our cost. We must understand the risk involved in the project. And what we'll have to do to mitigate those risks is we prepare an estimate. In course three, we'll learn about continuing how to estimate the cost of risk. For now, it's important to document the risk involved and understand how we will mitigate them. An example may help in understanding why these elements are important. Suppose you went to buy a house. You get an estimate of $100,000. What do you think? Good deal or not? Of course before you decide, you want to know what's the interest rate? What are the closing costs, monthly payments? All part of the business case and project charter. How big is it? What type of finishes will we use? What type of construction? Scope is also key to understanding the $100,000 price. Where will it be located? How will it be built? What type of foundation will be used? Who's the constructor? All elements of the project management plan. When will it be built? Or is it already built? How long will it take? Schedule. Who pays if it rains too much? What happens if someone damages it during construction? Is there a warranty? These risk elements all impact your view of the price. In our every day decisions we insist on having all these elements before we will accept an estimate. We should also insist on them and provide them as part of our project. Now let's look at the actual estimate basis document itself. One best practice is to have the estimate plan and the estimate basis mirror each other. One work process I use is to start the plan using a table of contents from the estimate basis. I document what I plan to do in each section. Then, as I actually complete the plan, I document what I actually did, converting the plan gradually into an estimate basis. The table of contents you see here is based on what is typical in the processing building industries. However in other industries, I would expect analogous sections to be included. The project and services scope one of the key baseline elements it is critical that this be well-documented as part of the estimate. The estimate may be based on these parameters. The work breakdown structure and cost elements. Best practice is to complete the estimate in accordance with the work breakdown structure. We should estimate the cost by project activity. This will later help us in matching the cost to the schedule. It will also be essential in controlling and monitor the project. Recording these basis now will eliminate confusion down the road. We should include the source and values of pricing and labor costs. It's always good to document how you determine the price of each element. Later when you do change control, the source of the pricing will help explain any variance. It also allows a user of the estimate to judge for themselves the accuracy of the estimate. If possible, it's good if the pricing sources can match the project management plan so that later, purchases are done from similar sources. We need to include drawings and specifications. It's important to document any requirements or engineering included in the estimate. This will provide a basis for the change later. It also allows stakeholders to understand the nature of the work and the extent of the engineering. We need to include the contractual requirements in the labor process. We need to know what the regulatory environment is. Is this job being done with union or non-union labor? Is it being done by our own staff or contract staff? This is all part of the pricing strategy. It's part of the legal basis for the project, if changed the costs could be impacted. The project execution plan, the project schedule, this is important to understand. Also I can approach the contingency escalation currency changes. We need to understand that, we need to put in our approach to allowances, exclusions, qualifications. Need to include the estimate schedule and the resource requirements to complete the estimate. These last three items document the philosophy we used in preparing the estimate. Writing them down allows others to review and comment on the approach we've used. One way to look at the estimate basis and ask yourself, what will I need in my files if someone asks me a detailed question on the estimate or how it's prepared a year from now? Actually, this is a pretty typical situation as we try to implement change control in our project. Someone will always ask, what's different? The estimate basis answers that question. Now before you say this is a lot of information for conceptual estimate, how am I going to get all of this information before I complete the project? Well the answer is simple, we develop varying levels of detail for each of these elements based on a class of estimate, let's have a look. For class 5 estimates, the entire estimate basis will be only a few pages long. The scope will be a description of the concept and size. The work breakdown structure will be only a few big elements. And the source of pricing will be previous projects, with a database we use to scale the pricing. The rest will be based on experience. The key here is to document your assumptions in a way that someone can repeat the estimate. Or they can understand you while you got a different answer and subsequent estimate. For a class 3 estimate we'll provide a lot more detail. Plans should be fairly complete, key drawings should be available, pricing will probably be based on quotes from accepted sources etc. The table here provides some indication of what should be done to achieve the level of engineering required to meet the class requirements. The estimate basis documents that level of engineering so that it's clear what is included in its status. Notice at the bottom of the table we've added revamps as a separate estimate class. Revamps are times where you're modifying an existing project to upgrade or add features. These types of estimates are the most challenging, because it's difficult to gauge the amount of modifications to the existing project that will be required. The more information we can gather to find the estimate, the better. These projects are almost always done to class 1 criteria. It's important we understand the standards of our industry in our organization for each class of estimate. We do not want to give others a false sense of comfort by misadvertising the accuracy of an estimate. Again, these scope items are targeted the process of building industries. The scope items in your industry will be different. Now that we decided on the level of accuracy of our estimate and we understand how to put the estimate basis together. It's time to look at the different estimating techniques and how to prepare an estimate to meet these goals.
