HKSM

The process of approximating the money needed to complete each activity or work package, including direct, indirect, and reserve amounts, and documenting how the numbers were developed.

Purpose & When to Use

• Develop a realistic view of how much the project work will cost so leaders can plan funding, compare options, and set expectations early.
• Used during planning to estimate at activity or work package level, then refined as scope, design, and quotes mature.
• Revisited when scope changes, risks evolve, procurement information arrives, or market rates shift.
• Outputs inform the budget baseline process and provide the basis for future cost control.

Mini Flow (How It’s Done)

• Collect inputs: scope baseline and WBS, activity list and durations, resource needs and rates, procurement strategy and quotes, risk register, lessons learned, cost policies, taxes, and currency assumptions.
• Select estimating approaches: analogous for quick top-down comparisons, parametric for rate-based calculations, three-point for uncertainty, and bottom-up for detailed rollups.
• Obtain market data and vendor pricing where relevant, and analyze bids when multiple offers exist.
• Include quality-related costs, indirects, fees, and life-cycle considerations if required by the business case.
• Calculate activity or work package costs, document assumptions and methods, and show ranges and confidence levels.
• Apply risk-based contingency using reserve analysis, and identify any management reserve held by sponsors if applicable.
• Aggregate estimates to work packages and control accounts aligned to the WBS, time-phase them to the schedule, and reconcile with funding limits.
• Produce cost estimates and a clear basis of estimate, and update the risk register and documents as needed.

Quality & Acceptance Checklist

• Each WBS item has an estimate that matches its defined scope and resources.
• Chosen estimating methods are appropriate for the data available and are explained clearly.
• Rates, units, and quantities are validated, current, and sourced.
• Assumptions, constraints, and exclusions are documented and traceable.
• Direct, indirect, procurement, logistics, taxes, and cost of quality are considered.
• Currency, inflation, and escalation factors are addressed when relevant.
• Risk-based contingency is calculated and linked to specific risks; no double counting with management reserve.
• Estimates are time-phased and consistent with the schedule.
• Estimate ranges and confidence levels are provided where uncertainty exists.
• Peer review completed and stakeholder acceptance recorded.

Common Mistakes & Exam Traps

• Confusing Estimate Costs (activity-level estimating) with Determine Budget (aggregating and setting the cost baseline).
• Providing single-point numbers without a basis, range, or confidence level.
• Ignoring indirect costs, cost of quality, or life-cycle impacts when required.
• Mixing up contingency (for identified risks) with management reserve (for unforeseen work).
• Double counting reserves or applying contingency at multiple rollup levels.
• Using analogous estimates when detailed data is available for bottom-up or parametric methods.
• Failing to refresh estimates after design changes or new vendor quotes.
• Choosing the lowest bid without analyzing total cost of ownership and risk.
• Overlooking currency conversions, inflation, or timing effects on cash flow.
• Assuming earned value techniques are used during estimating rather than during monitoring and control.

PMP Example Question

The sponsor asks for a quick cost figure early in planning to compare alternatives. Detailed design is not yet available. Which technique is most appropriate?

1. Analogous estimating.
2. Bottom-up estimating.
3. Vendor bid analysis.
4. Earned value analysis.

Correct Answer: A — Analogous estimating.

Explanation: Analogous uses historical data for fast, top-down estimates when detail is limited. Bottom-up needs detailed scope, vendor bid analysis applies to procurements, and earned value is for performance tracking, not estimating.