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An enterprise directs its work either at the production of goods or the delivery of services. Apart from being engaged in its main activity, a company might search for additional ways of profit-making or funding, which require an accurate assessment of opportunities and risks. Such projects constitute a significant part of many organizations’ work and enable them to widen the boundaries of their performance, improve the quality, and manage the finances.
Successful engagement in project work requires a company’s managers’ rational methods of project selection, utilization of estimating techniques, and methods of evaluation of project costs. All these elements should be incorporated in an effective system of planning interventions to ensure the success of the selected project.
Factors Determining a Company’s Selections of a Project
Based on the aims a company needs to achieve upon the project’s completion, managers identify the influential factors that determine the selection of the type of project. They include prioritization, time and funding limitations, “fit with other projects in the portfolio,” availability of resources, and level of competency of project managers (Kezner, 2017, p. 285).
The factors related to funds should be addressed at the initial stages of the project selection process because they present the limitations for the possible types of projects a company might consider. Also, the human, material, time, and other types of resources should be analyzed from their availability and applicability to the particular projects (Wilson, 2014). Finally, the prospects of profit-making or processing improvements should be taken into account when selecting a project.
Top-Down and Bottom-Up Estimates and Their Use
In the sphere of project management, there are two opposed types of estimating techniques: top-down and bottom-up. In general, top-down estimating addresses cost analyzing a project as a whole (Nicholas & Steyn, 2017). It utilizes general information available from experts or statistical data from the previously experienced activities in the field. Top-down estimating does not give a detailed cost evaluation since it emphasizes the ultimate costs of a project. This approach might be used at the initial stages of a project “when developing the overall scope statement or project character” (Wilson, 2014, p. 197). Thus, the top-down method is only effective for the general planning of the project but not for the detailed estimation of all the types of costs.
From this perspective, the bottom-up approach is the most effective due to its detailed analysis of all the influential factors at all stages of project processing. It presents specific information about the costs of all “components of each work activity and progressively forms the sum of all costs” (Wilson, 2014, p. 197). For a project manager to apply this method the most effective, it is essential to divide the steps of project implementation and analyze them separately. This method requires more time and more specific data than top-down (Nicholas & Steyn, 2017). It might be used at the later stages of the project selection process when there is a limited choice of the variants.
Methods for Estimating Project Costs
Effective performance within a project needs an objective estimation of the costs it will require at every level of work. There exist different estimating methods, which include analogous, parametric, three-point cost, contingency estimating, and others (Wilson, 2014).
All of these methods are designed for different cases with particularities applicable to specific companies. Enterprises use the analogous method of cost estimation in the case when there is a lack of available information about the particular project. For such estimation, company managers analyze the previous projects with similar features and apply the costs spent on those projects to the current one (Wilson, 2014). The parametric estimating technique involves detailed data and is based on statistical information, which may be retrieved from outside sources (Kezner, 2017). These methods are less accurate than other approaches but give a general idea about the costs of a project.
Three-point cost estimating is a more detailed method that addresses positive and negative factors capable of influencing the project’s costs. It incorporates “optimistic and pessimistic values to calculate an expected cost,” measuring it according to a scale embracing most likely, pessimistic, and optimistic costs (Wilson, 2014, p. 195). The most likely costs are the ones expected when the process goes according to the plan, and the pessimistic costs are those that will be required in the most misfortunate circumstances. Finally, the optimistic costs are calculated based on the anticipation of the performance that excels the planned outcomes.
The described methods incorporate the prediction of the costs without a precise analysis of the risks and unexpected expenses. The technique that specifically addresses these issues is called contingency cost estimating and includes all possible obstacles and their outcomes for the project (Wilson, 2014). Although all of the analyzed methods allow making the substantial analysis of the anticipated costs, the most applicable one is the bottom-up technique. It allows managers to accurately combine all the factors and provide a complete estimate of a project’s costs.
Types of Costs
Proper project planning requires a detailed estimation of the costs it entails. There are several types of costs in project management, which include indirect, direct, variable, and fixed. These types depend on the factors that might influence the ultimate project budget. Indirect costs refer to the expenses needed within several projects or might be used from a similar project within a company (Wilson, 2014). Direct costs are those required for a particular project and are based on its unique requirements. The costs that change during the project’s process are called variables. On the contrary, those costs that remain unchanged during the project lifecycle are fixed (Wilson, 2014). The awareness of the different types of costs allows managers to estimate them more accurately and predict possible changes in the planned expenses.
Summarizing the discussion, it is essential to underline that the project selection process and its estimation constitute a core of a company’s successful performance within additional activities. It is important to incorporate all the factors influencing the choice of a project, incorporating a company’s resources and fund, their quality, and availability. Also, costs estimation plays a significant role in successful project implementation. Rational application of the information about the types of costs and the techniques of their estimation might enable fund saving and excellence of a company’s performance within a project.
Kerzner, H. (2017). Project management: A systems approach to planning, scheduling, and controlling (12th ed.). Hoboken, NJ: John Wiley and Sons.
Nicholas, J. M., & Steyn, H. (2017). Project management for engineering, business and technology (5th ed.). New York, NY: Routledge.
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Wilson, R. (2014). A comprehensive guide to project management schedule and cost control: Methods and models for managing the project lifecycle. Upper Saddle River, NJ: Pearson Education.