There are four common estimating techniques. Analogous estimating uses the cost of a similar past project; it's quick but rough. Parametric estimating multiplies a quantity by a unit rate, such as square meters times cost per meter; it's accurate if the data is reliable. Bottom-up estimating estimates each work package and adds them up; it's the most accurate but needs time and detail. Three-point estimating uses optimistic, most likely and pessimistic values to reflect uncertainty.
Accuracy improves as we learn more. At the start we have a rough order of magnitude (ROM) estimate that may range from about -25% to +75%. As details are filled in we reach a definitive estimate of roughly -5% to +10%. So it's normal for estimates to change during planning; this is called progressive elaboration.
After estimating, we build the budget: add up the work package costs, then add the contingency reserve set aside for known risks identified in the risk register. The result is the cost baseline, the approved reference we measure performance against, usually spread over time.
Above the baseline sits the management reserve, for completely unforeseen surprises. The key difference: contingency reserve is inside the baseline and the project manager uses it according to the risk response plan; management reserve is outside the baseline, controlled by management or the sponsor, and using it requires approval and a formal change to the baseline. Total project budget = cost baseline + management reserve.
💡 Key points
- Analogous is quick and rough, parametric uses unit rates, bottom-up is the most accurate.
- Accuracy improves over time: from ROM to definitive.
- Cost baseline = work package estimates + contingency reserve.
- The PM manages contingency reserve; management controls management reserve.
🌍 Real-life example
A restaurant plans to renovate its dining hall. In the first meeting the manager estimated about 200,000 riyals because the last branch renovation cost that (analogous). Later he priced the flooring: 150 m² × 120 riyals = 18,000 riyals (parametric), then added up quotes for every item (bottom-up). He added 15,000 as contingency reserve for the risk of the chairs shipment being late, while the owner kept 20,000 as management reserve, spent only with his approval.
📖 Key terms
| English | العربية |
|---|---|
| Analogous Estimating | التقدير بالقياس |
| Parametric Estimating | التقدير المعياري |
| Bottom-up Estimating | التقدير من الأسفل إلى الأعلى |
| Rough Order of Magnitude (ROM) | التقدير التقريبي لحجم الأمر |
| Cost Baseline | خط أساس التكلفة |
| Contingency Reserve / Management Reserve | احتياطي الطوارئ / احتياطي الإدارة |