Question

Prompt: Explain the various classification structures for an agency’s cost estimation, and give a specific example of each.

Answer 1

Answer:  Cost estimation is the process of forecasting the cost and other resources needed to complete a project within a defined scope. Cost estimation calculates a total amount that determines a project’s budget. It have single total value and may have identifiable component values.

Types of Agency's cost estimation:

1) Order of magnitude estimate: It is a rough estimation of costs used at the very early stage of a project, particularly during the evaluation and planning stages. The purpose is to have an idea about general and total expenditures. Eg : It usually written as 10 to the nth power. The n represents the order of magnitude. If you raise a number by one order of magnitude, then by that number will be multiplied by 10. If decreased , then that number is multiplying by 0.1

2) Budget estimate: Also known as preliminary cost estimates, it is more accurate than an order of magnitude estimate. Accuracy is around -10 percent to +25 percent. The purpose is to generate a preliminary itemized list of expenditures based on the major components of the project. This is done within the actual planning stage of the project. Example: estimation of expected labor cost or a summative costing of equipment and materials requirements.

3) Definative estimate: A definitive estimate has an accuracy of around -10 percent to +15 percent and in some standards, around -5 percent to +15 percent and also called as detail cost estimate. As name suggests it provides details and more accurate as compare to above two types of estimates. Example : If project involves purchasing of 100 webcams from outside supplier in 2 months then definative estimate is required in order to have evaluation of supplier proposal and allocating funds for payment to that supplier.