2.4.2.2 Estimate Costs: Process Definition and Exam Essentials

PMBOK v8 Definition

Estimate Costs is the process of developing an approximation of the cost of resources needed to complete project work. This process belongs to the Planning Process Group and the Project Cost Management Knowledge Area. The cost estimate is a prediction based on information known at a given point in time, and it includes identification and consideration of costing alternatives to initiate and complete the project.

Why It Matters for the Exam

The Estimate Costs process appears frequently in PMI exam questions testing your understanding of cost estimation as a planning activity, its relationship to resource estimation, and how estimates evolve throughout the project life cycle. Expect scenario-based questions where you must identify the correct estimation approach, distinguish cost estimates from budget forecasts, or recognize when estimate refinement is required.

Key Points to Remember (for the exam)

• Definition: Estimate Costs develops an approximation of the cost of resources needed to complete project work
• Nature of Cost Estimates: A prediction based on information known at a given point in time
• Costing Alternatives: Must consider make versus buy, buy versus lease, and resource sharing to achieve optimal costs
• Units of Expression: Generally expressed in currency units (dollars, euros, yen); staff hours or staff days may facilitate comparisons by eliminating currency fluctuation effects
• Estimate Refinement: Cost estimates should be reviewed and refined during the project to reflect additional details as assumptions are tested
• Accuracy Progression: Estimate accuracy increases as the project progresses through the project life cycle
• Resources Included: Labor, materials, equipment, services, facilities, inflation allowance, cost of financing, and contingency costs

Typical PMI Exam Example

A project manager is developing cost estimates during project planning. The team has identified that leasing equipment for six months costs $30,000, while purchasing the same equipment costs $25,000. The project manager must consider both options as part of which activity?

Answer: This scenario tests your understanding that cost estimates include consideration of costing alternatives, specifically buy versus lease decisions, to achieve optimal costs for the project.

PMI Exam Traps

• Trap: Confusing cost estimates with budget forecasts

  • Reality: Cost estimates are quantitative assessments of likely costs; budget forecasts are predictions of future expenditures based on current data

• Trap: Thinking cost estimates are expressed only in currency

  • Reality: Staff hours or staff days may be used to facilitate comparisons by eliminating currency fluctuation effects

• Trap: Assuming cost estimates are fixed once created

  • Reality: Cost estimates should be reviewed and refined during the project as additional details become available and assumptions are tested

• Trap: Confusing Estimate Costs with Determine Budget

  • Reality: Estimate Costs produces cost estimates; Determine Budget aggregates individual cost estimates to establish a cost baseline

Important PMI Connections

Quick Review Questions

1. What is the definition of a cost estimate according to PMBOK v8?

2. Why might a project manager express cost estimates in staff hours or staff days instead of currency?

3. How does the accuracy of a project estimate change as the project progresses through the project life cycle?

4. What types of resources must be included when estimating costs for a project?

5. What costing alternatives should be considered during the Estimate Costs process?

PMBOK v8 Reference

Section 2.4.2.2 – Estimate Costs