Cost Estimate: Quantitative Assessment of Likely Costs for Resources

PMBOK v8 Definition

A cost estimate is a quantitative assessment of the likely costs for resources required to complete an activity. The cost estimate is a prediction that is based on the information known at a given point in time. Cost estimates include the identification and consideration of costing alternatives to initiate and complete the project, and they are generally expressed in units of some currency (e.g., dollars, euros, yen, etc.) or in other units of measure such as staff hours or staff days.

Why It Matters for the Exam

Cost estimates appear frequently in PMI exam questions testing your understanding of project cost management fundamentals. You will encounter this concept in situational questions about estimating accuracy over the project life cycle, in definition-based questions distinguishing cost estimates from budgets or forecasts, and in questions about what resources must be included in a cost estimate.

Key Points to Remember (for the exam)

Definition Core: A cost estimate is a quantitative assessment of likely costs for resources required to complete an activity—it is a prediction based on known information at a given point in time.
Costing Alternatives: Cost estimates must identify and consider costing alternatives such as make versus buy, buy versus lease, and sharing of resources to achieve optimal costs.
Risk Consideration: Cost trade-offs and risks must be considered when developing cost estimates.
Units of Measure: Cost estimates are generally expressed in currency units (dollars, euros, yen) but may use staff hours or staff days to eliminate currency fluctuation effects.
Progressive Elaboration: Cost estimates must be reviewed and refined during the project to reflect additional details as assumptions are tested; accuracy increases as the project progresses through the project life cycle.
Resources Included: Costs are estimated for ALL resources charged to the project: labor, materials, equipment, services, facilities, inflation allowance, cost of financing, and contingency costs.
Presentation Format: Cost estimates may be presented at the activity level or in summary form.

Typical PMI Exam Example

A project manager is developing cost estimates during project planning. The team is evaluating whether to purchase specialized equipment or lease it for the duration of the project. According to PMBOK v8, which of the following must the cost estimate consider?

This situation tests your knowledge that cost estimates must include identification and consideration of costing alternatives such as buy versus lease, along with associated risks and trade-offs.

PMI Exam Traps

Trap: Confusing cost estimates with the cost baseline or budget forecasts Reality: Cost estimates are predictions of likely costs; the cost baseline is the approved version of the cost estimate; budget forecasts are predictions of future expenditures based on current data
Trap: Thinking cost estimates only include direct labor and materials Reality: Cost estimates must include ALL resources charged to the project: labor, materials, equipment, services, facilities, inflation allowance, cost of financing, and contingency costs
Trap: Assuming cost estimates remain static once created Reality: Cost estimates must be reviewed and refined during the project as additional details become available and assumptions are tested
Trap: Believing cost estimates are always in currency units Reality: Cost estimates may use staff hours or staff days to facilitate comparisons by eliminating currency fluctuation effects

Important PMI Connections

Related Concept	Relationship Type	Exam Attention Point
Cost Baseline	Output of cost estimate refinement	The cost baseline is an updated version that reflects approved changes to the cost estimate
Budget Forecasts	Related output	Budget forecasts are predictions of future project expenditures based on current data, distinct from the original cost estimate
Estimate Resources Process	Closely coordinated process	Resource estimation must align with cost estimation to ensure the project remains financially viable and resources are utilized optimally
Change Log	Documentation link	All changes made to the cost baseline (derived from cost estimates) must be documented in the change log

Quick Review Questions

What is the PMBOK v8 definition of a cost estimate?
A project manager is estimating costs for a global project with team members in three different countries. What alternative unit of measure may be used to eliminate the effects of currency fluctuations?
During which phase of the project life cycle are cost estimates most accurate?
List five categories of resources that must be included when estimating project costs.
When considering costing alternatives, what three specific trade-offs must a cost estimate address according to PMBOK v8?

PMBOK v8 Reference

Section 7.2 - Estimate Costs (Process Group: Planning, Knowledge Area: Project Cost Management)