Cost Estimation & Budgeting Flashcards

What is the primary purpose of cost estimation in project management?

Answer: To predict financial requirements for a project

Cost estimation in project management is the process of approximating the monetary resources needed to complete project activities. Its primary purpose is to predict the total financial requirements, providing a baseline for budgeting, resource allocation, and financial planning. Accurate cost estimates are crucial for securing funding, setting realistic expectations, and controlling project expenditures throughout its lifecycle.

Which cost estimation method relies on past project data to estimate costs?

Answer: Analogous estimation

Analogous estimation, also known as top-down estimation, is a cost estimation technique that uses the actual cost or duration of a previous, similar project as the basis for estimating the current project. This method relies on historical data from comparable projects, adjusting for differences in complexity, size, and other factors. It is often used early in a project when detailed information is limited, providing a quick, high-level estimate.

What is a key characteristic of a bottom-up cost estimation approach?

Answer: Estimates costs at a detailed component level

A bottom-up cost estimation approach involves breaking down a project into its smallest components or work packages. Costs are then estimated for each individual component, and these detailed estimates are aggregated to determine the total project cost. This method provides a highly accurate and granular cost estimate because it builds from the ground up.

Which budgeting technique assigns costs based on project deliverables?

Answer: Activity-based budgeting

Activity-based budgeting (ABB) is a technique where costs are assigned to specific activities required to produce project deliverables. By understanding the resources consumed by each activity, organizations can accurately allocate costs directly to the outputs or deliverables they create. This method provides a clear link between activities, resources, and project outcomes.

Which factor can lead to cost overruns in a project budget?

Answer: Scope creep

Scope creep refers to the uncontrolled expansion of a project's scope after it has begun, often by adding new features or requirements without adjusting time, cost, or resources. This uncontrolled growth directly leads to increased work, requiring more resources and time than initially budgeted, thereby causing cost overruns. Strict scope control, conversely, helps prevent overruns.

What is the purpose of contingency reserves in budgeting?

Answer: To cover unforeseen project costs

Contingency reserves are funds specifically set aside in a project budget to account for known-unknown risks or unexpected events that may occur during the project lifecycle. These reserves are crucial for managing uncertainties and preventing cost overruns when identified risks materialize. They ensure the project has financial flexibility to address unforeseen challenges without derailing the budget.