TOPIC: Cost Estimates and Reserve Amount

Hi Experts,

I need a clarification regarding Cost estimate which is the cost to complete each scheduled activities.

We can aggregate the cost estimate for each schedule activities and add Activity level contingency reserves to come up with Work package level Cost estimate. Now Work package level cost estimates plus contingency reserve at Work package level constitute Control Account level Cost estimate i.e. Cost baseline. Cost baseline plus management reserve is project Budget.

PMBOK at page 246 says: Cost Estimates Include Quantitative assessment of the probable costs required to complete the project work, as well as contingency amounts to account to account for identified risks , and management reserve to cover for unplanned work.

Could you please explain above statement from PMBOK? As per my understanding, cost estimate doesn't include Management reserve.. Please clarify.

Thanks,
Vivek

Hi Vivek,

A cost estimate is a very general term. For it to be meaningful, you need to know what the cost estimate is for. As you pointed out, cost estimates can be at the activity level or the work package level, but cost estimates can also refer to any projected costs. The project budget, which includes management reserves, is still just a cost estimate.

Thanks Donald!
Could you please clarify what exactly we get out of Estimate Cost process(It says Cost estimates)? Isn't it the cost of each activity and work packages which are aggregated as part of Determine budget to come up with project Budget? Is my understanding correct , please clarify..

Yes, the cost estimates are aggregated as part of the Determine Budget process. The verbiage regarding the management reserves is a little confusing. Note that data analysis is among the tools and techniques for the Determine Budget process and specifically describes the determination of management reserves. However, the description for cost estimates in the Estimate Costs process mentions management reserves as well. My interpretation of this is that management reserves are determined as part of the Determine Budget process. Costs are aggregated during the Determine Budget process to derive the cost baseline and then management reserves are added in to determine the project budget. I believe the management reserves are mentioned in the cost estimates section of the Estimate Costs process because they are just providing a definition and not that management reserves are determined as part of the Estimate Costs process. After all, the project budget is just a cost estimate.

Thanks for the clarification and clearing up confusion on this!