Introduction to Analogous Cost Estimating
Analogous cost estimating projects’ historic records are applied by the analogous cost estimating method of project management. It relies on history and judgment and is most suitable to utilize at the initiation stages of a project when overall information is yet to be compiled. The technique offers a speedy and low-cost way of estimating project cost, time, and resources for enabling earlier decisions and easier commencement of a project.
The advantages of analogy cost estimating are obvious: it is quick, inexpensive, and best suited to pre-planning. It leverages historic data where there is no detailed data to use to create a realistic estimate to allow project managers to plan initial budgets, screen for feasibility, and resource plan. It is best suited to project initiation and initial resource planning.
With equal cost estimating, early project budgets and schedules can be quickly established without having to estimate in depth. It permits planning to happen at early stages and provides the foundation for final estimates later on.
Key Analogous Estimating Features:
- From Earlier Experience: It employs results of comparable earlier endeavors to estimate resources, duration, or cost, and hence is adequately appropriate for coarse estimating.
- A fast and Inexpensive: Analogous estimating is fast and cheap, admirably appropriate to get preliminary estimates, especially when the project has just begun with limited information available.
- Less Accurate Than Other Techniques: Contrary to other advanced techniques, the analogous estimating method produces a rough estimate, an approximate figure, as opposed to an exact quantity.
- Provides a Rough Order-of-Magnitude Figure: It provides an order-of-magnitude value that can later be elaborated and refined using more accurate information collected on the project.
5 Easy Steps for Accurate Project Budgeting
Step 1: Find Similar Previous Projects
The initial step for similar cost estimating is finding similar previous projects with the same scope, goals, and complexity as your project. Your own previous projects are a good benchmark for your estimate, where you can make sensible estimates based on hard experience.
- Why it matters: The similarity between your previous projects and your project strongly influences the correctness of your estimate.
Step 2: Collect Historic Data
When you have listed similar projects, gather historic data regarding cost, duration, and quantity of resources used. This is for the sake of preparing a rational, analogous cost estimate. The larger the number of databases you gather from previous projects, the better the estimate will turn out.
- Tip: Gather data points like labor cost, material costs, and any significant issues that were faced on comparable projects.
Step 3: Differences in Scale
No two projects are the same, so be sure to adjust your estimate for any differences between previous and present projects. This may include differences in technology, scope, or experience of the team.
- Why it matters: Tackling variation grounds your analogous cost estimate in reality and makes it applicable to the particular character of your project at hand.
Step 4: Apply Expert Judgment
Take the advice of experts who have done similar work previously. Expert advice can give you a better idea and even put your comparable cost estimate in motion. With historical data and expert advice, you can make your estimate concrete and achievable.
- Expert tip: Ask for the critique of team leaders or project managers working on a similar project in the past.
Step 5: Document Assumptions and Review
Treat your assumptions always in terms of the analogous cost estimating process. They will be used to monitor any divergence from the estimate throughout the life of the project. It also forms the platform for future estimate calibration.
- Key takeaway: Thoroughly documented assumptions allow your estimate to be revisited and remeasured as the project unfolds.
What is an Absolute or One-Point Estimate?
An Absolute or One-Point Estimate gives one absolute figure for a project estimate derived from the result of a previous similar project. It is an easy and rapid technique ideally suited when the current project is quite similar to a past project.
Example:
Assume your group has already built a basic company website for $10,000. You now have a new client who requires the same scope, feature, and duration. With the one-point estimate, you would bid the new project also at $10,000 with little variation or risk.
Best For:
Best for projects with low complexity where the outcomes, resources, and scope are nearly the same as work previously completed
What is a Ratio Estimate?
Definition:
A ratio estimate is a similar cost estimate from cost-per-unit data of a past project to estimate an equivalent one. It is the optimum technique when cost is linearly proportional to quantity.
Example:
If your last office renovation was $100 per square foot, and your new office space is 2,000 square feet, your analogous cost estimate would be
2,000 sq. ft. × $100 = $200,000
This provides a quick and effective means of project cost estimation based on historical data.
Best For:
Those projects whose costs increase in a determinate and predictable manner—such as per unit, per square foot, or per feature—have a similar cost estimate as the best used in construction, designing, and manufacturing.
What is an estimated range?
Definition:
An estimated range is a cost estimate of the same type that provides you with a low and a high value, allowing you to include uncertainties like scope change, market fluctuation, or team capability.
Example:
Historical experience indicates that the cost of a similar computer program will range from $50,000 to $70,000. This range-analogous cost estimate allows for likely variation in requirements or team performance.
Best For:
Unknown cost or unknown project. A similar cost estimate with a range reduces risk by setting sound financial boundaries.
What is a Three-Point Estimate?
Definition:
The three-point estimate is a more accurate analogous cost estimate that uses three values: optimistic, most likely, and pessimistic. It reduces risk by averaging
Formula:
Estimate = (Optimistic + 4 × Most Likely + Pessimistic)/6
Example:
- Optimistic: $80,000
- Most Likely: $100,000
- Pessimistic: $120,000
Analogous cost estimate = {80,000 + (4 × 100,000) + 120}/6 = $100,000
Best For:
Sophisticated risk or planning phases for projects. The analogous cost estimate in this format is appropriate for new product launches, software development, or R&D.
What is the Difference Between Parametric and Analogous Estimating?
In estimating the cost of a project, it is necessary to understand how the various methods compare. The following is a fair comparison between analogous cost estimating and parametric estimating so that you can choose the best strategy for your project phase and data availability.
| Feature | Analogous Cost Estimate | Parametric Estimating |
|---|---|---|
| Basis | Relies on historical data and expert judgment | Relying on mathematical models and statistical relationships |
| Data Requirement | Low — low amount of data needed to produce an initial analogous cost estimate | High — requires detailed quantitative historical data |
| Accuracy | Moderate accuracy; satisfactory for first-order forecasting | High accuracy when inputs are satisfactory |
| Complexity | Easy and quick to apply | More challenging; employs formulae and data models |
| Best Use Case | Early phases of a project with minimal detail | Low—low amount of data needed to produce an initial analogous cost estimate |
✅ Advantages and Disadvantages of Analogous Estimating
Advantages of Analogous Cost Estimating:
- Easy to Apply: Saves time, particularly in the preliminary stage of a project when plenty of data is not available.
- Cost-Saving: Requires fewer resources than meticulous estimation methods.
- Easy to Explain: A Simple technique that can quite easily be explained to project personnel and stakeholders.
- Early Planning: Provides a rough figure immediately, perfect for initiating planning of the project.
- Dependent on Historical Data: Based on historical project data, which may consistently give some data regarding similar future projects.
Disadvantages of Analogous Cost Estimating:
- Less Precision: Provides less precise estimates compared to methods like parametric estimating.
- Dependent on Judgment: Expert judgment of the estimator plays a major part in the accuracy of the estimate.
- Lack of Data: False estimates are created in the case of a lack of similar historical data.
- Not Applicable to New Projects: Not so good for a project with no past precedent or too innovative a project.
- Risk of Bias: Estimators might have the tendency to accord undue preference to estimates based on past experience and hence bias.
General Applications in Project Management:
- Feasibility Studies:
- Used to determine whether a project is feasible with regard to cost, time, and resources required.
- Helps to determine whether a project can be undertaken using preliminary estimates.
- Budgeting:
- Creates preliminary estimates of costs when first planning the project.
- Gives a low-cost way of estimating costs using the history of comparable past projects.
- Scheduling:
- Estimate durations of projects based on the duration of comparable past projects.
- Assists in establishing realistic timelines at the planning phase.
- Resource Planning:
- Estimates the resources (manpower, equipment, materials) needed for the project based on past similar projects.
- Assists in identifying the magnitude of resources needed for effective implementation of the project.
- Risk Assessment:
- Gives a preliminary overview of potential risks based on past experiences of similar projects.
- Assists in the identification and planning of potential obstacles along the project life cycle.
Example of Analogous Estimating in Projects
In this example, different types of analogous estimating methods are applied in the following scenario:
A construction firm has been requested by a client to provide an analogous cost estimate and duration for constructing a medium-sized office building. The firm had previously undertaken several similar office building projects and had maintained important data points in its project database. The database reflects the following details for previous projects:
| Historical Project Data | Cost (in $1,000) | Duration (in days) |
|---|---|---|
| Project A | 400 | 120 |
| Project B | 500 | 150 |
| Project C | 350 | 110 |
| Project D | 450 | 130 |
| Project E | 420 | 125 |
To find an analogous estimate for the current project, the estimators compare the features of the future office building with those of the five past projects mentioned above
One-Point Estimate
The team evaluates the features of the current project and decides that it closely resembles Project E in size, complexity, and available resources. Therefore, they adopt the observed cost and time of Project E as their analogous estimate (E):
- E_cost = $420,000
- E_duration = 125 days
Range of Estimates and Three-Point Estimate
Since the estimators cannot obtain an exact match in their previous data, they prefer to provide a range of estimates rather than a point estimate. They exclude Project C since it is an outlier, as it is both less expensive and shorter.
Their cost and duration estimated range is:
- E_cost_min = $400,000
- E_cost_max = $500,000
- E_duration_min = 120 days
- E_duration_max = 150 days
The team communicates the range to the stakeholders. However, due to the broad range, they are asked to provide a “most likely” estimate. The team will therefore use the one-point estimate of Project E as the most likely estimate:
- E_cost_mostlikely = $420,000
- E_duration_mostlikely = 125 days
For a three-point estimate, the team assumes the minimum and maximum estimates to be the optimistic and pessimistic points, respectively, to be assessed using a triangular or PERT distribution.
Ratio Estimate
Or, the estimators decide to use a ratio estimate. The estimators assume that the current project will be 15% more expensive and 10% longer in duration than Project A, since it is slightly more complex and larger in size.
- E_cost = $400,000 × 1.15 = $460,000
- E_duration = 120 days × 1.10 = 132 days
On some projects, the estimated effort and duration must be broken down to some degree. According to their experience, the team breaks down the project into a number of phases with the following rough distribution:
| Project Phase | Typical Share | Cost Estimate | Time Estimate |
|---|---|---|---|
| Total Estimate | – | $460,000 | 132 days |
| Project Management | 10% | $46,000 | 13.2 days |
| Construction | 50% | $230,000 | 66 days |
| Interior Design | 20% | $92,000 | 26.4 days |
| Landscaping & External Work | 10% | $46,000 | 13.2 days |
| Quality Assurance | 10% | $46,000 | 13.2 days |
With these breakdowns, the estimators will be in a position to allocate some portions of the budget and timeline to every stage of the project, allowing the stakeholders to have a clearer view of how resources will be utilized and ensuring that all parts of the project are planned.
Choosing the Correct Type of Estimate
- One-Point Estimate:
Quick checks, usually during initial project consultations. - Range Estimates:
Most applicable when much uncertainty or variability exists in items. - Ratio Estimates:
Most applicable in standardized projects with having known cost per unit. - Three-Point Estimates:
Required where projects involve risk assessment and contingency planning.
Conclusion
Analogous cost estimating is a useful technique for project managers during initial planning. Based on historical data and experience, it provides quick, low-cost estimates of budgets, especially where reliable data are not yet available. The technique is most useful with well-defined projects that closely resemble earlier work so that initial expectations can be established and early approvals obtained.
But remember that these kinds of approximations are only moderately precise and cannot be used for special or highly intricate projects. For more precision, it’s better to supplement this process with other techniques of estimating once more data are obtained.
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