Project Cost Estimation: Using a Probabilistic Approach
We present here an integrated business case for calculating a simplified project cost estimation. There are many ways in which, in real practice, these project cost estimates are built. We propose a structure where the major components are categorized by activity. For simplification and training purposes, only ten activities are considered for quantifying the project estimates. Instead of activities, other cost estimation structures are possible: by department, functionality, material or service, etc.
Besides these activities that comprise project cost estimates, three additional contingent risks are incorporated on the risk register section. We use only three examples to show three different ways in which specific kinds of risk can be evaluated on a risk register quantitative model. In real practice, risk registers usually contain dozens of risks and opportunities categorized by all kinds of color coded diagrams called, among other denominations, heat maps or risk maps. Some of these reporting structures have been criticized mostly by the fact that they do not carry along any financial or quantitative interpretation of risks.
The objective of presenting this example is to demonstrate a number of basic and intermediate tools from @RISK that are relevant to current practices used in the world of project management. The goal is to show how @RISK tools can be used to represent quantitative – not qualitative – risk analysis.