Cost estimation, budgeting and risk planning
Cost, budget and risk
Cost management estimates the cost of resources, then aggregates estimates into a cost baseline and adds reserve to form the budget. Estimation methods include analogous (top-down, similar past project), parametric (cost per unit), bottom-up (WBS work packages) and three-point/PERT. Contingency reserve covers identified risks (“known unknowns”) and is usually inside the baseline; management reserve covers unidentified risks and sits outside the baseline but inside the approved budget. Life-cycle cost includes operation and disposal, not just build cost.
Risk planning follows a cycle: identify, analyse (qualitative and quantitative), plan responses, implement, and monitor. A probability–impact matrix prioritises risks; a risk register records cause, event, effect, owner, response and trigger. Responses for threats include avoid, mitigate, transfer and accept; opportunities can be exploited, enhanced, shared or accepted. A risk is an uncertain future event; an issue has already happened.
Traps
Watch for “contingency is extra profit” or “management reserve belongs in the cost baseline”-both are wrong. An estimate is not a budget. Do not accept a risk response that has no owner or no cost. Do not confuse risk with issue. PERT questions may ask for expected value; use (O + 4M + P) / 6.
Worked example
A task is estimated at optimistic 4 days, most likely 6, pessimistic 14. Expected duration = (4 + 4×6 + 14) / 6 = 7 days. If the cost baseline is 100,000 and management reserve is 10,000, the approved budget is 110,000. Rule of thumb: every significant risk needs an owner, a response, a trigger and, where appropriate, a reserve.