Estimating is typically the domain of a subject matter expert with the bid management hierarchy. Nevertheless it is useful for a bid manager to understand and be able to apply estimating techniques.

Common Estimating Methods

The four most common estimating methods are:

1. Analogous

2. Bottom-Up

3. Parametric

4. Simulation

Analogous

Analogous estimating uses the costs and timelines associated with previous projects as the basis for estimating new opportunities. This approach uses historical data and as such is only effective when estimating projects involving minimal detail. This analogous method is usually the least costly method, however it is also generally less accurate.

Bottom-Up

The bottom-up method involves estimating the cost of level 3 items in a project work breakdown schedule and then totalling the costs to arrive at an overall estimate. This method generally produces accurate estimates, but at same time can be costly.

Parametric

Synonymous with construction projects, parametric estimating uses mathematical techniques to estimate time and costs. For example a certain time and cost per square metre may be associated with construction of a home and is extrapolated out to give the total cost for building a home with a specific aggregate square size. The method produces the most varying results.

Simulation

The simulation method uses computer modelling to analyse numerous time and cost parameters to produce an estimate. Monte Carlo is one of the most popular simulation methods, however its accuracy is directly linked to the number iterative process run, which in some cases can take days or weeks to complete.

Inflating Estimates

During the early conceptual stages of a project you may be called upon to provide a broad time and cost estimate. In situation it is common for an estimate range of plus or minus 25% to be used. However a formal estimate should be as accurate as possible and not include a contingency amount beyond 5% for straightforward projects. In some circumstances such as extremely complex projects, a contingency amount of 10 to 15% maybe acceptable.

Weighted Estimate Formulas

In situations where there is little risk and the new project activities are well known to the bidder they may elect to use a weighted estimate formula. One the most common formulas is the PERT weighted average calculated thus: