Cost Estimating

Parametric Cost Estimating

Cost Estimating is the process of developing a cost estimate. Cost estimating involves collecting and analyzing historical data and applying quantitative models, techniques, tools, and databases to predict a program’s future cost.

Parametric cost estimating is a parametric technique that uses regression or other statistical methods to develop Cost Estimating Relationships (CERs). A CER is an equation used to estimate a given cost element using an established relationship with one or more independent variables. The relationship may be mathematically simple or it may involve a complex equation (often derived from regression analysis of historical systems or subsystems). CERs should be current, applicable to the system or subsystem in question, and appropriate for the range of data being considered. [1]

Cost Estimating Methods

There are a number of cost estimating methods that can be used in estimating the costs of a future and current of a system.   The use of a specific approach will depend on how much information is available and where the system is in its development and lifecycle. A few of the most common cost estimating techniques are:

  • Parametric: The parametric technique uses regression or other statistical methods to develop Cost Estimating Relationships (CERs).
  • Analogy: An analogy is a technique used to estimate a cost based on historical data for an analogous system or subsystem.
  • Engineering Estimate: With this technique (Also called Bottoms Up), the system being costed is broken down into lower-level components (such as parts or assemblies), each of which is costed separately for direct labor, direct material, and other costs.
  • Actual Costs: With this technique, actual cost experience or trends (from prototypes, engineering development models, and/or early production items) are used to project estimates of future costs for the same system.
  • Three-Point Estimate: This Program Analysis and Review Technique (PERT) style cost estimate has the project manager identifies three separate estimates.

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Updated: 7/18/2021

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