Complex Uncertain Projects

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5.What is Cost Aggregation and Why is it Important?[Original Blog]

Cost aggregation is a technique that involves grouping and summarizing the costs of different activities, resources, or work packages in a project. It is an important tool for project managers and stakeholders to monitor and control the project budget, as well as to communicate the cost performance and status of the project. In this section, we will explore the benefits and challenges of cost aggregation, the methods and tools for performing it, and some best practices and tips for applying it effectively.

Some of the benefits of cost aggregation are:

1. It provides a clear and concise overview of the project costs at different levels of detail, such as by phase, deliverable, or task. This helps to identify the major cost drivers and areas of concern, as well as to compare the actual costs with the planned or baseline costs.

2. It facilitates the analysis and reporting of the project cost performance, such as by using earned value management (EVM) or other metrics. This helps to measure the progress and value of the project, as well as to forecast the future costs and completion date.

3. It enables the allocation and management of the project budget and contingency reserves, as well as the approval and tracking of any changes or variances. This helps to ensure that the project is adequately funded and that the costs are within the agreed scope and quality.

4. It supports the decision-making and problem-solving processes of the project team and stakeholders, as well as the communication and collaboration among them. This helps to align the expectations and objectives of the project, as well as to resolve any issues or conflicts that may arise.

Some of the challenges of cost aggregation are:

1. It requires accurate and reliable data on the costs of the project activities, resources, and work packages, as well as the assumptions and estimates used to calculate them. This can be difficult to obtain or verify, especially for complex or uncertain projects, or for projects that involve multiple vendors or subcontractors.

2. It involves a trade-off between the level of detail and the level of aggregation of the project costs. Too much detail can make the cost aggregation process cumbersome and time-consuming, as well as increase the risk of errors or inconsistencies. Too much aggregation can make the cost aggregation process oversimplified and misleading, as well as reduce the visibility and accountability of the project costs.

3. It depends on the availability and suitability of the methods and tools for performing the cost aggregation, such as spreadsheets, software applications, or templates. These can vary in their functionality, usability, and compatibility, as well as in their cost and accessibility. Some of them may also have limitations or drawbacks, such as being prone to errors, outdated, or incompatible with other systems or formats.

4. It requires the skills and knowledge of the project team and stakeholders to perform the cost aggregation, as well as to interpret and use the results. This can be challenging for some of them, especially for those who are not familiar with the project scope, schedule, or quality, or with the cost aggregation technique, methods, or tools.

Some examples of cost aggregation are:

- A project manager uses a spreadsheet to aggregate the costs of the project activities by phase, such as initiation, planning, execution, monitoring and control, and closure. He or she then compares the aggregated costs with the project budget and baseline, and calculates the cost variance (CV) and the cost performance index (CPI) for each phase.

- A project sponsor uses a dashboard to aggregate the costs of the project deliverables by category, such as hardware, software, training, or documentation. He or she then reviews the aggregated costs and the status of the deliverables, and approves or rejects any change requests or issues that may affect the project costs.

- A project team member uses a software application to aggregate the costs of the project resources by type, such as labor, materials, equipment, or travel. He or she then updates the actual costs and the remaining costs of the resources, and reports any deviations or risks that may impact the project costs.

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6.Organizational Structure and Resource Allocation[Original Blog]

One of the most important factors that affect the cost estimation of a project is the internal factors of the organization. These include the organizational structure and the resource allocation of the project team. The organizational structure refers to how the project is divided into subtasks, roles, and responsibilities, and how the communication and coordination among the project members are facilitated. The resource allocation refers to how the human, financial, and physical resources are assigned, managed, and utilized for the project. Both of these factors have a significant impact on the accuracy, reliability, and feasibility of the cost estimation. In this section, we will discuss how these factors influence the cost drivers of a project, and what are some of the best practices to consider when dealing with them.

Some of the insights from different point of views are:

- From the project manager's perspective, the organizational structure and the resource allocation are crucial for planning, executing, and controlling the project. The project manager needs to define the scope, schedule, and budget of the project, and allocate the resources accordingly. The project manager also needs to monitor and control the progress, performance, and quality of the project, and adjust the resource allocation as needed. The project manager should consider the following aspects when designing the organizational structure and the resource allocation:

1. The complexity and uncertainty of the project. The more complex and uncertain the project is, the more flexible and adaptive the organizational structure and the resource allocation should be. The project manager should use a matrix or a projectized structure, rather than a functional or a hybrid structure, to allow for more collaboration and communication among the project members. The project manager should also use a bottom-up or a parametric approach, rather than a top-down or an analogous approach, to estimate the cost of the project, as these methods are more accurate and reliable for complex and uncertain projects.

2. The size and diversity of the project team. The larger and more diverse the project team is, the more challenging the organizational structure and the resource allocation are. The project manager should use a flat or a horizontal structure, rather than a tall or a vertical structure, to reduce the hierarchy and bureaucracy of the project. The project manager should also use a team-based or a collaborative approach, rather than a individual-based or a competitive approach, to allocate the resources of the project, as these methods are more effective and efficient for large and diverse teams.

3. The culture and values of the organization. The culture and values of the organization influence the organizational structure and the resource allocation of the project. The project manager should use a organic or a adhocratic structure, rather than a mechanistic or a bureaucratic structure, to foster a culture of innovation and creativity in the project. The project manager should also use a value-based or a ethical approach, rather than a cost-based or a rational approach, to allocate the resources of the project, as these methods are more aligned with the organization's vision and mission.

- From the project team member's perspective, the organizational structure and the resource allocation are essential for performing, learning, and growing in the project. The project team member needs to understand the expectations, objectives, and deliverables of the project, and contribute to the project accordingly. The project team member also needs to communicate and collaborate with the other project members, and seek feedback and guidance from the project manager. The project team member should consider the following aspects when adapting to the organizational structure and the resource allocation:

1. The skills and competencies of the project team member. The skills and competencies of the project team member determine the suitability and the contribution of the project team member to the project. The project team member should use a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) to assess the skills and competencies of the project team member, and identify the areas of improvement and development. The project team member should also use a SMART framework (Specific, Measurable, Achievable, Relevant, and Time-bound) to set the goals and objectives of the project team member, and measure the progress and performance of the project team member.

2. The motivation and satisfaction of the project team member. The motivation and satisfaction of the project team member influence the engagement and commitment of the project team member to the project. The project team member should use a Maslow's hierarchy of needs theory to understand the motivation and satisfaction of the project team member, and address the needs of the project team member accordingly. The project team member should also use a Herzberg's two-factor theory to enhance the motivation and satisfaction of the project team member, and provide the hygiene and motivator factors of the project team member.

3. The personality and behavior of the project team member. The personality and behavior of the project team member affect the interaction and cooperation of the project team member with the other project members. The project team member should use a Myers-Briggs Type Indicator (MBTI) test to identify the personality and behavior of the project team member, and understand the preferences and tendencies of the project team member. The project team member should also use a Thomas-Kilmann Conflict Mode Instrument (TKI) to manage the conflict and negotiation of the project team member, and choose the appropriate mode of conflict resolution of the project team member.

- From the stakeholder's perspective, the organizational structure and the resource allocation are important for evaluating, influencing, and benefiting from the project. The stakeholder needs to know the scope, schedule, and budget of the project, and the expected outcomes and benefits of the project. The stakeholder also needs to provide the inputs, feedback, and support to the project, and monitor and control the risks and issues of the project. The stakeholder should consider the following aspects when reviewing the organizational structure and the resource allocation:

1. The interest and power of the stakeholder. The interest and power of the stakeholder determine the level of involvement and influence of the stakeholder on the project. The stakeholder should use a stakeholder analysis matrix to classify the interest and power of the stakeholder, and identify the key and secondary stakeholders of the project. The stakeholder should also use a stakeholder engagement plan to define the communication and participation strategies of the stakeholder, and ensure the alignment and satisfaction of the stakeholder.

2. The requirements and expectations of the stakeholder. The requirements and expectations of the stakeholder define the scope and quality of the project, and the deliverables and outcomes of the project. The stakeholder should use a requirements management plan to collect, analyze, prioritize, and validate the requirements of the stakeholder, and document the scope and quality of the project. The stakeholder should also use a stakeholder satisfaction survey to measure, evaluate, and improve the expectations of the stakeholder, and report the deliverables and outcomes of the project.

3. The value and benefit of the stakeholder. The value and benefit of the stakeholder reflect the return on investment and the impact of the project, and the objectives and goals of the stakeholder. The stakeholder should use a value analysis to estimate, compare, and optimize the value and benefit of the stakeholder, and justify the feasibility and viability of the project. The stakeholder should also use a benefit realization plan to monitor, track, and verify the value and benefit of the stakeholder, and ensure the sustainability and scalability of the project.

These are some of the insights from different point of views on the internal factors of organizational structure and resource allocation. By considering these factors, the project team can improve the accuracy, reliability, and feasibility of the cost estimation, and achieve the success and satisfaction of the project.

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7.Cost Estimation Challenges and Failures in Real-World Projects[Original Blog]

Cost estimation is a crucial process in any project management, as it helps to define the scope, budget, and schedule of the project. However, cost estimation is also prone to many challenges and failures, especially in complex and uncertain projects. In this section, we will explore some of the common cost estimation challenges and failures in real-world projects, and how they can be avoided or mitigated. We will also look at some of the best practices and tools for improving cost estimation accuracy and reliability.

Some of the cost estimation challenges and failures in real-world projects are:

1. Underestimating the complexity and uncertainty of the project. Many projects, especially in the fields of software, engineering, and construction, involve a high degree of complexity and uncertainty, which can affect the cost estimation process. For example, the project may have unclear or changing requirements, dependencies, risks, or quality standards, which can increase the scope and duration of the project. Additionally, the project may face external factors, such as market fluctuations, regulatory changes, or environmental issues, which can impact the cost of the project. These factors can make the cost estimation process more difficult and prone to errors, as they require more assumptions, contingencies, and adjustments. A common failure in this case is to use a simple or optimistic cost estimation method, such as analogy, expert judgment, or parametric estimation, which may not capture the complexity and uncertainty of the project adequately. This can result in a significant cost overrun or underrun, as the actual cost of the project may deviate from the estimated cost significantly. For example, the Sydney Opera House project, which started in 1957 and finished in 1973, had an initial cost estimate of $7 million, but ended up costing $102 million, due to the complexity and uncertainty of the design and construction of the iconic building.

2. Overlooking the human and organizational factors of the project. Another challenge and failure in cost estimation is to neglect the human and organizational factors that can affect the cost of the project. These factors include the skills, experience, motivation, and productivity of the project team, the communication, coordination, and collaboration among the project stakeholders, the culture, values, and norms of the project organization, and the leadership, governance, and oversight of the project. These factors can have a significant impact on the cost of the project, as they can influence the quality, efficiency, and effectiveness of the project work. A common failure in this case is to assume that the project team and organization are homogeneous, rational, and consistent, and that they will perform according to the plan and the expectations. This can result in a cost estimation bias, as the actual performance of the project team and organization may differ from the assumed performance. For example, the Denver International Airport project, which started in 1989 and finished in 1995, had an initial cost estimate of $1.7 billion, but ended up costing $4.8 billion, due to the human and organizational factors, such as the lack of coordination and integration among the contractors, the disputes and lawsuits among the stakeholders, the poor management and oversight of the project, and the low morale and productivity of the project team.

3. Ignoring the feedback and learning from the project. A third challenge and failure in cost estimation is to ignore the feedback and learning that can be obtained from the project. Feedback and learning are essential for improving the cost estimation process, as they can help to validate, calibrate, and update the cost estimates, as well as to identify and correct the errors, gaps, and deviations in the cost estimation process. Feedback and learning can be obtained from various sources, such as the project data, metrics, and reports, the project reviews, audits, and evaluations, the project lessons learned and best practices, and the project stakeholders' feedback and satisfaction. A common failure in this case is to treat the cost estimation process as a one-time or static activity, and to disregard the feedback and learning that can be derived from the project. This can result in a cost estimation inaccuracy, as the cost estimates may not reflect the current or future state of the project, and may not incorporate the improvements or changes that can be made to the cost estimation process. For example, the Hubble Space Telescope project, which started in 1977 and finished in 1990, had an initial cost estimate of $400 million, but ended up costing $2.5 billion, due to the ignorance of the feedback and learning from the project, such as the technical and operational issues, the design and testing flaws, the schedule and budget overruns, and the stakeholder dissatisfaction.

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8.What are some limitations and pitfalls of using CPR as a metric for cost management?[Original Blog]

CPR, or Cost Performance Ranking, is a metric that measures the efficiency of cost management by comparing the actual cost of a project or activity with its planned or budgeted cost. It is calculated by dividing the planned cost by the actual cost and multiplying by 100. A higher CPR indicates a better performance, while a lower CPR indicates a worse performance. However, CPR is not a perfect metric and has some limitations and pitfalls that need to be considered when using it for cost management. In this section, we will discuss some of the challenges of CPR from different perspectives, such as project managers, stakeholders, and analysts.

Some of the challenges of CPR are:

1. CPR does not reflect the quality or value of the project or activity. CPR only measures the cost efficiency, but not the quality or value of the deliverables or outcomes. For example, a project may have a high CPR because it was completed under budget, but the quality of the work may be poor or the customer may be dissatisfied. Conversely, a project may have a low CPR because it exceeded the budget, but the quality of the work may be high or the customer may be delighted. Therefore, CPR should not be used as the sole indicator of project success or failure, but rather as one of the factors to consider along with other metrics, such as schedule performance, scope performance, customer satisfaction, and return on investment.

2. CPR does not account for changes in scope, schedule, or resources. CPR is based on the planned or budgeted cost, which may not reflect the actual or current scope, schedule, or resources of the project or activity. For example, a project may have a low CPR because the scope was increased, the schedule was delayed, or the resources were reduced due to unforeseen circumstances or changes in requirements. However, this does not necessarily mean that the project was poorly managed or that the cost performance was bad. It may mean that the project adapted to the changing environment or delivered more value than originally planned. Therefore, CPR should be adjusted or recalculated based on the changes in scope, schedule, or resources, or supplemented with other metrics, such as earned value management, that can account for these changes.

3. CPR does not consider the risks and uncertainties of the project or activity. CPR is based on the assumption that the planned or budgeted cost is accurate and realistic, which may not be the case for complex or uncertain projects or activities. For example, a project may have a high CPR because the planned or budgeted cost was too high or conservative, or because the project faced no or few risks or issues. However, this does not necessarily mean that the project was well managed or that the cost performance was good. It may mean that the project was overestimated or overbudgeted, or that the project was lucky or simple. Conversely, a project may have a low CPR because the planned or budgeted cost was too low or optimistic, or because the project faced many or severe risks or issues. However, this does not necessarily mean that the project was poorly managed or that the cost performance was bad. It may mean that the project was underestimated or underbudgeted, or that the project was unlucky or complex. Therefore, CPR should be based on realistic and reliable estimates, or adjusted or recalculated based on the actual or expected risks and uncertainties, or supplemented with other metrics, such as risk management, that can consider these factors.

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9.Understanding the Importance of Cost Predictability Simulation[Original Blog]

cost predictability simulation is a technique that helps project managers and stakeholders to estimate the cost of a project based on various factors and scenarios. It can help to reduce the risk of cost overruns, optimize the allocation of resources, and improve the decision-making process. In this section, we will explore the importance of cost predictability simulation from different perspectives, such as the project manager, the client, the team, and the organization. We will also provide some examples of how cost predictability simulation can be applied to real-world projects.

Some of the benefits of cost predictability simulation are:

1. It can increase the confidence and trust of the client. By using cost predictability simulation, the project manager can provide the client with a realistic and transparent estimate of the project cost, as well as the range of possible outcomes and the associated probabilities. This can help the client to understand the risks and uncertainties involved in the project, and to make informed choices based on their preferences and expectations. For example, the project manager can use cost predictability simulation to show the client how different changes in scope, schedule, quality, or resources can affect the project cost, and how they can balance the trade-offs between them.

2. It can improve the performance and motivation of the team. cost predictability simulation can also help the project manager to communicate the project goals and expectations to the team members, and to assign them tasks and responsibilities that are aligned with their skills and capabilities. By using cost predictability simulation, the project manager can monitor the progress and performance of the team, and provide them with timely feedback and guidance. This can help the team to work more efficiently and effectively, and to overcome any challenges or issues that may arise during the project. For example, the project manager can use cost predictability simulation to identify and mitigate any potential risks or threats that can jeopardize the project cost, such as delays, errors, defects, or conflicts.

3. It can enhance the reputation and value of the organization. Cost predictability simulation can also help the organization to demonstrate its competence and professionalism in delivering high-quality projects within the budget and the deadline. By using cost predictability simulation, the organization can showcase its ability to handle complex and uncertain projects, and to satisfy the needs and expectations of the clients. This can help the organization to attract and retain more clients, and to gain a competitive edge in the market. For example, the organization can use cost predictability simulation to showcase its previous projects and achievements, and to highlight its best practices and standards.

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10.A Powerful Tool for Estimating and Tracking Project Costs[Original Blog]

One of the most important aspects of cost management is to have accurate and reliable estimates of the project costs. However, estimating costs can be challenging, especially for complex and uncertain projects. That's why many project managers use a technique called cost survey to collect and analyze data from similar projects and use them as a basis for their own estimates. Cost survey is a powerful tool for estimating and tracking project costs, as it can help you:

- Benchmark your project against industry standards and best practices

- Identify the key drivers and factors that affect the project costs

- Adjust your estimates according to the project scope, schedule, quality, and risks

- Monitor the actual costs and compare them with the estimated costs

- Control the project budget and avoid cost overruns

In this section, we will discuss how to conduct a cost survey and how to use the results to improve your cost management. We will cover the following steps:

1. Define the purpose and scope of the cost survey

2. Select the sources and methods of data collection

3. Analyze the data and calculate the cost metrics

4. Apply the cost survey results to your project

5. Update the cost survey periodically

Let's look at each step in more detail.

1. Define the purpose and scope of the cost survey. The first step is to clearly define why you are conducting the cost survey and what you want to achieve from it. For example, you may want to estimate the total cost of your project, the cost per unit of output, the cost variance, or the cost performance index. You also need to define the scope of the cost survey, which means the type, size, complexity, and duration of the projects that you want to compare with your own project. For example, if you are managing a software development project, you may want to include only projects that use the same programming language, platform, methodology, and quality standards as your project. This will ensure that the cost survey is relevant and reliable for your project.

2. Select the sources and methods of data collection. The next step is to select the sources and methods of data collection for the cost survey. You can use primary or secondary sources of data, or a combination of both. Primary sources are the original data that you collect directly from the project stakeholders, such as the project team, the sponsors, the customers, or the suppliers. Secondary sources are the data that are already available from other sources, such as the project documents, the historical records, the databases, the reports, or the publications. You can use different methods of data collection, such as interviews, surveys, questionnaires, observations, or experiments. You should choose the sources and methods that are most appropriate, feasible, and reliable for your project.

3. Analyze the data and calculate the cost metrics. The third step is to analyze the data and calculate the cost metrics that you want to use for the cost survey. You can use descriptive statistics, such as the mean, median, mode, range, standard deviation, or coefficient of variation, to summarize and compare the data. You can also use inferential statistics, such as the correlation, regression, hypothesis testing, or confidence intervals, to test the relationships and differences between the data. You should calculate the cost metrics that are relevant and meaningful for your project, such as the cost estimate, the cost baseline, the cost variance, the cost performance index, the earned value, or the estimate at completion.

4. Apply the cost survey results to your project. The fourth step is to apply the cost survey results to your project. You can use the cost metrics to estimate and track the project costs, and to adjust them according to the project changes and uncertainties. You can also use the cost survey results to benchmark your project against the industry standards and best practices, and to identify the areas of improvement and the opportunities for cost savings. You should document and communicate the cost survey results to the project stakeholders, and to justify and support your cost management decisions.

5. Update the cost survey periodically. The last step is to update the cost survey periodically throughout the project life cycle. You should collect and analyze the new data and recalculate the cost metrics as the project progresses and as new information becomes available. You should also compare the actual costs with the estimated costs and monitor the cost performance and variance. You should update the cost survey to reflect the current status and performance of the project, and to revise and refine the cost estimates and forecasts. You should also update the cost survey to incorporate the feedback and lessons learned from the project stakeholders and the previous projects.

By following these steps, you can conduct a cost survey and use it as a powerful tool for estimating and tracking project costs. Cost survey can help you improve your cost management and achieve your project objectives within the budget.

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11.Overview of Cost Simulation Models[Original Blog]

cost simulation models are powerful tools that can help project managers and decision makers to estimate, analyze, and optimize the costs of their projects. They can also help to identify and eliminate the sources of waste and inefficiency that can affect the project performance and profitability. In this section, we will provide an overview of the main types, features, benefits, and challenges of cost simulation models. We will also discuss how to use them effectively in different project scenarios and contexts.

Some of the main types of cost simulation models are:

1. Deterministic models: These models use fixed values or formulas for the input variables, such as the project duration, resources, activities, and costs. They produce a single output value for the total project cost or any other cost-related metric. They are useful for simple and well-defined projects with low uncertainty and variability. However, they do not account for the possible fluctuations and risks that can occur in real-world projects. For example, a deterministic model might assume that a project will take 12 months to complete, with a fixed budget of $1 million and a constant resource allocation. It will not consider the possibility of delays, changes, or unforeseen events that might affect the project cost.

2. Probabilistic models: These models use probability distributions or ranges for the input variables, such as the project duration, resources, activities, and costs. They produce multiple output values for the total project cost or any other cost-related metric, along with their probabilities or confidence intervals. They are useful for complex and uncertain projects with high variability and risk. They can account for the different scenarios and outcomes that can occur in real-world projects. For example, a probabilistic model might assume that a project will take between 10 and 14 months to complete, with a budget of $0.8 to $1.2 million and a variable resource allocation. It will generate a range of possible project costs, along with their likelihoods or confidence levels.

3. Dynamic models: These models use feedback loops and time-dependent variables to capture the interactions and changes that occur in the project over time. They produce output values for the total project cost or any other cost-related metric at different points in time or stages of the project. They are useful for adaptive and evolving projects with changing conditions and requirements. They can account for the effects of learning, feedback, and adaptation on the project cost. For example, a dynamic model might assume that a project will start with a budget of $1 million and a resource allocation of 10 people, but these values will change over time depending on the project progress, performance, and feedback. It will generate a series of project costs at different time intervals or milestones.

Some of the main features of cost simulation models are:

- Input variables: These are the factors that influence the project cost, such as the project duration, resources, activities, and costs. They can be either fixed or variable, depending on the type of model. They can also be either independent or dependent, depending on the relationships among them. For example, the project duration might depend on the resource allocation, or the activity cost might depend on the activity duration.

- Output variables: These are the metrics that measure the project cost, such as the total project cost, the cost variance, the cost performance index, or the return on investment. They can be either single or multiple, depending on the type of model. They can also be either deterministic or probabilistic, depending on the uncertainty and variability of the input variables. For example, the total project cost might be a single deterministic value or a multiple probabilistic range.

- Model structure: This is the way the input and output variables are organized and connected in the model. It can be either linear or nonlinear, depending on the complexity and dynamics of the project. It can also be either static or dynamic, depending on the time-dependence and feedback of the project. For example, the model structure might be a linear equation or a nonlinear system of equations, or a static spreadsheet or a dynamic simulation software.

Some of the main benefits of cost simulation models are:

- Accuracy: They can provide more accurate and realistic estimates of the project cost, compared to traditional methods such as the bottom-up or top-down approaches. They can account for the uncertainty and variability of the project, and the interactions and changes that occur over time. They can also provide more information and insights about the project cost, such as the probabilities, confidence intervals, trends, and patterns.

- Flexibility: They can accommodate different types of projects, with different levels of complexity, uncertainty, and risk. They can also handle different types of input and output variables, with different ranges and distributions. They can also be easily modified and updated, as the project progresses and new information becomes available.

- Optimization: They can help to optimize the project cost, by identifying and eliminating the sources of waste and inefficiency that can affect the project performance and profitability. They can also help to evaluate and compare different alternatives and scenarios, and to select the best option that meets the project objectives and constraints. They can also help to monitor and control the project cost, by detecting and correcting any deviations or issues that might arise during the project execution.

Some of the main challenges of cost simulation models are:

- Data: They require a large amount of data and information, both qualitative and quantitative, to build and run the model. They also require reliable and valid data sources, to ensure the quality and credibility of the model. They also require appropriate data analysis and interpretation, to avoid any errors or biases in the model results.

- Skills: They require a high level of skills and expertise, both technical and managerial, to design and develop the model. They also require a good understanding of the project context and objectives, to ensure the relevance and applicability of the model. They also require effective communication and presentation, to convey the model assumptions, results, and implications to the stakeholders and decision makers.

- Resources: They require a significant amount of resources, both time and money, to create and maintain the model. They also require adequate software and hardware, to support the model functionality and performance. They also require sufficient support and involvement, from the project team and the organization, to ensure the model alignment and integration with the project plan and strategy.

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12.Understanding the Cost Breakdown Structure[Original Blog]

The cost breakdown structure (CBS) is a hierarchical representation of the costs associated with a project, program, or portfolio. It is derived from the work breakdown structure (WBS), which defines the scope and deliverables of the project. The CBS helps to estimate, monitor, and control the costs of each work package, activity, or resource involved in the project. The CBS also enables the analysis of different scenarios and alternatives for the project, such as changes in scope, schedule, quality, or risks. In this section, we will discuss the following aspects of the CBS:

1. The benefits and challenges of using the CBS for scenario simulation.

2. The steps and best practices for creating and maintaining the CBS.

3. The tools and techniques for performing scenario simulation using the CBS.

4. The examples of how the CBS can be used for different types of projects and industries.

Let's start with the first point: the benefits and challenges of using the CBS for scenario simulation.

Some possible benefits of using the CBS for scenario simulation are:

- It provides a clear and consistent view of the project costs and their allocation across the WBS elements.

- It facilitates the comparison and evaluation of different scenarios and alternatives for the project, such as what-if analysis, sensitivity analysis, or contingency planning.

- It supports the decision-making process and the communication of the project status and performance to the stakeholders.

- It helps to identify and manage the cost drivers, risks, and opportunities for the project.

- It enables the integration of the cost information with other project management processes, such as scope, schedule, quality, or risk management.

Some possible challenges of using the CBS for scenario simulation are:

- It requires a detailed and accurate WBS as the basis for the CBS, which may not be available or feasible for some projects, especially in the early stages.

- It involves a high level of effort and expertise to estimate, validate, and update the cost data for each WBS element, especially for complex or uncertain projects.

- It may encounter difficulties in handling the dynamic and interdependent nature of the project costs, such as escalation, inflation, exchange rates, or resource availability.

- It may face limitations in the availability and reliability of the tools and techniques for performing scenario simulation, such as software, data, or models.

- It may encounter resistance or misunderstanding from some stakeholders who may have different perspectives or expectations on the project costs and their implications.

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13.Best Practices for Conducting Cost Predictability Simulation[Original Blog]

Cost predictability simulation is a powerful technique that can help you align your cost and schedule plans by estimating the probability of achieving your project objectives within the budget and time constraints. It involves creating a realistic model of your project costs and schedule, and then running multiple scenarios to account for the uncertainties and risks that may affect them. By analyzing the results of the simulation, you can identify the most likely outcomes, the best and worst cases, and the areas of improvement for your project plan. In this section, we will discuss some of the best practices for conducting cost predictability simulation and how they can benefit your project.

Some of the best practices for conducting cost predictability simulation are:

1. Define your project objectives and success criteria. Before you start the simulation, you need to have a clear idea of what you want to achieve with your project and how you will measure its success. For example, you may want to complete the project within a certain budget, schedule, quality, scope, or customer satisfaction level. You should also define the acceptable range of deviation from your objectives and the threshold of risk exposure that you are willing to tolerate.

2. Collect and validate the data for your cost and schedule model. You need to have reliable and accurate data for your project costs and schedule, such as the work breakdown structure, the resource requirements, the cost estimates, the duration estimates, the dependencies, the milestones, and the deliverables. You should also validate the data by checking its sources, assumptions, and calculations, and by comparing it with historical data or benchmarks from similar projects.

3. identify and quantify the uncertainties and risks that may affect your project. You need to consider all the possible factors that may cause your project costs and schedule to deviate from your plan, such as changes in scope, requirements, quality, resources, productivity, technology, market conditions, regulations, or stakeholder expectations. You should also assess the likelihood and impact of each uncertainty and risk, and assign them a probability distribution that reflects their variability and uncertainty. For example, you may use a normal, triangular, uniform, or beta distribution to model your uncertainties and risks.

4. Run the simulation and analyze the results. You need to use a software tool that can perform the cost predictability simulation by generating random values for your uncertainties and risks, and then calculating the corresponding values for your project costs and schedule. You should run the simulation for a sufficient number of iterations, such as 1000 or more, to ensure the stability and accuracy of the results. You should also analyze the results by using statistical and graphical methods, such as histograms, cumulative frequency curves, confidence intervals, sensitivity analysis, or tornado charts, to understand the distribution and variation of your project outcomes, the probability of achieving your project objectives, and the key drivers of your project performance.

5. Use the results to improve your project plan and decision making. You need to use the insights from the simulation to identify the strengths and weaknesses of your project plan, and to make adjustments or corrections as needed. For example, you may want to revise your cost or schedule estimates, allocate more resources or contingency, reduce or mitigate your risks, or change your project scope or strategy. You should also use the results to communicate and justify your project plan and expectations to your stakeholders, and to support your project monitoring and control activities.

By following these best practices, you can conduct a cost predictability simulation that can help you align your cost and schedule plans and increase your chances of delivering your project successfully. Cost predictability simulation is a valuable tool that can enhance your project planning and management skills and enable you to handle complex and uncertain projects with confidence and competence.

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14.How to Choose the Right Approach for Your Project?[Original Blog]

cost simulation is a powerful technique that can help you estimate the cost of your project and identify the key drivers of uncertainty and risk. However, not all cost simulation methods are created equal. Depending on the nature and complexity of your project, you may need to choose between different approaches that vary in their assumptions, inputs, outputs, and level of detail. In this section, we will discuss some of the most common cost simulation methods and how to choose the right one for your project. We will also provide some examples of how these methods can be applied in practice.

Some of the factors that you should consider when choosing a cost simulation method are:

- The type of project you are working on. Different projects may have different sources of uncertainty, such as technical, market, environmental, or political factors. You should choose a method that can capture the relevant uncertainties and their impact on your project cost.

- The level of detail you need in your cost estimate. Some methods can provide more granular and detailed information about the cost components and their distributions, while others can only provide aggregate or average values. You should choose a method that can provide the level of detail that meets your project objectives and stakeholder expectations.

- The availability and quality of data you have for your project. Some methods require more data and assumptions than others, such as historical data, expert opinions, or parametric models. You should choose a method that can make the best use of the data you have and account for any data limitations or uncertainties.

- The time and resources you have for your cost simulation. Some methods are more complex and time-consuming than others, requiring more computational power, software tools, or human expertise. You should choose a method that can fit within your project schedule and budget.

Based on these factors, some of the most common cost simulation methods are:

1. monte Carlo simulation. This is a probabilistic method that uses random sampling to generate a large number of possible scenarios for your project cost. Each scenario is based on a set of input variables, such as cost drivers, risk factors, or contingency allowances, that have a probability distribution assigned to them. The output of the monte Carlo simulation is a probability distribution of the total project cost, as well as the individual cost components. This method can provide a high level of detail and accuracy, as well as sensitivity and risk analysis. However, it also requires a lot of data and assumptions, as well as specialized software and expertise. It is suitable for complex and uncertain projects that need a robust and comprehensive cost estimate.

2. Three-point estimation. This is a deterministic method that uses three values for each cost component: the most likely, the optimistic, and the pessimistic value. These values are based on historical data, expert judgment, or parametric models. The total project cost is calculated by using a weighted average of these three values, such as the PERT (Program Evaluation and Review Technique) formula or the triangular distribution. This method can provide a simple and quick estimate of the project cost, as well as a range of uncertainty. However, it also has some limitations, such as assuming a symmetrical distribution of the cost components, ignoring the correlations between the cost drivers, and oversimplifying the uncertainty and risk factors. It is suitable for simple and well-defined projects that need a rough and conservative cost estimate.

3. Analogous estimation. This is a comparative method that uses the cost data from similar or analogous projects to estimate the cost of your project. The cost data can be adjusted for any differences in size, scope, quality, or complexity between the projects, using scaling factors or ratios. This method can provide a reliable and realistic estimate of the project cost, as well as a benchmark for comparison. However, it also depends on the availability and quality of the historical data, as well as the similarity and relevance of the analogous projects. It is suitable for projects that have a high degree of similarity with past projects or industry standards.

How to Choose the Right Approach for Your Project - Cost Simulation Evaluation: How to Measure and Report the Results and Outcomes of Your Cost Simulation Activities

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15.Methods and Techniques for Risk Estimation in Expenditure Projects[Original Blog]

Techniques in risk

Expenditure Projects

When it comes to undertaking expenditure projects, risk estimation plays a crucial role in ensuring the success and viability of the endeavor. Accurately assessing potential risks allows project managers and stakeholders to make informed decisions, allocate resources effectively, and implement appropriate mitigation strategies. In this section, we will delve into the various methods and techniques employed for risk estimation in expenditure projects, exploring insights from different perspectives and providing in-depth information on each approach.

1. Expert Judgment:

One commonly used method for risk estimation is expert judgment. This involves seeking input from individuals with relevant expertise and experience in the field. Experts can provide valuable insights into identifying and assessing potential risks based on their knowledge and understanding of similar projects or industry trends. Their judgment can be particularly useful in situations where historical data or quantitative models are limited. For example, in a construction project, an experienced civil engineer can assess the risk associated with soil erosion based on their understanding of local geology and past projects in the area.

2. historical Data analysis:

analyzing historical data is another effective technique for risk estimation. By examining data from previous projects that share similarities with the current endeavor, project managers can identify patterns and trends related to risks and their impacts. This approach relies on the assumption that history often repeats itself, allowing for more accurate predictions. For instance, in a software development project, analyzing data from past projects can help estimate the risk of schedule delays due to unforeseen technical complexities.

3. Quantitative Models:

Quantitative models provide a systematic approach to risk estimation by assigning numerical values to various risk factors. These models use mathematical algorithms to calculate the probability and impact of specific risks. monte Carlo simulation, for example, is a widely used technique that generates thousands of possible scenarios based on input variables and their probability distributions. By simulating numerous iterations, project managers can estimate the likelihood of different outcomes and evaluate the associated risks. This method is particularly useful when dealing with complex projects involving multiple interdependent variables, such as large-scale infrastructure development.

4. Sensitivity Analysis:

Sensitivity analysis helps identify the most critical variables and their impact on project outcomes. By systematically varying input parameters within a quantitative model, project managers can assess the sensitivity of the results to changes in these variables. This analysis provides insights into which factors have the greatest influence on project risks and allows for targeted risk mitigation strategies. For example, in an oil exploration project, sensitivity analysis can determine the impact of fluctuating oil prices on the project's profitability, enabling proactive measures to be taken.

5. Delphi Technique:

The Delphi technique involves obtaining consensus from a panel of experts through a structured iterative process. In this method, experts provide anonymous input on potential risks, and their responses are compiled and shared with the group. The experts then review the collective feedback, revise their initial assessments, and provide further input. This process continues until a consensus is reached. The Delphi technique helps overcome biases and encourages open discussion among experts, leading to more accurate risk estimations. It is particularly valuable when dealing with complex and uncertain projects, such as research and development initiatives.

6. Scenario Analysis:

Scenario analysis involves constructing hypothetical scenarios to evaluate the impact of different risk events on project outcomes. By considering various plausible situations, project managers can assess the potential consequences and develop appropriate contingency plans. For instance, in a renewable energy project, scenario analysis can explore the effects of unexpected regulatory changes or fluctuations in government incentives on the project's financial viability. By preparing for multiple scenarios, project teams can adapt quickly and mitigate risks effectively.

7. Checklists and Templates:

Checklists and templates provide a structured approach to risk estimation by ensuring that all relevant factors are considered. These tools help project managers systematically identify potential risks based on predefined categories and criteria. By following a checklist or using a template, project teams can avoid overlooking critical risks and ensure comprehensive risk estimation. For example, in a manufacturing project, a checklist might include categories such as supply chain disruptions, equipment failure, or quality control issues.

Risk estimation in expenditure projects requires a multifaceted approach that combines expert judgment, historical data analysis, quantitative models, sensitivity analysis, the Delphi technique, scenario analysis, and checklists/templates. By employing these methods and techniques, project managers can gain a comprehensive understanding of potential risks and make informed decisions to mitigate them effectively. Each approach brings its own unique insights and benefits, allowing for a more robust risk management strategy tailored to the specific needs of the project.

Methods and Techniques for Risk Estimation in Expenditure Projects - Risk Estimation: Risk Estimation and Mitigation Strategies for Expenditure Projects

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16.Key Factors to Consider[Original Blog]

Budget risk is the possibility that the actual costs of a project or activity will exceed the planned or allocated budget. Budget risk can have negative impacts on the performance, quality, and scope of the project or activity, as well as the reputation and profitability of the organization. Therefore, it is important to assess budget risk and take measures to mitigate it. In this section, we will discuss some key factors to consider when assessing budget risk and how they can affect the budget outcome.

Some of the key factors to consider when assessing budget risk are:

1. The accuracy and reliability of the budget estimates. The budget estimates are the basis for planning and controlling the costs of the project or activity. They should be realistic, consistent, and based on reliable data and assumptions. If the budget estimates are inaccurate or unreliable, they can lead to underestimating or overestimating the costs, which can result in budget overruns or underutilization. For example, if the budget estimates do not account for inflation, currency fluctuations, or market changes, they can be outdated and inaccurate. Therefore, it is important to review and update the budget estimates regularly and use appropriate methods and tools to estimate the costs.

2. The complexity and uncertainty of the project or activity. The complexity and uncertainty of the project or activity can affect the budget risk by increasing the variability and unpredictability of the costs. Complex and uncertain projects or activities involve more tasks, resources, dependencies, stakeholders, and changes, which can increase the difficulty and cost of planning, executing, and monitoring the project or activity. For example, a project that involves multiple phases, locations, technologies, and vendors can have more complex and uncertain costs than a simple and straightforward project. Therefore, it is important to identify and analyze the sources and levels of complexity and uncertainty and use appropriate techniques and strategies to manage them.

3. The alignment and communication of the budget expectations and objectives. The budget expectations and objectives are the desired and agreed outcomes and targets of the project or activity in terms of costs, benefits, and value. They should be aligned and communicated clearly and effectively among the project or activity team, sponsors, stakeholders, and customers. If the budget expectations and objectives are misaligned or poorly communicated, they can lead to conflicts, confusion, and dissatisfaction, which can affect the budget performance and quality. For example, if the project or activity team and the customer have different expectations and objectives regarding the scope, schedule, and quality of the project or activity, they can have different views and opinions on the budget adequacy and efficiency. Therefore, it is important to establish and communicate the budget expectations and objectives clearly and consistently and ensure that they are understood and accepted by all parties involved.

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17.How to use Cost of Delay to rank your projects by value and urgency?[Original Blog]

One of the most important decisions that project managers have to make is how to prioritize their projects. There are many factors that can influence this decision, such as the strategic alignment, the stakeholder expectations, the resource availability, and the risk level. However, one factor that is often overlooked or misunderstood is the Cost of Delay. Cost of Delay is a metric that quantifies the economic impact of delaying or not delivering a project. It helps project managers to rank their projects by value and urgency, and to make trade-offs between competing options. In this section, we will explain how to use Cost of Delay to prioritize your projects, and what are the benefits and challenges of this approach. We will also provide some examples and tips to help you apply this concept in your own context.

To use Cost of Delay to rank your projects, you need to follow these steps:

1. Identify the value drivers of your projects. Value drivers are the factors that determine how much value a project can deliver to your organization or customers. They can be financial, such as revenue, profit, or cost savings; or non-financial, such as customer satisfaction, brand awareness, or social impact. You need to identify the most relevant and measurable value drivers for each project, and estimate how they will change over time.

2. Estimate the Cost of Delay for each project. Cost of Delay is the value that is lost or foregone by delaying or not delivering a project. It can be calculated by multiplying the value drivers by the rate of change of those value drivers over time. For example, if a project can generate $100,000 of revenue per month, and the revenue growth rate is 10% per month, then the Cost of Delay for that project is $10,000 per month. The higher the Cost of Delay, the more urgent the project is.

3. Rank your projects by Cost of Delay divided by Duration (CD3). CD3 is a ratio that compares the Cost of Delay of a project with its duration, or the time required to complete it. It measures the value per unit of time of a project, and it helps to identify the projects that can deliver the most value in the shortest time. To calculate CD3, you need to divide the Cost of Delay by the duration of the project. For example, if a project has a Cost of Delay of $10,000 per month, and a duration of 3 months, then its CD3 is $3,333 per month. The higher the CD3, the higher the priority of the project.

4. Review and adjust your project ranking periodically. Cost of Delay and CD3 are not static metrics. They can change over time due to internal or external factors, such as market conditions, customer feedback, competitor actions, or new opportunities. Therefore, you need to review and update your project ranking regularly, and adjust your plans accordingly. You also need to monitor the actual value delivered by your projects, and compare it with your initial estimates.

Some of the benefits of using Cost of Delay to prioritize your projects are:

- It helps you to focus on the most valuable and urgent projects, and avoid wasting time and resources on low-value or low-urgency projects.

- It helps you to align your project portfolio with your strategic goals and vision, and communicate them clearly to your stakeholders and team members.

- It helps you to make better trade-offs and decisions, and to justify them with data and logic.

- It helps you to create a culture of continuous improvement and learning, and to adapt to changing circumstances and customer needs.

Some of the challenges of using Cost of Delay to prioritize your projects are:

- It can be difficult to identify and measure the value drivers of your projects, especially for non-financial or intangible benefits.

- It can be difficult to estimate the Cost of Delay and the duration of your projects, especially for complex or uncertain projects.

- It can be difficult to compare and rank projects that have different value drivers, different time horizons, or different levels of risk.

- It can be difficult to balance the short-term and long-term value of your projects, and to account for the interdependencies and synergies between them.

Some examples of using Cost of Delay to prioritize your projects are:

- A software company that has several features in its backlog, and wants to decide which ones to develop first. The company can use cost of Delay to estimate the value and urgency of each feature, based on the expected revenue, customer retention, and competitive advantage that each feature can generate. The company can then rank the features by CD3, and allocate its development resources accordingly.

- A hospital that has several improvement projects, and wants to decide which ones to implement first. The hospital can use Cost of Delay to estimate the value and urgency of each project, based on the expected impact on patient outcomes, safety, and satisfaction. The hospital can then rank the projects by CD3, and prioritize the ones that can save more lives and improve more health conditions in the shortest time.

- A nonprofit organization that has several social projects, and wants to decide which ones to fund first. The organization can use Cost of Delay to estimate the value and urgency of each project, based on the expected social and environmental benefits, such as reducing poverty, improving education, or protecting the environment. The organization can then rank the projects by CD3, and allocate its donations and grants accordingly.

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18.Estimation, Budgeting, and Control[Original Blog]

cost engineering is the discipline of applying scientific principles and techniques to problems of cost estimation, budgeting, and control in various projects. cost engineering is essential for ensuring the optimal allocation of resources, the timely completion of tasks, and the achievement of project objectives. However, cost engineering also faces many challenges in the current and future context of project management. Some of the common challenges are:

1. Estimating the cost of complex and uncertain projects. cost estimation is the process of predicting the cost of a project based on its scope, duration, resources, and risks. However, many projects today are characterized by high complexity and uncertainty, which make it difficult to estimate the cost accurately and reliably. For example, projects involving new technologies, innovative designs, or changing requirements may have significant cost variations and contingencies. Moreover, cost estimation may be influenced by human factors such as optimism bias, anchoring effect, or political pressure. To overcome these challenges, cost engineers need to use advanced methods and tools such as parametric models, monte Carlo simulations, artificial neural networks, or machine learning to improve the accuracy and reliability of cost estimation.

2. Budgeting for dynamic and adaptive projects. Budgeting is the process of allocating the estimated cost of a project to its various components and activities. However, many projects today are dynamic and adaptive, which means that they may change their scope, schedule, or resources during the execution phase. For example, projects following agile or iterative methodologies may have frequent changes in the project scope or deliverables based on customer feedback or market conditions. Moreover, projects may face unexpected events or risks that may require adjustments in the budget. To cope with these challenges, cost engineers need to use flexible and responsive budgeting techniques such as rolling wave planning, earned value management, or agile budgeting to accommodate the changes and uncertainties in the project.

3. Controlling the cost of interdependent and collaborative projects. cost control is the process of monitoring and managing the actual cost of a project compared to its budget and taking corrective actions if necessary. However, many projects today are interdependent and collaborative, which means that they may involve multiple stakeholders, teams, or organizations that have different goals, expectations, or interests. For example, projects that are part of a larger program or portfolio may have dependencies or synergies with other projects that affect their cost performance. Moreover, projects that are executed in a distributed or virtual environment may have communication or coordination challenges that may increase the cost of the project. To address these challenges, cost engineers need to use effective and efficient cost control methods and tools such as dashboards, reports, or analytics to track and communicate the cost performance of the project and to identify and resolve any issues or conflicts that may arise.

Estimation, Budgeting, and Control - Cost Engineering Challenges: A Discussion of the Common and Emerging Problems in Cost Engineering

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19.Mitigating Risks in Cost Plus Contracts[Original Blog]

One of the main challenges of cost plus contracts is managing the risks associated with cost overruns, delays, and quality issues. Cost plus contracts are often used for complex and uncertain projects, where the scope and specifications are not well defined or may change during the project. In such cases, the contractor is reimbursed for the actual costs incurred, plus a fee or profit margin. However, this also means that the contractor has less incentive to control the costs and deliver the project on time and within the expected quality standards. Therefore, it is essential for both the client and the contractor to adopt some strategies to mitigate the risks in cost plus contracts. In this section, we will discuss some of these strategies from different perspectives, such as the client, the contractor, and the project manager. We will also provide some examples of how to use a cost simulation model to negotiate and manage cost plus contracts for your project.

Some of the strategies to mitigate the risks in cost plus contracts are:

1. Define the scope and specifications clearly and realistically. One of the main sources of risk in cost plus contracts is the ambiguity and uncertainty of the project scope and specifications. This can lead to misunderstandings, disputes, changes, and rework, which can increase the costs and delay the project. Therefore, it is important for both the client and the contractor to define the scope and specifications as clearly and realistically as possible, and to document them in the contract. The scope and specifications should also be aligned with the project objectives, requirements, and expectations of the stakeholders. If the scope and specifications are likely to change during the project, the contract should also specify the procedures and criteria for managing the changes, such as the approval process, the cost implications, and the impact on the schedule and quality.

2. Establish a realistic and transparent budget and schedule. Another source of risk in cost plus contracts is the lack of a fixed or agreed-upon budget and schedule. This can create uncertainty and confusion for both the client and the contractor, and can also affect the cash flow and profitability of the project. Therefore, it is important for both the client and the contractor to establish a realistic and transparent budget and schedule, based on the scope and specifications, the available resources, and the market conditions. The budget and schedule should also include some contingencies and allowances for unforeseen events and risks. The budget and schedule should be communicated and updated regularly, and any deviations or issues should be reported and resolved promptly.

3. Use a cost simulation model to negotiate and manage the contract. A cost simulation model is a tool that can help both the client and the contractor to negotiate and manage the cost plus contract more effectively and efficiently. A cost simulation model is a mathematical representation of the project, which can estimate the probability distribution of the project costs, based on the input variables, such as the scope, specifications, resources, rates, productivity, uncertainties, and risks. A cost simulation model can also perform sensitivity analysis, scenario analysis, and optimization analysis, to identify the key drivers and trade-offs of the project costs, and to find the optimal solutions for the project objectives and constraints. A cost simulation model can be used to:

- Negotiate the contract terms and conditions. A cost simulation model can help both the client and the contractor to negotiate the contract terms and conditions, such as the reimbursement method, the fee or profit margin, the incentive or penalty clauses, and the risk-sharing mechanisms. A cost simulation model can provide a common and objective basis for the negotiation, and can also facilitate the communication and understanding of the project assumptions, expectations, and risks. A cost simulation model can also help both the client and the contractor to evaluate the impact of different contract options on the project costs and outcomes, and to find the best balance between the project risks and rewards.

- Manage the project performance and progress. A cost simulation model can also help both the client and the contractor to manage the project performance and progress, by providing a reliable and timely forecast of the project costs, based on the actual data and information collected during the project execution. A cost simulation model can also help both the client and the contractor to monitor and control the project costs, by comparing the actual costs with the planned or expected costs, and by identifying and analyzing the variances and causes. A cost simulation model can also help both the client and the contractor to make informed and proactive decisions, by simulating the impact of different actions or scenarios on the project costs and outcomes, and by recommending the best course of action for the project success.

For example, suppose that a client wants to hire a contractor to build a new hospital, and they decide to use a cost plus contract with a fixed fee of 10% of the actual costs. The client and the contractor can use a cost simulation model to negotiate and manage the contract, as follows:

- Negotiate the contract terms and conditions. The client and the contractor can use a cost simulation model to estimate the probability distribution of the project costs, based on the scope and specifications, the resources and rates, and the uncertainties and risks. The cost simulation model can also perform sensitivity analysis, scenario analysis, and optimization analysis, to identify the key drivers and trade-offs of the project costs, and to find the optimal solutions for the project objectives and constraints. For instance, the cost simulation model can show that the project costs have a mean of $100 million, a standard deviation of $10 million, and a 90% confidence interval of $82 million to $118 million. The cost simulation model can also show that the project costs are most sensitive to the labor productivity, the material prices, and the design changes. The cost simulation model can also show that the optimal solution for the project is to use a cost plus contract with a fixed fee of 8%, an incentive clause of 2% for completing the project within the budget and schedule, and a penalty clause of 2% for exceeding the budget and schedule by more than 10%.

- Manage the project performance and progress. The client and the contractor can use a cost simulation model to update the forecast of the project costs, based on the actual data and information collected during the project execution. The cost simulation model can also help the client and the contractor to monitor and control the project costs, by comparing the actual costs with the planned or expected costs, and by identifying and analyzing the variances and causes. The cost simulation model can also help the client and the contractor to make informed and proactive decisions, by simulating the impact of different actions or scenarios on the project costs and outcomes, and by recommending the best course of action for the project success. For example, the cost simulation model can show that after six months of the project, the actual costs are $52 million, which is 4% higher than the expected costs of $50 million. The cost simulation model can also show that the main reasons for the cost overrun are the lower than expected labor productivity, the higher than expected material prices, and the design changes requested by the client. The cost simulation model can also show that if the project continues as it is, the final costs will be $106 million, which is 6% higher than the budget of $100 million, and the project will be completed in 13 months, which is one month later than the schedule of 12 months. The cost simulation model can also show that the best course of action for the project is to increase the labor productivity by 10%, to negotiate the material prices with the suppliers, and to limit the design changes to the essential ones.

By using a cost simulation model, the client and the contractor can mitigate the risks in cost plus contracts, and achieve a win-win situation for both parties. A cost simulation model can help both the client and the contractor to negotiate and manage the contract more effectively and efficiently, and to deliver the project on time, within the budget, and with the expected quality.

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20.A Simple and Effective Method for Comparing and Ranking Investment Projects[Original Blog]

Simple but Effective

Investment for projects

One of the challenges of capital budgeting is how to compare and rank different investment projects that have different costs, benefits, risks, and durations. A common method is to use the net present value (NPV) or the internal rate of return (IRR) of each project, but these methods have some limitations and drawbacks. For example, NPV and IRR do not account for the strategic value of a project, the flexibility to adapt to changing conditions, or the opportunity cost of delaying or rejecting a project. Moreover, NPV and IRR can be difficult to calculate and interpret, especially for complex or uncertain projects.

A simpler and more effective method for comparing and ranking investment projects is capital scoring. Capital scoring is a technique that assigns a score to each project based on a set of criteria that reflect the objectives and preferences of the decision maker. The criteria can include both quantitative and qualitative factors, such as profitability, risk, strategic alignment, social impact, environmental sustainability, and innovation. The score of each project is calculated by multiplying the weight of each criterion by the rating of the project on that criterion. The weights and ratings can be determined by using various methods, such as expert judgment, surveys, scoring models, or decision analysis tools. The projects with the highest scores are then selected for funding, subject to the budget constraint.

Capital scoring has several advantages over NPV and IRR. Some of them are:

1. Capital scoring is easy to understand and communicate. The score of each project is a single number that summarizes its overall attractiveness, based on multiple criteria. The score can be easily compared and ranked with other projects, without requiring complex calculations or assumptions. The score can also be easily explained and justified to stakeholders, by showing how each criterion contributes to the score.

2. Capital scoring is flexible and adaptable. The criteria, weights, and ratings can be customized to suit the specific needs and preferences of the decision maker. The criteria can be changed or added as new information or opportunities arise. The weights and ratings can be adjusted to reflect different scenarios or sensitivities. Capital scoring can also accommodate different types of projects, such as mutually exclusive, independent, or interdependent projects.

3. Capital scoring is comprehensive and holistic. Capital scoring considers not only the financial aspects of a project, but also the non-financial aspects, such as strategic value, social impact, environmental sustainability, and innovation. Capital scoring captures the trade-offs and synergies among different criteria, and allows the decision maker to balance them according to their priorities. Capital scoring also accounts for the opportunity cost of capital, by using a minimum acceptable score or a hurdle rate as a benchmark for selecting projects.

To illustrate how capital scoring works, let us consider an example of a company that has four investment projects to choose from, with a total budget of $10 million. The projects have the following characteristics:

| Project | Cost ($ million) | NPV ($ million) | IRR (%) | Strategic Alignment | risk | Social impact | Innovation |

| A | 2 | 3 | 25 | High | Low | High | High |

| B | 4 | 5 | 20 | Medium | Medium | Medium | Medium |

| C | 3 | 4 | 22 | Low | High | Low | Low |

| D | 6 | 7 | 19 | High | Low | Medium | High |

The company decides to use capital scoring to compare and rank the projects, based on the following criteria and weights:

| Criterion | Weight (%) |

| NPV | 30 |

| IRR | 20 |

| Strategic Alignment | 20 |

| Risk | 10 |

| Social Impact | 10 |

| Innovation | 10 |

The company also decides to use a 5-point scale to rate each project on each criterion, where 5 is the best and 1 is the worst. The ratings are shown in the table below:

| Project | NPV | IRR | Strategic Alignment | Risk | social Impact | innovation |

| A | 5 | 5 | 5 | 5 | 5 | 5 |

| B | 4 | 4 | 3 | 3 | 3 | 3 |

| C | 3 | 4 | 1 | 1 | 1 | 1 |

| D | 4 | 3 | 5 | 5 | 3 | 5 |

The score of each project is then calculated by multiplying the weight of each criterion by the rating of the project on that criterion, and summing up the results. The scores are shown in the table below:

| Project | Score |

| A | 4.8 |

| B | 3.4 |

| C | 1.8 |

| D | 4.0 |

Based on the scores, the company can rank the projects as follows:

1. Project A (score = 4.8)

2. Project D (score = 4.0)

3. Project B (score = 3.4)

4. Project C (score = 1.8)

The company can then select the projects that have the highest scores and fit within the budget. In this case, the company can fund project A and project D, with a total cost of $8 million and a total score of 8.8. Alternatively, the company can use a minimum acceptable score or a hurdle rate as a benchmark for selecting projects. For example, if the company requires a minimum score of 3.5, then only project A and project D would qualify, and project B would be rejected.

Capital scoring is a simple and effective method for comparing and ranking investment projects, that can overcome some of the limitations and drawbacks of NPV and IRR. capital scoring allows the decision maker to consider multiple criteria that reflect their objectives and preferences, and to balance them according to their priorities. Capital scoring is also easy to understand and communicate, flexible and adaptable, and comprehensive and holistic. Capital scoring can help the decision maker to select the best investment projects for their business, and to maximize the value of their capital budget.

A Simple and Effective Method for Comparing and Ranking Investment Projects - Capital Budgeting: How to Use Capital Scoring to Select the Best Investment Projects for Your Business

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21.How to calculate Cost of Delay for your projects?[Original Blog]

Calculate its cost

One of the most important aspects of managing your projects is to prioritize them based on their value and urgency. However, how do you measure these factors? One way is to use a metric called Cost of Delay, which quantifies the impact of delaying a project or a feature. cost of Delay can help you compare different projects and decide which ones to work on first, and which ones to postpone or cancel. In this section, we will explain how to calculate cost of Delay for your projects, and how to use it to make better decisions.

To calculate Cost of Delay, you need to consider two main components: the value of the project, and the urgency of the project. The value of the project is the benefit that you or your customers will get from completing it. The urgency of the project is the rate at which the value of the project decreases over time. For example, a project that has a high value but low urgency might be a new feature that will increase customer satisfaction, but is not critical for the business. A project that has a low value but high urgency might be a bug fix that will prevent customer complaints, but will not generate new revenue. A project that has both high value and high urgency might be a regulatory compliance requirement that will avoid penalties, and also improve customer trust.

To estimate the value and the urgency of a project, you can use different methods, such as:

1. Customer surveys: You can ask your customers how much they value a project, and how soon they need it. You can use tools such as Net Promoter score (NPS) or customer Satisfaction score (CSAT) to measure the value, and tools such as Expected Delivery Date (EDD) or Time to Market (TTM) to measure the urgency. For example, if your customers give a high NPS and a short EDD for a project, it means that they value it highly and want it soon, which implies a high Cost of Delay.

2. Business analysis: You can analyze the impact of a project on your business goals, such as revenue, profit, market share, or customer retention. You can use tools such as Return on investment (ROI) or Net Present Value (NPV) to measure the value, and tools such as Discount Rate or opportunity Cost to measure the urgency. For example, if a project has a high ROI and a high Discount Rate, it means that it will generate a lot of profit in a short time, which implies a high Cost of Delay.

3. Expert judgment: You can consult with experts or stakeholders who have relevant knowledge or experience about a project, and ask them to estimate the value and the urgency of the project. You can use tools such as Delphi Method or Planning Poker to elicit and aggregate their opinions. For example, if the experts agree that a project has a high value and a high urgency, it means that they have a strong consensus and confidence about the project, which implies a high Cost of Delay.

Once you have estimated the value and the urgency of a project, you can calculate the Cost of Delay by multiplying them together. For example, if a project has a value of $100,000 and an urgency of 10% per month, the Cost of Delay is $10,000 per month. This means that every month that you delay the project, you lose $10,000 in value. Alternatively, you can use a formula such as:

$$\text{Cost of Delay} = \text{Value} \times \text{Urgency}$$

You can use Cost of Delay to prioritize your projects by ranking them from highest to lowest Cost of Delay. The projects with the highest Cost of Delay should be worked on first, and the projects with the lowest Cost of Delay should be worked on last, or even canceled. This way, you can maximize the value that you deliver to your customers and your business, and minimize the waste that you incur from delaying your projects. Cost of Delay is a powerful metric that can help you make better decisions about your projects. However, it is not a perfect tool, and it has some limitations and challenges, such as:

- It can be difficult to estimate the value and the urgency of a project accurately, especially for complex or uncertain projects. You may need to use multiple methods, and update your estimates frequently, to account for changes in the market, customer feedback, or project scope.

- It can be influenced by human biases, such as anchoring, framing, or overconfidence. You may need to use techniques such as calibration, peer review, or feedback loops, to reduce the errors and improve the reliability of your estimates.

- It can be affected by external factors, such as dependencies, constraints, or risks. You may need to use tools such as Critical Chain, Theory of Constraints, or monte Carlo simulation, to account for these factors and optimize your project schedule.

Cost of Delay is a metric that can help you prioritize your projects based on their value and urgency. By calculating and comparing the cost of Delay of your projects, you can make better decisions about which projects to work on first, and which projects to work on later or cancel. Cost of Delay can help you deliver more value to your customers and your business, and reduce the waste that you incur from delaying your projects. However, Cost of Delay is not a magic bullet, and it requires careful estimation, validation, and adjustment, to ensure its accuracy and effectiveness. Cost of Delay is a useful tool, but it is not a substitute for good judgment and common sense.

How to calculate Cost of Delay for your projects - Cost of Delay: A Metric for Prioritizing Your Projects

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22.Achieving Accurate and Transparent Cost Estimation Reconciliation[Original Blog]

Achieving accurate

Cost estimation reconciliation is a crucial process that helps to align the expectations and realities of a project. It involves identifying, analyzing, and explaining the differences between the estimated and actual costs of a project, and taking corrective actions if needed. In this section, we will discuss some of the best practices and challenges of achieving accurate and transparent cost estimation reconciliation, and how it can benefit the project stakeholders.

Some of the best practices for cost estimation reconciliation are:

1. establish a clear and consistent methodology for cost estimation and reconciliation. This means defining the scope, assumptions, risks, contingencies, and sources of data for the cost estimation, and following the same approach for the reconciliation. A common methodology can help to reduce the variability and uncertainty of the cost estimates, and make the reconciliation process more efficient and reliable.

2. Involve the relevant stakeholders in the cost estimation and reconciliation process. This includes the project team, the client, the contractors, the suppliers, and any other parties who have an interest or influence on the project. By involving the stakeholders, the cost estimation and reconciliation process can benefit from their expertise, feedback, and validation, and ensure that the cost estimates and actual costs are aligned with the project objectives and expectations.

3. Document and communicate the cost estimation and reconciliation results. This means creating a detailed and comprehensive report that explains the cost estimation and reconciliation process, the assumptions, the data sources, the results, the differences, and the actions taken or recommended. The report should also include charts, tables, graphs, and other visual aids that can help to illustrate and compare the cost estimates and actual costs. The report should be shared with the stakeholders and discussed in regular meetings or workshops, to ensure that everyone is on the same page and understands the cost estimation and reconciliation results.

4. monitor and update the cost estimation and reconciliation process. This means tracking and reviewing the cost estimates and actual costs throughout the project lifecycle, and adjusting them as necessary to reflect the changes in the project scope, schedule, quality, risks, and other factors. The cost estimation and reconciliation process should be dynamic and flexible, and not a one-time activity. By monitoring and updating the cost estimates and actual costs, the project team can identify and address any issues or deviations early, and avoid any surprises or disputes at the end of the project.

Some of the challenges of cost estimation reconciliation are:

- Data availability and quality. The cost estimation and reconciliation process depends on the availability and quality of the data that is used to calculate and compare the cost estimates and actual costs. However, in some cases, the data may be incomplete, inaccurate, outdated, or inconsistent, which can affect the reliability and validity of the cost estimates and actual costs. Therefore, the project team should verify and validate the data before using it, and use appropriate methods and tools to collect, store, and analyze the data.

- Complexity and uncertainty of the project. The cost estimation and reconciliation process can be challenging for complex and uncertain projects, such as those that involve new technologies, innovative solutions, multiple stakeholders, or changing requirements. These projects can have high levels of variability and risk, which can make the cost estimation and reconciliation process more difficult and uncertain. Therefore, the project team should use appropriate techniques and tools to account for the complexity and uncertainty of the project, such as probabilistic methods, sensitivity analysis, scenario analysis, or monte Carlo simulation.

- Human factors and biases. The cost estimation and reconciliation process can be influenced by human factors and biases, such as optimism, overconfidence, anchoring, or confirmation bias. These factors and biases can affect the judgment and decision-making of the project team and the stakeholders, and lead to unrealistic or inaccurate cost estimates or actual costs. Therefore, the project team should be aware of and mitigate the human factors and biases, and use objective and rational methods and tools to estimate and reconcile the costs.

Achieving accurate and transparent cost estimation reconciliation can have many benefits for the project stakeholders, such as:

- Improved project performance and outcomes. By achieving accurate and transparent cost estimation reconciliation, the project team can ensure that the project is delivered within the budget, and that the project objectives and expectations are met. This can improve the project performance and outcomes, and increase the satisfaction and trust of the stakeholders.

- Enhanced project learning and improvement. By achieving accurate and transparent cost estimation reconciliation, the project team can learn from the cost estimation and reconciliation process, and identify the strengths and weaknesses of the project. This can enhance the project learning and improvement, and help the project team to apply the lessons learned and best practices to future projects.

- Reduced project conflicts and disputes. By achieving accurate and transparent cost estimation reconciliation, the project team can avoid or resolve any conflicts or disputes that may arise from the differences between the cost estimates and actual costs. This can reduce the project conflicts and disputes, and foster a positive and collaborative relationship among the stakeholders.

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23.What to Watch Out for and How to Overcome Them?[Original Blog]

The cost variance tool is a useful tool to identify and explain cost deviations, but it is not without its limitations and challenges. In this section, we will discuss some of the common pitfalls and difficulties that may arise when using the cost variance tool, and how to overcome them. We will also provide some insights from different perspectives, such as project managers, accountants, and stakeholders, on how to use the cost variance tool effectively and efficiently. Here are some of the main points to consider:

1. The cost variance tool is based on the assumption that the planned budget and schedule are realistic and accurate. However, this may not always be the case, especially for complex and uncertain projects. If the planned budget and schedule are too optimistic or pessimistic, the cost variance tool may give misleading results and cause unnecessary alarm or complacency. To avoid this, it is important to review and update the planned budget and schedule regularly, and to use techniques such as risk analysis, contingency planning, and scenario analysis to account for uncertainties and changes.

2. The cost variance tool only measures the difference between the actual and planned costs, but it does not explain the root causes or the impacts of the cost deviations. For example, a positive cost variance may indicate that the project is under budget, but it may also mean that the project is behind schedule, or that the quality or scope of the project has been compromised. Similarly, a negative cost variance may indicate that the project is over budget, but it may also mean that the project is ahead of schedule, or that the quality or scope of the project has been enhanced. To understand the reasons and the consequences of the cost deviations, it is necessary to use other tools and methods, such as variance analysis, earned value analysis, performance measurement, and stakeholder communication.

3. The cost variance tool may not capture all the relevant costs and benefits of the project. For example, the cost variance tool may not include the opportunity costs, sunk costs, external costs, or intangible benefits of the project. These costs and benefits may have a significant impact on the project's value and feasibility, but they may not be reflected in the planned or actual costs. To account for these costs and benefits, it is advisable to use other tools and techniques, such as cost-benefit analysis, return on investment analysis, net present value analysis, and value engineering.

4. The cost variance tool may not be suitable for all types of projects and organizations. For example, the cost variance tool may not work well for agile projects, where the budget and schedule are flexible and adaptive, rather than fixed and predetermined. Similarly, the cost variance tool may not be compatible with some organizational cultures, where the focus is on collaboration and learning, rather than control and accountability. In these cases, the cost variance tool may create unnecessary pressure and conflict, and hinder the project's success. To avoid this, it is important to adapt the cost variance tool to the specific characteristics and needs of the project and the organization, and to use it as a guide, rather than a rule.

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24.How to Stay Updated and Adapt to the Changing Cost Management Landscape?[Original Blog]

Adapt to changing

Cost management is a dynamic and evolving field that requires project managers to keep up with the latest trends and best practices. In this section, we will explore some of the current and emerging cost management trends, and how project managers can stay updated and adapt to the changing cost management landscape. We will also provide some tips and resources for effective cost management in different types of projects.

Some of the cost management trends that project managers should be aware of are:

1. Digital transformation and automation: Digital technologies such as cloud computing, artificial intelligence, big data, and blockchain are transforming the way projects are planned, executed, and monitored. These technologies can help project managers automate and optimize various cost management processes, such as estimating, budgeting, forecasting, tracking, reporting, and controlling. For example, project managers can use cloud-based tools to access real-time data and collaborate with stakeholders, use artificial intelligence to generate accurate and reliable estimates, use big data to analyze and predict cost trends and risks, and use blockchain to ensure transparency and security of transactions. Project managers need to embrace these technologies and learn how to leverage them for cost management.

2. Agile and hybrid methodologies: Agile and hybrid methodologies are becoming more popular and widely adopted in project management, especially for complex and uncertain projects. These methodologies emphasize flexibility, adaptability, and collaboration, and allow project managers to deliver value to customers faster and more efficiently. However, these methodologies also pose some challenges and opportunities for cost management. Project managers need to adjust their cost management approach to suit the agile and hybrid environment, such as using iterative and incremental planning, using value-based metrics, and applying rolling wave budgeting. Project managers also need to balance the trade-offs between scope, time, cost, and quality, and manage the expectations of stakeholders.

3. sustainability and social responsibility: Sustainability and social responsibility are becoming more important and influential factors in project management, as customers, investors, regulators, and society demand more ethical and environmental practices from organizations. Project managers need to consider the environmental, social, and economic impacts of their projects, and align their cost management objectives with the sustainability and social responsibility goals of their organizations. Project managers need to adopt a triple bottom line approach, which measures the success of a project not only by its financial performance, but also by its environmental and social performance. Project managers also need to implement green and social cost management practices, such as reducing waste, minimizing emissions, using renewable resources, and supporting local communities.

How to Stay Updated and Adapt to the Changing Cost Management Landscape - Cost Management: Cost Management: A Comprehensive Guide for Project Managers

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25.Top-Down, Bottom-Up, Parametric, Analogous, and Expert Judgment[Original Blog]

Cost engineering is the application of scientific principles and techniques to estimate, plan, control, and optimize the costs of engineering projects. It involves various methods and tools to support the decision-making process and ensure the project's success. In this section, we will explore some of the most common cost engineering methods: top-down, bottom-up, parametric, analogous, and expert judgment. These methods differ in their level of detail, accuracy, reliability, and applicability. We will discuss the advantages and disadvantages of each method, as well as some examples of how they are used in practice.

1. Top-down method: This method involves estimating the total cost of the project based on its scope, objectives, and deliverables. It is usually done at the early stages of the project, when there is not much information available about the specific tasks and resources. The top-down method is useful for setting a preliminary budget, comparing different alternatives, and communicating with stakeholders. However, it also has some limitations, such as being too optimistic, ignoring uncertainties, and not reflecting the actual work breakdown structure. An example of the top-down method is using a percentage of the sales price or the gross domestic product (GDP) to estimate the cost of a project.

2. Bottom-up method: This method involves estimating the cost of each individual task or activity, and then aggregating them to get the total cost of the project. It is usually done at the later stages of the project, when there is more information available about the specific tasks and resources. The bottom-up method is useful for creating a detailed and realistic budget, tracking and controlling the project progress, and identifying and managing risks. However, it also has some drawbacks, such as being too time-consuming, complex, and dependent on the quality of the data. An example of the bottom-up method is using historical data or quotes from suppliers to estimate the cost of each task or activity.

3. Parametric method: This method involves estimating the cost of the project based on one or more parameters that are correlated with the project characteristics. It is usually done by using mathematical models, formulas, or algorithms that are derived from historical data or industry standards. The parametric method is useful for estimating the cost of similar or repetitive projects, adjusting the cost for different scenarios, and performing sensitivity analysis. However, it also has some challenges, such as being sensitive to the accuracy and validity of the parameters, assumptions, and models. An example of the parametric method is using the number of units, the size, or the complexity to estimate the cost of a project.

4. Analogous method: This method involves estimating the cost of the project based on the cost of a similar or comparable project that has been completed in the past. It is usually done by adjusting the cost of the previous project for the differences in scope, quality, location, and other factors. The analogous method is useful for estimating the cost of unique or innovative projects, when there is not enough data or time to use other methods. However, it also has some risks, such as being subjective, unreliable, and dependent on the availability and similarity of the previous projects. An example of the analogous method is using the cost of a similar bridge, building, or software to estimate the cost of a new project.

5. Expert judgment method: This method involves estimating the cost of the project based on the opinions, experience, and knowledge of experts or specialists in the field. It is usually done by using techniques such as brainstorming, interviews, surveys, or Delphi method to collect and analyze the expert inputs. The expert judgment method is useful for estimating the cost of complex or uncertain projects, when there is not enough data or time to use other methods. However, it also has some limitations, such as being subjective, inconsistent, and influenced by biases and conflicts. An example of the expert judgment method is using the opinions of engineers, managers, or consultants to estimate the cost of a project.

Top Down, Bottom Up, Parametric, Analogous, and Expert Judgment - Cost Engineering: Cost Engineering Concepts and Applications for Engineering Projects

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