Estimating Costs in Project Management Using Templates and Ratios

Estimating Methods

Top down and bottom up estimating methods offer different approaches to arriving at estimates, and each may be used based on relevant circumstances. Upper level managers, for example, will engage in top down estimation—but the problem that can arise is that these managers are far removed from the reality of costs on the ground and may deliver estimates that are unrealistic as a result (Larson & Gray, 2018). The better option for project managers is to take a bottom up approach. As Larson and Gray (2018) note, the bottom up estimate “provides the customer with an opportunity to compare the low-cost, efficient method approach with any imposed restrictions”—but it also is based on the premise that “good sense suggests project estimates should come from the people most knowledgeable about the estimate needed” (p. 135). In other words, it should involve the people who actually handle costs and know them intimately.

For familiar projects that are like previous ones, the template method is a good bottom up estimate method that can be used by project managers. Project managers can use the template method for estimation for a variety of reasons. The template provides consistency across estimations, ensuring that all elements are accounted for. This allows for accurate comparisons between projects (Shekhar et al., 2021). In addition, the template can be customized to account for the unique aspects of each project. This ensures that each estimation is as accurate as possible. Finally, the template provides a straightforward way to communicate estimates to clients and other stakeholders. This can help to build trust and confidence in the project manager's ability to deliver on their promises.

However, if there is uncertainty about work packages, range estimation can work well (Larson & Gray, 2018). Range estimation is particularly helpful when dealing with unknowns because it “provides a basis for assessing risk, managing resources, and determining the project contingency fund” (Larson & Gray, 2018, p. 141). Thus, the project manager can go from an unfamiliar place to a familiar place by looking towards the management of risk.

The method that is probably most ineffective from a project management perspective is the ratio method—not because it cannot be effective but because it does not factor into the equation unknowns that can pose a risk. For a project manager, it is not just about going back to a basic formula to calculate costs but rather about using experience and understanding of risk to look at what might cause a problem. For instance, what happens if there are supply chain hiccups? The entire estimate can be off in a big way if one is just relying on ratio method (Shou & Yao, 2000).

The ratio method does have its utility, of course, and it is a method that project managers have used for making accurate estimates. But it works best in certain circumstances—like when one is dealing with the familiar production processes that can be easily quantified. For instance, the basic idea is to take the total cost of a similar project and divide it by the number of units produced. If a company wants to estimate the cost of building a new factory, they would first find the cost of a comparable project. Then, they would divide that number by the number of units produced by the factory. This would give them an estimate of the cost per unit.

However, the ratio method is often used in conjunction with other estimating techniques, such as the analogy method. So by itself it is not necessarily the most effective way to go about estimating. Rather, by using multiple methods, project managers can increase the accuracy of their estimates. In addition, the ratio method can be used to compare the costs of different projects. This can be helpful in deciding which projects are worth pursuing and which ones should be scrapped. Overall, the ratio method is a valuable tool that every project manager should be familiar with—but it should not be relied upon solely in every situation.

In any estimation, there are always some factors which are known and some which are not. For example, in construction, the dimensions of the site and the type of building to be constructed are usually known in advance. On the other hand, the cost of materials and labor can vary depending on market conditions. As a result, estimators must choose between two different methods: the template method and the ratio method.

The template method involves using a standard set of factors to estimate the cost of a project. For example, an estimator might use the dimensions of a site and the type of building to calculate an estimate for the number of bricks needed. This estimate would then be multiplied by the current price of bricks to arrive at a total cost. The main advantage of this method is that it is relatively simple to use. The ratio method involves taking into account all of the factors that can affect the cost of a project, and then weighting them according to their importance. For example, an estimator might begin by calculating the cost per square foot for a given project. The advantage of this method is that it is more accurate than the template method. However, it can be more time-consuming to use, since all of the relevant information must be gathered before an estimate can be calculated. Additionally, it should not be relied upon solely to produce an estimate.