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Estimating the Cost of Effort, Essay Example

Pages: 2

Words: 659

Essay

Project cost estimations are vital to the success of virtually any organizational venture. The process is required to develop a true understanding of the financial implications associated with the project, which is not only necessary for arranging the plan components in an optimal manner but also to competently present the proposal to higher authoritative bodies within the company and/or stakeholders who are otherwise associated with the task. However, the nature of estimation is that it is known to be inaccurate in comparison to the actual value (Gray & Larson, 2011), so it is especially important to take every measure possible that may reduce the influence of error in the eventual application of these approximations.

Physical and standardized costs like wages and supplies are generally easier to estimate due to the existence of structured referencing material. Other expenses are more ambiguous in nature and require a great deal of consideration. One such factor is the cost of effort, which is not the subject of established standards but can instead fluctuate wildly on a case to case basis. Part of the reason for this variation is the subjective nature of effort cost measurements as the technique commonly requires the creation of a hypothetical unit of measurement to represent increments in the amount of effort applied to the project. This can be especially complicated when the level of effort accrues exponentially rather than in distinct and equal intervals, which is an entirely possible yet often ignored prospect. Still, the designation of a cost value to such a measurement is a creative and appropriate attempt to account for expenses that may be otherwise overlooked. Effort cost is measured by comparing the value of one effort unit increase in comparison to the associated gains in production.

Estimations are never “correct” as is mentioned above, but they must be reasonably within range of actual results in order to have a positive impact on the project planning process and related outcomes. The most commonly addressed accuracy issue in cost analysis is underestimation. It is known that humans have a tendency to judge the costs and efforts of potential ventures as being lower than they will actually be, and this issue remains true even if this tendency is taken into account. The basis for the error may be found in psychological or sociological influences that promote the exaggeration of personal or in-group qualities, which are often respectively referred to as egocentrism and ethnocentrism. As a result there is a certainty of underestimating project costs when expectations are falsely inflated, which is almost always. One of the few ways of guarding against this influence is to involve several people in the process, including outside perspectives from experts with little investment in the project.

The threat of underestimation has led to the enactment of padding as a counter measure. Padding refers to the allotment of extra funds to cost estimations that are intended to cover unpredicted expenses. While this approach may appear to be intuitively correct, it can instead lead to a second and equally devastating problem in overestimates. In bidding or other competitive situations the inclusion of unnecessary cost estimates will damage the proposal effort by underrepresenting the potential for monetary gains. In cases with less competition the presence of padded cost approximations may lead to a reduced work effort due to a false sense of confidence in the apparent buffer zone. Additionally, overestimates on a single project can harm an entire organization by directing resources away from areas in which they would be beneficial.

The estimation process during any cost analysis is not as simple as identifying items and adding numbers. Considerations must be made to address potential problems arising from difficult to define concepts like cost of effort. The elimination of influences leading to under and overestimates is a necessary goal during such processes to avoid the potential for associated harm.

Reference

Gray, C. F., & Larson, E. W. (2011). Project management: The managerial process (5th ed.). New York, NY: McGraw-Hill/Irwin.

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