Cost Estimation Through the Life Cycle of a Project

By: Christina Olivarria, BS, LBBP

How a budget is managed during a project has a major impact on whether a project is deemed successful. Project estimating is a key contributor to ensuring project success, and something that all project managers should learn. Project cost estimating is linked to so many other aspects of the project, including but not limited to, scheduling, resource planning, procurement, and stakeholder expectation management.

According to the Project Management Institue, there are four stages in the project estimating life cycle. Those are:

  • Prepare to Estimate
  • Create Estimates
  • Manage Estimates
  • Improve the Estimating Process

There is overlap between the project estimation life cycle and the various phases of a project. This process is known as progressive elaboration and involves the continuous improvement and detailing of the project’s estimates as more accurate and precise information becomes available. The following cost estimation approach can be applied to traditional waterfall-style projects, including healthcare transition and activation projects.

Phase 1: Project Initiation Phase- Prepare, Create, Manage Estimates

During the project initiation phase, the primary goal of the project team is to define the project in its broadest terms. For project cost estimating, the team will identify resources that will be required to produce the estimates, then begin preparing the estimate and identify any known constraints, such as funding or resources. The requirements of the business case will lead to the development of the project charter and project initiation document. These documents will include the information necessary to begin the creation of the project cost estimate, including business needs and a stakeholder registrar that will identify who will be responsible for the management of the budget and who will be approving the budget.

Often during the initiation phase, the project team will create a rough order magnitude budget to determine if the project is achievable and if it should move forward. This estimate serves as a quantitative assessment of the likely costs for the project. As the project moves forward, the estimate will become more definitive in nature.

Phase 2: Project Planning Phase- Continue to Prepare, Create and Refine, Manage Estimates

It is during the planning phase of the project that the team will consider the cost estimation techniques and approach they will use to create and maintain the budget. Often this is heavily reliant on environmental factors such as market conditions and exchange rates, and organizational process assets such as policies, templates, and lessons learned.

Once a project management team has assessed these factors, they will continue the progressive elaboration of the cost estimate using one or more estimation techniques. Analogous estimation relies on comparisons of past projects of similar scope, size, and duration to create the estimate. Parametric estimation creates a more accurate estimate by evaluating both the statistical relationship between historical data and by using the relationship between variables (a unit cost/duration and the number of units) to estimate the cost of the project. Once all the details are known about the scope and duration of a project, bottom-up estimation can provide a higher level of detail by estimating the cost of each work package in the work breakdown structure. This process of elaboration will result in the establishment of a project cost baseline that can be used to gauge a project’s success. The cost baseline is the approved time-phased budget and will be used by the project manager to manage cost estimation and forecasting.

An important step in this process is to document the basis of your cost estimate. This should include any assumptions, known constraints, identified risks, the estimate range, and the level of accuracy of the estimate in the project plan to ensure stakeholders understand that the project estimates may change if the factors documented change. The project manager should update the assumptions log and risk register regularly to ensure that cost estimate information is accurately captured and effectively communicated.

Phase 3: Project Execution Phase- Create and Refine, Manage, Improve Estimates

During the execution phase of the project, the project manager will oversee multiple phases of the cost estimation process. It is during project execution that required resources will be procured.  This will result in more specific cost estimates from vendors, which will allow the project manager to continue the progressive elaboration of the budget.

As work is completed, the project manager will update the project forecast with the actual expenditures. This will allow the project manager to better manage stakeholder expectations and facilitate transparent communication about the project costs. As resources are used, they can be compared to the original assumptions made during the planning phase of the estimation process.

Phase 4 & 5: Monitor and Control Phase- Manage and Improve Estimates

During the monitoring phase of the project, the project manager will continue the management and improvement of project cost estimates. The project manager should use key performance indicators (KPIs) to measure the success of the project. These KPIs can include a measurement of project objectives, effort, and cost tracking, and project performance.

It is important for a project manager to monitor change requests as they occur and prevent unauthorized changes from moving forward. Monitoring cost variances to the approved cost baseline can assist the project manager in isolating the cause of variances. This is typically done by performing an Earned Value Analysis, which compares the data from the planned value, the earned value, and cost actuals.

During the control phase of the project, the project manager will be responsible for managing change requests and updating project documents as necessary, including but not limited to, the cost management plan and cost baseline. The project manager will improve the cost estimates using lessons learned through the life of the project, and by updating methods and forms used for the cost estimation process. Continually updating the assumptions log, basis of estimates, and cost estimates will ensure that there are fewer surprises at the end of the project and will facilitate a more transparent handoff between the project sponsor and the project manager.


Project Management Institute, Inc. [PMI]. (2017). A guide to the project management body of knowledge (PMBOK Guide) (6th ed.). Newtown Square, PA: Project Management Institute. ISBN-13: 9781628251845 (print)

Project Management Institute, Inc. [PMI]. (2011). Practice standard for project estimating. Newtown Square, PA: Project Management Institute. ISBN-13: 97819355890129 (print)