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Empirical estimation techniques are based on making an educated guess of the project parameters. While using this technique, prior experience with development of similar products is helpful. Although empirical estimation techniques are based on common sense, different activities involved in estimation have been formalized over the years. Two popular empirical estimation techniques are: Expert judgment technique and Delphi cost estimation.

Expert Judgment Technique

Expert judgment is one of the most widely used estimation techniques. In this approach, an expert makes an educated guess of the problem size after analyzing the problem thoroughly.

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Usually, the expert estimates the cost of the different components (i.e. modules or subsystems) of the system and then combines them to arrive at the overall estimate. However, this technique is subject to human errors and individual bias. Also, it is possible that the expert may overlook some factors inadvertently. Further, an expert making an estimate may not have experience and knowledge of all aspects of a project. For example, he may be conversant with the database and user interface parts but may not be very knowledgeable about the computer communication part. A more refined form of expert judgment is the estimation made by group of experts. Estimation by a group of experts minimizes factors such as individual oversight, lack of familiarity with a particular aspect of a project, personal bias, and the desire to win contract through overly optimistic estimates. However, the estimate made by a group of experts may still exhibit bias on issues where the entire group of experts may be biased due to reasons such as political considerations. Also, the decision made by the group may be dominated by overly assertive members.

Delphi cost estimation

Delphi cost estimation approach tries to overcome some of the shortcomings of the expert judgment approach. Delphi estimation is carried out by a team comprising of a group of experts and a coordinator. In this approach, the coordinator provides each estimator with a copy of the software requirements specification (SRS) document and a form for recording his cost estimate. Estimators complete their individual estimates anonymously and submit to the coordinator. In their estimates, the estimators mention any unusual characteristic of the product which has influenced his estimation. The coordinator prepares and distributes the summary of the responses of all the estimators, and includes any unusual rationale noted by any of the estimators. Based on this summary, the estimators re-estimate. This process is iterated for several rounds. However, no discussion among the estimators is allowed during the entire estimation process. The idea behind this is that if any discussion is allowed among the estimators, then many estimators may easily get influenced by the rationale of an estimator who may be more experienced or senior. After the completion of several iterations of estimations, the coordinator takes the responsibility of compiling the results and preparing the final estimate.

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5.5 SUMMARY

Project cost management is a traditionally weak area of information technology projects. Information technology project managers must acknowledge the importance of cost management and take responsibility for understanding basic cost concepts, cost estimating, budgeting, and cost control. Project managers must understand several basic principles of cost management in order to be effective in managing project costs. Important concepts include profits and profit margins, life cycle costing, cash flow analysis, sunk costs, and learning curve theory.

Estimating costs is a very important part of project cost management. There are several types of cost estimates, including rough order of magnitude (ROM), budgetary, and definitive. Each type of estimate is done during different stages of the project life cycle, and each has a different level of accuracy. There are several tools and techniques for developing cost estimates, including analogous estimating, bottom-up estimating, parametric modelling, and computerized tools.

5.6 KEYWORDS

Actual cost, Analogous estimate, Bottom-up estimate, Cash flow analysis, Contingency reserves, Indirect costs, Intangible costs, Life cycle costing, Parametric modelling, Sunk costs, Tangible costs, Top-down estimates.

5.7 QUESTIONS

1. Discuss why many information technology professionals may overlook project cost management and how this might affect completing projects within budget.

2. Explain some of the basic principles of cost management, such as profits, life cycle costs, tangible and intangible costs and benefits, direct and indirect costs, reserves, and so on. 3. Give examples of when you would prepare rough order of magnitude (ROM), budgetary,

and definitive cost estimates for an information technology project.

4. Give an example of how you would use each of the following techniques for creating a cost estimate: analogous, parametric, and bottom-up.

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5.8 EXERCISE

1. Create a cost estimate/model for building a new, state-of-the-art multimedia classroom for your organization within the next six months. The classroom should include 20 high-end personal computers with appropriate software for your organization, a network server, Internet access for all machines, an instructor station, and a projection system. Be sure to include personnel costs associated with the project management for this project. Document the assumptions you made in preparing the estimate and provide explanations for key numbers.

5.9 REFERENCE

19. Information Technology Project Management: Kathy Schwalbe, International Student Edition, Thomson Course Technology, 2003.

20. Software Project Management: Bob Hughes and Mike Cotterell, Third Edition, Tata McGraw-Hill.

21. Basics of Software Project Management: NIIT, Prentice-Hall of India, 2004. 22. Software Project Management in Practice: Pankaj Jalote, Pearson Education, 2002. 23. Software Project Management – A Concise Study: S.A.Kelkar, Revised Edition, Prentice-

Hall of India, 2003.

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UNIT – 6