Financial Management for Project Managers Cost Estimation and Budgeting 1 — Questions and Answers
Question 1: Which type of cost estimate is typically prepared during the project initiation phase using analogous techniques and carries an accuracy range of -25% to +75%?
- Definitive estimate
- Parametric estimate
- Rough Order of Magnitude (ROM) estimate (Correct answer)
- Bottom-up estimate
Correct answer: Rough Order of Magnitude (ROM) estimate
A ROM estimate is a high-level approximation made early in a project with limited information, typically ranging from -25% to +75% accuracy.
Question 2: Bottom-up cost estimating involves:
- Using historical data from similar projects
- Estimating costs at the work package level and summing them up (Correct answer)
- Applying a cost per unit formula to project scope
- Using expert judgment from senior management
Correct answer: Estimating costs at the work package level and summing them up
Bottom-up estimating breaks work into the smallest components, estimates each individually, and aggregates them to arrive at the total project cost.
Question 3: Parametric cost estimating uses:
- Detailed analysis of each work package
- Statistical relationships between historical data and project variables (Correct answer)
- Only the judgment of the project sponsor
- The average cost of the last three similar projects
Correct answer: Statistical relationships between historical data and project variables
Parametric estimating applies a statistical model or cost driver (e.g., cost per square foot) derived from historical data to estimate project costs.
Question 4: The project cost baseline is best described as:
- The maximum budget approved by the sponsor
- The time-phased budget used to measure and monitor project cost performance (Correct answer)
- The total budget including management reserves
- The initial ROM estimate submitted for approval
Correct answer: The time-phased budget used to measure and monitor project cost performance
The cost baseline is the approved, time-phased budget against which actual project costs are tracked and measured throughout execution.
Question 5: Which cost is directly traceable to a specific project deliverable or work package?
- Indirect cost
- Overhead cost
- Direct cost (Correct answer)
- Sunk cost
Correct answer: Direct cost
Direct costs can be specifically attributed to a project activity or deliverable, such as labor hours worked on a task or materials purchased for it.
Question 6: Contingency reserves in project budgeting are set aside to address:
- Known unknowns — identified risks with uncertain impact (Correct answer)
- Unknown unknowns — completely unforeseeable events
- Scope creep requested by the project sponsor
- Overruns due to poor initial estimating
Correct answer: Known unknowns — identified risks with uncertain impact
Contingency reserves cover known risks that have been identified in the risk register but whose exact impact is uncertain.
Financial Management for Project Managers Cost Estimation and Budgeting 1
Which type of cost estimate is typically prepared during the project initiation phase using analogous techniques and carries an accuracy range of -25% to +75%?