TABLE OF CONTENTS This is the start of Part 2, which expands the estimation techniques covered in Part 1 to include risks and uncertainty. This unit shows how to include risks when estimating costs.
Learning Objectives - When you have completed this unit you should:
Know the major cost risk factors.
Be able to formulate likely scenarios.
Be able to assign probabilities to likely scenarios.
Know how to compute expected cost including risk effects.
In a predictable, well-ordered world, cost estimation would simply follow the procedure laid out in Unit 5. The categories that must be estimated would be identified and costs assigned to each of them. Category costs would be summed to produce an overall cost estimate, which would be part of the overall cash flow. Unfortunately, the world is seldom as predictable or well-ordered as might be desired. Projects often deviate widely from plan: hardware may not work as advertised; software may run into unexpected difficulties. It is more likely that several possible scenarios must be considered. Each scenario will have a set of cost cash flows and a probability associated with it. A single expected cost can be produced by combining scenario costs, each weighted according to its probability.
where estimate is the estimated...
