On the consideration of variability in cost estimating

Engineering companies are frequently requested to submit a fixed-price bid or a ceiling on cost-plus bids. These bids may be subjected to competition or negotiations. In order to determine the bid price, engineering management must first estimate the actual costs to be incurred on the project. The method presented utilizes three estimates for each cost entity considered: a low value, a most likely value, and a high value. From these, estimates of the expected cost and standard deviation of each cost entity as well as the entire project are determined. Once the total cost distribution has been determined, statistically sound probabilistic statements may be made about the estimate, ranges of costs which may be incurred, expected profit at a given bid price, probability of losing money, etc. A specific example is presented and interpreted in detail. The paper concludes with a discussion of several theoretical and practical considerations.