Archived - Guideline on Cost Estimation for Capital Asset Acquisitions

Long description for image: Figure 2. Analyzing Cost Estimate Uncertainty Using an S Curve

Figure 2 is a graph that shows the relationship between a point estimate of a project's cost and the likelihood that the project will be completed on budget. As the title of the figure suggests, the relationship can be described as an S curve, though the curves are flatter than a regular S.

The point estimate is plotted along the x axis on a scale of 0 to an undefined higher number of dollars. The likelihood of the actual cost being equal to or less than the point estimate is plotted along the y axis on a scale of 0 to 100 per cent. The graph illustrates a point estimate in the middle of the dollar-value range on the x axis. A vertical line at this dollar value intersects with the centre of the S curve. A horizontal line from the intersection point meets the y axis at 50 per cent likelihood that the project will be completed on budget.

The figure also identifies two spatial ranges in the graph. The financial impact of actual costs exceeding the point estimate is a spatial range located along the x axis to the right of the point estimate; the likelihood of actual costs exceeding the point estimate is a spatial range located along the y axis above the line that runs from the 50 per cent midpoint to the centre of the S curve.

The portion of the curve below the midpoint illustrates that a low cost estimate is associated with a high likelihood that the project will exceed the estimated cost, and shows that the financial impact of a cost overrun would be significant. As you move through the middle portion of the curve toward the top, the point estimate gets higher, the likelihood that the project will be on budget goes up, and the potential size of the cost overrun decreases.

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