Cost estimation can be termed as a well-devised forecast of the possible construction cost of a specific building project. A detailed cost estimate presents information to owners, architects, and builders about the facility and the project budget throughout the design phase.

A cost estimate should incorporate all the items to be included in the general contractor’s bid. A standard format is applied to break down the items for preparing the cost estimate. The cost of each item is established from a database of up to date construction cost information. 

Accurate cost estimation plays a key role in construction projects that leads to better decision making. There are several methods available to prepare the estimate of a project. These methods are based on the project’s scope, estimating purpose and estimating resources.

Parametric cost models 
Under this method a parametric model is applied in which costs are forecasted based on project characteristics (parameters) in a mathematical model. Here models are developed from historical cost data based or from building a model scenario on similar systems or subsystems. Models can be simple (for instance, with the cost per square foot to estimate the total cost of building a home) or they can be complex (for instance, applying several factors to estimate the total cost of home construction, for example the number of floors, windows, and doors).

Statistical analysis is performed on the data to discover connections between cost drivers and other system parameters, for example design or performance parameters. The analysis creates cost equations or cost estimating relationships to be utilized independently or grouped into more complex models.

Bottoms-Up method
This method is applied at the time of progression of level of detail with the advancement of project. Under this method a work statement and set of drawings or specifications are utilized to “takeoff” material quantities necessary for executing each separate task achieved in completing a prearranged operation or generating an equipment component. From these quantities, direct labor, equipment, and overhead costs are derived and added. The contractors always organize this type of estimate to support their proposal bid process. This entails with a detailed WBS and pricing out each work package making up the project.

Top-down estimate
It is subsidiary technique that starts with work breakdown structure (WBS). To get a top down estimated schedule the estimator has to break down the activity and set up linkage between activities. It is applied once a good overall estimate is ascertained for the project and the method is sub-divided down through the layers of the work breakdown structure.

A top-down estimate facilitates a project manager to obtain a very similar project’s budget, work some financial math magic and get a rational budget for the current project.

Top down estimating is primarily applied in construction projects to provide a quick estimate where the prerequisites are more or less static, and there aren't too much unknowns. This method can also be applied for small software projects.

Top-down estimates employ rules of thumb, parametric models, analogies, or cost estimating relationships (CERs). CERs based on historical experience that can present data involving the cost to build up a source line of software or the cost per square foot for a building construction project.

This method estimate the size (duration and cost) and risk of a project (or phase) by looking at the project as a whole and matching it with the similar projects executed in the past. 

Specific Analogy Technique
This method is useful for early life cycle macro-estimation. Analogous estimating relies on historical information to forecast the cost of the current project. Under this method one has to select one or two completed projects that most intimately match the characteristics of your launching project concerning the scope of the current project, its size, and other known variables.

The process of analogous estimating considers the known cost of an item used in previous estimating systems as the basis for the cost of a similar item in a new estimating system. If any similarity is found, observe how many effort hours that project took, and utilize the information for your estimate. (If the organization don’t have any tracking for actual effort hours, detect how many people worked on the project for how long, and then regulate the hours as required.) Adjustments are made to known costs to make up differences in relative complexities of performance, design, and operational characteristics.

Watch the following power point presentation for demo.
http://www.nps.navy.mil/orfacpag/resumePages/OA4702/Chapter%2011%20Analogy.ppt

Cost Review and Update Technique
Under this method an estimate is created by investigating previous estimates of the same project for internal logic, completeness of scope, assumptions, and estimating methodology and bring up to date with any alterations.

Trend Analysis Technique
This method compares originally estimated contract costs against actual costs on work performed up till now to obtain a contractor efficiency index. The index is very useful for regulating the cost estimate of work not completed so far.

"Design-to-Cost" 
Under this method all cost goals for development, acquisition, or operations and maintenance are utilized like design parameters together with technical performance, in the systems design trade-off process. In some situation where the absolute value of a dollar threshold required to be enclosed, the project definition, conceptual design, and development can deal with performance trade-offs to arrange the project in a predetermined cost envelope.

"Cost as the Independent Variable" 
This method is an affordability based method ideal for planning project scope. The method begins with a fixed budget and performs toward the back in the course of a repetitive procedure of prioritizing and choosing constraints to appear at a project scope attainable within budget constrictions.