A good Basis of Estimate (BoE) starts with a quality WBS, as is everything in project management. It's the documentation of how a time or cost estimate was produced for each lowest level (work package) of the WBS.
Minimally it should include
- the method used for estimating,
- assumptions taken,
- who made the estimate,
- specific cost figures used (eg internal hour rates or external consultants fees etc.),
- possible risks involved (with the worst case estimate, see below)
In short, it should be the proof you made a reliable estimate for the project, based upon the information known at the time.
All work packages should be included; rolling up those cost figures (higher level WBS elements) together with management and contingecy reserves will be the project's Budget.
I've seen BoE documents of government agencies like NASA that have much higher requirements for their BoE (like probablity distribution for each WBS element) and require lots of additional documentation and multiple estimating techniques. But for my type of projects the above will do.
Regarding the method for estimating, there are ofcourse many possibilities. The ones I use most often are
- Historical data: comparing the work packages with data from similar projects
- Breaking down the Work Package into its tasks and estimating each task
Ideally you should work with estimate ranges, taking into account uncertainty and hence schedule risk. Some use PERT, but I stick with Most likely - Worst Case.