Cost estimation is an essential part of the project management process. It’s also one of the most difficult to do well.
What is project cost estimating?
Project cost estimating is the process by which a company predicts the total cost of a project by precisely outlining its work scope. To forecast a project’s overall price to deliver, consider the tasks, duration, as well as resources required. The closer an estimate is to the real cost of a project, the more likely spending will remain positive once the project begins.
Although the cost of the project estimation may be the least exciting aspect of your job, getting the budget correct can mean the difference between a successful project and one that fails. With the number of tasks suffering from scope creeping on the rise, team leaders must be diligent in the forecasting and planning stages to make sure that their project costs are accurately estimated and that they are taking on work that is actually profitable.
Because project cost estimating depends on tying costs to the scope of work of a project, the method must highlight how long tasks will take and who will complete them, in addition to closely tracking the project. Project cost estimating does not end when a project begins; it must be tracked and modified as the project progresses.
Gain visibility of the costs
It is important to understand that the cost of a project is not just the number of hours you spend on it. Rather, it includes all the costs incurred during the course of your project, such as:
- The cost of hiring an individual or team to complete your work;
- The cost of their equipment;
- Their software costs related to working on your project (e.g., server licenses);
- Their hardware costs relating to working on your project (e.g., laptops);
- The infrastructure required for running your team’s systems during its duration (e.g., servers).
Get structured in the project definition
- The project definition should be clear and unambiguous.
- All stakeholders should sign off on it in writing.
- It must review regularly, to make sure that it remains up-to-date as the project evolves.
Use a team for estimation support
- Use a team for estimation support.
- A team with different expertise, levels of experience, and seniority.
- Have the members geographically distributes so that they can provide honest feedback on each other’s work without bias or conflict of interest.
Understand and structure technical knowledge
Understanding the technology stack and its relationship with business requirements is one of the most important aspects of cost estimation. You should also understand your technical architecture, constraints, risks, and other factors that affect project planning.
Estimate in phases
The best way to do this is by breaking your project down into phases and estimating each phase separately. You should estimate the time, cost, and resources that you will need for each phase. Then you can add up all of these figures together to get an overall estimate of how much your project will cost.
To help with this process, use a spreadsheet or other software like Excel or Google Sheets so that you can keep track of all the numbers involved in your estimation process (including costs).
Plan for contingencies
When you’re working on a project, it’s important to plan for contingencies. To do this, you need to define the problem before starting on a solution. For example, if your goal is to lose weight by running 10 miles every day (and achieving this goal would require some serious exercise), then setting up an exercise routine with some friends might help motivate you even more than just thinking about it alone.
This way of thinking can also help keep your motivation high while writing out estimates and budgeting for each task because if there are any unexpected obstacles along the way (such as being injured), then those costs will be taken care of first so that they don’t affect other parts of your project budget too much!
The golden rule is to estimate early and estimate often.
- The golden rule is to estimate early and often.
- Estimate the project in phases.
- Estimate the project in phases, and then break it down into smaller tasks.
- Make sure you have the right people involved in the estimation.
Methods for estimating project costs
The scope of a project should determine its budget, not the other reason around. Here are methods of estimations you can use to estimate project costs accurately.
Ballpark estimate
A ballpark estimate is an estimate of the value of a project based on assumptions.
Is your client aware of their budget? If not, a ballpark estimate will provide you with a rough estimate to provide your client in order to determine whether they can finance a project before it begins. This calculation is typically a combination of similar works you’ve completed in the past in addition to any expenses special to the project.
Assume your client requires a website and your team has previously completed similar projects for $10,000. The cost could range from -25% to +50percentage points ($7.5k – $15k) based on the ballpark estimate.
Isn’t it simple? Yep. Although it is not the most precise method of estimating project costs.
Parameter estimation
Parameter estimation is a data-driven approach to estimating project costs. It employs historical data to provide a more accurate estimation of a project’s total cost.
First, determine how much time you will devote to each task on your list. Then, add a cost figure by increasing the hours of every task by the hourly rate of each team member.
Task Cost = Task Duration x Employee Hourly Rate
Once you’ve determined the cost of each task, add everyone up to get an estimated total.
Although this method takes longer than a ballpark figure, it is also more accurate. It works best for projects with clear beginning and ending points for tasks, such as social media management.
Conclusion
The key to successful cost estimation is planning and communication. You need to develop a process for communicating with your team members so that they can provide accurate estimates on their own. It’s also important to understand how much time each person will need in order for them to complete their tasks, as well as any other resources required by this project.