Good cost estimation is essential for keeping a project under budget. Many costs can appear over the life cycle of a project, and an accurate estimation method can be the difference between a successful plan and a failed one. Estimation, however, is easier said than done. Projects bring risks, and risks bring unexpected costs.
Cost estimation is the process that takes those factors into account, and calculates a budget that meets the financial commitment necessary for a successful project. Project cost estimation applies to everything from building a bridge to developing that new killer app. It all costs money, so the clearer you are on the amount required, the more likely you’ll achieve your objective.
An Overview of Cost Estimation
Cost estimation is the summation of individual cost elements, using established methods and valid data, to estimate the future costs of a program, based on what is known today.
It further defines the basic characteristics of credible cost estimation as including:
- Clear identification of tasks
- Broad participation in preparing estimates
- Availability of valid data
- Standardized structures for the estimates
- Provisions for program uncertainties
- Recognition of inflation
- Excluded costs
- Independent reviews of estimates
- Revision of estimates for significant program changes
12-Step Process for Cost Estimation
The U.S. government has identified a 12-step process that results in reliable and valid cost estimates. Those twelve steps are outlined below.
- Define Estimate’s Purpose: Determine the purpose of the estimate, the level of detail which is required, who receives the estimate and the overall scope of the estimate.
- Develop Estimating Plan: Assemble a cost-estimating team, and outline their approach. Develop a timeline, and determine who will do the independent cost estimate. Finally, create the team’s schedule.
- Define Characteristics: Create a baseline description of the purpose, system and performance characteristics. This includes any technology implications, system configurations, schedules, strategies and relations to existing systems. Don’t forget support, security, risk items, testing and production, deployment and maintenance, and any similar legacy systems.
- Determine Estimating Approach: Define a work breakdown structure (WBS), and choose an estimating method that is best suited for each element in the WBS. Cross-check for cost and schedule drivers; then create a checklist.
- Identify Rule and Assumptions: Clearly define what is included and excluded from the estimate, and identify specific assumptions.
- Obtain Data: Create a data collection plan, and analyze data to find cost drivers.
- Develop Point Estimate: Develop a cost model by estimating each WBS element.
- Conduct Sensitivity Analysis: Test sensitivity of costs to changes in estimating input values and key assumptions, and determine key cost drivers.
- Conduct Risk and Uncertainty Analysis: Determine the cost, schedule and technical risks inherent with each item on the WBS and how to manage them.
- Document the Estimate: Have documentation for each step in the process to keep everyone on the same page with the cost estimate.
- Present Estimate to Management: Brief stakeholders on cost estimates to get approval.
- Update Estimate: Any changes must be updated and reported on. Also, perform a postmortem where you can document lessons learned.
Challenges of Cost Estimation
There are many factors that are uncertain when cost estimating. For example, if the project is not like prior ones, then experience won’t help guide you. If the planning horizon is further out, the greater the uncertainty. That said, the longer the project’s duration, the less in focus cost estimations will be.
Then there is the team: the level of skill and experience available are going to have a big factor on overall costs of the project.
Project Cost Estimation Techniques
All of these factors impact project cost estimation, making it difficult to come up with precise estimates. Luckily, there are techniques that can help with developing a more accurate cost estimation.
Seek the help of experts who have experience in similar projects, or use your own historical data. If you have access to relevant historical data, try analogous estimating, which can show precedents that help define what your future costs will be in the early stages of the project.
There is statistical modeling, or parametric estimating, which also uses historical data of key cost drivers and then calculates what those costs would be if the duration or another aspect of the project is changed.
A more granular approach is bottom-up estimating, which uses estimates of individual tasks and then adds those up to determine the overall cost of the project.
Another approach is the three-point estimate, which comes up with three scenarios: most likely, optimistic and pessimistic ranges. These are then put into an equation to develop an estimation.
Reserve analysis determines how much contingency reserve must be allocated. This approach tries to wrangle uncertainty.
Cost of Quality
Cost of quality uses money spent during the project to avoid failures and money applied after the project to address failures. This can help fine-tune your overall project cost estimation. And comparing bids from vendors can also help figure out costs.
Whenever you’re estimating costs, it helps to use an online software to collect all of your project information. Project management software that can be used in congress with many of these techniques to help facilitate the process. Use online software to define your project teams, tasks and goals. Even manage your vendors and track costs as the project unfolds. We’ll show you how.
How ProjectManager.com Can Help with Cost Estimation
ProjectManager.com is a project management software that has features to help create a more accurate project cost estimate. Our online Gantt chart can be used to help you track costs and expenditures for projects and tasks.
Estimate Costs of Specific Tasks
When estimating individual tasks, costs can also be collected and tracked on our online Gantt chart. Here you can add a column for the estimated costs, baseline cost and the actual costs to help you keep the project on budget once it’s been executed.
Our online Gantt chart can not only track tasks, but you can set it up to track materials and fixed costs associated with each project task, and monitor the difference between budget and actual costs, as you can with each task. All this data is collected on one page.
Start by creating a project and then going to the Gantt view on ProjectManager.com. If you already have data, you can import it by clicking on the import button on the top right-hand side of the page. Or you can use this online Gantt chart to collect the data. It can be easily shared with team members and stakeholders when you’re ready to get input or approval.
Estimate Cost of Resources
The resource management feature on ProjectManager.com is another tool that can help you achieve a more accurate project cost estimate. It offers a way to look at your costs through the workload across tasks and projects.
When planning a project with our resource management tool, you can account for employee schedules, equipment rentals, holidays and office space, among other factors that will have an impact on your budget. Distributing project resources is one way to balance a budget.
Create a resource plan by scheduling the dates for planned resources, how long you’ll need them and the people who will be involved. That includes any equipment or site rentals. Also, break that down into the amount of resources needed for each activity on a daily basis. Then create a schedule with detailed resources, including duration and estimated costs.
When estimating costs on a project, you want to have the best tools to help you calculate a more accurate budget. ProjectManager.com is a cloud-based project management software with online Gantt charts and resource management features that give you control over your project costs. See how ProjectManager.com can assist with your project cost estimation by taking this free 30-day trial today.