Good cost estimation is essential for project management success. Many costs can appear over the project management life cycle, and an accurate cost estimation method can be the difference between a successful plan and a failed one. Cost estimation, however, is easier said than done. Projects bring risks, and risks bring unexpected costs and cost management issues.
Cost estimation is the process that takes direct costs, indirect costs and other factors into account, and calculates a budget that meets the financial commitment necessary for a successful project. Project cost estimation techniques apply to any project, from building a bridge to developing that new killer app. Everything costs money, so the clearer you are on the amount required, the more likely you’ll achieve your objective.
Cost estimation is simplified with the help of project management software like ProjectManager. Add project budgets, planned costs for specific tasks and include labor rates for your team. When you build your plan on our Gantt chart, your estimated project costs will be calculated automatically. Plus, as the project unfolds, you can track your costs in real time on our automated dashboard. Try it for free today.
What Is Cost Estimation?
In project management, cost estimation is the summation of individual cost elements, using established estimating methods and valid data, to estimate the future costs of a project, based on what is known today.
It further defines the basic characteristics of credible cost estimates 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
Why Is Cost Estimation Important?
Cost estimation and cost management are an essential part of project management. The project manager is responsible for making the most accurate project budget possible by using a work breakdown structure (WBS) and cost estimation techniques to visualize the project scope and then assign costs to each project task. Knowing the project scope will help not only in the planning phase but throughout the project life cycle, especially during executing, monitoring and controlling a project.
Having a cost estimation process is how project managers are able to achieve the goals and objectives of the project set forth by executives and project stakeholders. The project budget will collect indirect costs and direct costs as it estimates the overall cost of delivering the project on time and meeting quality expectations. That means, whatever you’re going to need to make the project successful will be thought through during the cost estimation process.
Cost Estimation Techniques
All of these factors impact project cost estimation, making it difficult to come up with precise estimates. Luckily, there are cost estimating techniques that can help with developing a more accurate cost estimation.
1. Analogous Estimating
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.
2. Parametric Estimating
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 of the project is changed.
3. Bottom-Up Estimating
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. This cost estimating method is even more detailed than parametric estimating and is used in complex projects with lots of variables such as software development or construction projects.
4. Three-point Estimate
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.
5. Reserve Analysis
Reserve analysis determines how much contingency reserve must be allocated. This approach tries to wrangle uncertainty.
6. 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.
7. Dynamic Tools
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 to Estimate Costs in 10 Steps
The U.S. government has identified a 12-step process that results in reliable and valid cost estimates for project management. Those twelve steps are outlined below.
1. Define Cost Estimate’s Purpose
Determine the purpose of the cost estimate, the level of detail which is required, who receives the estimate and the overall scope of the estimate.
2. Develop Estimating Plan
Assemble a cost-estimating team, and outline their estimation techniques. Develop a timeline, and determine who will do the independent cost estimate. Finally, create the team’s schedule.
3. 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.
4. Determine Cost Estimating Techniques
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.
5. Identify Rule, Assumptions and Obtain Data
Clearly define what is included and excluded from the estimate, and identify specific assumptions.
6. Develop Point Estimate
Develop a cost model by estimating each WBS element.
7. Conduct Sensitivity Analysis
Test sensitivity of costs to changes in estimating input values and key assumptions, and determine key cost drivers.
8. Conduct Risk and Uncertainty Analysis
Determine the cost, schedule and technical risks inherent with each item on the WBS and how to manage them.
9. Document the Estimate and Present to Management
Have documentation for each step in the cost estimate process to keep everyone on the same page with the cost estimate. Then you can brief the project stakeholders on cost estimates to get their approval.
10. Update Cost Estimate
Any changes to the cost estimate must be updated and reported on. Also, perform a postmortem where you can document lessons learned.
Free Cost Estimation Template
ProjectManager has free templates for every aspect of managing a project, including a free cost estimate template for Excel. It can be used for any project by simply replacing the items in the description column with those items that are relevant to your project.
This free cost estimate template has all the fields you’d need to fill in when estimating project costs. For example, there is the description column, followed by the vendor or subcontractor column and then there are columns to capture the labor and raw materials costs. These can be added together by line and then a total project cost can be calculated by the template.
Naturally, a cost estimate template is a static document. It’s handy in terms of collecting all your project costs and then even tracking them over the life cycle of the project. However, all that data must be manually added, which takes time and effort—two things that you don’t have in abundance when managing a project. Once you’re ready to streamline the cost estimate process you’ll find that there are many project management software solutions out there that can build budgets and track them in real time to keep you from overspending.
Project Cost Estimation Example
Let’s take a moment to create a hypothetical project and run through a general cost estimate example to see how this process works. Construction cost estimation is straightforward so we’ll use a construction estimate example. This construction project will focus on the general requirements for cost estimation in project management.
First, you’ll want to have a list describing the various elements needed to build your construction project. Gather all your construction project management documents such as plans, designs and specifications, blueprints and permits to find out cost data. In your documents, you’ll find administrative costs, financing costs, letal fees, engineering fees, insurance and other cost items.
Now it’s time to use a work breakdown structure (WBS) to identify all your construction project activities. Identify the labor costs, direct costs and indirect costs associated with every single activity in your project schedule. There are various cost estimating techniques such as bottom-up estimating which allow contractors to estimate costs for each construction activity to create accurate proposals for the construction bidding process.
These costs are then added together for a line total. All those line totals are then added together and you have your total project cost. Having a cost estimation template is a good tool to collect and track this information.
How ProjectManager Can Help with Cost Estimation
ProjectManager 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. 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 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 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 can assist with your project cost estimation by taking this free 30-day trial today.