Good cost estimation is essential for project management success. Many costs can appear over the project management life cycle, and an accurate project cost estimation method can be the difference between a successful plan and a failed one. Project cost estimating, however, is easier said than done. Projects bring risks, and risks bring unexpected costs and cost management issues.
What Is Project Cost Estimation?
Project cost estimation is the process that takes direct costs, indirect costs and other types of project costs into account and calculates a budget that meets the financial commitment necessary for a successful project. To do this, project managers and project estimators use a cost breakdown structure to determine all the costs in a project.
Project cost estimation is critical for any type of 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 and your project team will achieve your objective.
Project cost estimating is a critical step during the project planning phase because it helps project managers create a project budget that covers the project costs that are needed to achieve the goals and objectives of the project set forth by executives and project stakeholders.
Get your free
Project Estimate Template
Use this free Project Estimate Template for Excel to manage your projects better.
What Is a Project Estimate?
A project estimate is the process of accurately forecasting the time, cost and resources required for a project. This is done by looking at historical data, getting information from the client and itemizing each resource and its duration of use in the project.
To create a project estimate, you should first define your project scope and then create a project cost breakdown structure, which allows you to pinpoint all of your different project costs for each stage of the project life cycle.
Project cost estimation is simplified with the help of project management software like ProjectManager. Add project budgets and 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 calculate 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 a Project Cost Breakdown Structure?
A cost breakdown structure (CBS) is a very important project costing tool that details the individual costs of a project on a document. Similar to a work breakdown structure (WBS), it’s a hierarchical chart where each row represents a type of cost or item. This is done at the task level, which is called a bottom-up analysis.
Creating a cost breakdown structure might be time-consuming, but one that’s worth the effort in that the result is a more accurate estimate of costs than you’d get with a top-down approach, such as basing all your estimates on the costs of previous, similar projects.
Using a cost breakdown structure is an essential part of project cost management and resource management. By zeroing in on costs at the task level early during the project planning phase, you’re less likely to miss hidden costs that could come up later during the project execution stage and throw your project budget off.
Types of Project Costs
There are five main types of costs that make up your total project cost. Here’s a quick overview of these types of project costs and how to measure them.
- Direct costs: Direct costs are those that occur in a project and are attached to specific activities. These are generally costs that are easier to accurately estimate. They include raw materials, labor, supplies, etc.
- Indirect costs: Indirect costs in a project are those that are in support of the project, such as administrative fees. These can include everything from rent to salaries of the administrative staff to utilities, etc.
- Fixed costs: Fixed costs, as the name suggests, are those that don’t change throughout the life cycle of a project. Some examples of fixed costs include setup costs, rental costs, insurance premiums, property taxes, etc.
- Variable costs: Variable costs are costs that change due to the amount of work that’s done in the project and are variable in nature. These costs can include hourly labor wages, materials, fuel costs and so on.
- Sunk costs: In project cost estimating, when an investment has already been incurred and can’t be recovered it’s called a sunk cost or retrospective cost. Some examples of sunk costs include marketing, research, installation of new software, etc.
What Does a Project Estimator Do?
The project estimator or cost estimator, is tasked with figuring out the duration of the project in order to deliver it successfully. This includes determining the resources needed, including labor, materials, etc., which informs the project budget.
In order to do this, a project estimator must understand the project and its phases and be able to research the historical data of projects that were similar and executed in the past. Cost estimators also need to have a firm grasp of mathematical concepts.
Unlike a project manager, who’s responsible for the delivery and oversight of the project, a project estimator is focused on the direct and indirect costs associated with the project. Project estimators work closely with contractual professionals to develop accurate estimates, which are presented to project leaders.
Project 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.
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’s statistical modeling or parametric estimating, another cost estimation method that 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.
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 many variables such as software development or construction projects.
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 cost estimation method 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. Plus, comparing bids from vendors can also help figure out costs.
Dynamic Project Costing Tools
Whenever you’re estimating costs, it helps to use online software to collect all of your project information. Project management software 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.
Free Project 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’s 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 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 that can build budgets and track them in real time to keep you from overspending.
How to Estimate Project Costs in 10 Steps
The U.S. government has identified a 10-step process that results in reliable and valid cost estimates for project management. Those steps are outlined below.
- Define the cost estimate’s purpose: Determine the purpose of the cost estimate, the level of detail that is required, who receives the estimate and the overall scope of the estimate.
- Develop an 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.
- 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 cost estimating techniques: Define a work breakdown structure (WBS) and choose an estimating method that’s best suited for each element in the WBS. Cross-check for cost and schedule drivers; then create a checklist.
- Identify rules, assumptions and obtain data: Clearly define what’s included and excluded from the estimate and identify specific assumptions.
- Develop a point estimate: Develop a cost model by estimating each WBS element.
- Conduct a sensitivity analysis: Test the 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 and present it to management: Having documentation for each step in the cost estimate process keeps everyone on the same page with the cost estimate. Then you can brief the project stakeholders on cost estimates to get their approval.
- Update the cost estimate: Any changes to the cost estimate must be updated and reported. Also, perform a postmortem where you can document lessons learned.
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.
Related: Construction Estimate Template
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, legal 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 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, and those line totals are added together to determine your total project cost. Having a cost estimation template is a good tool to collect and track this information.
ProjectManager Helps With Project Cost Estimation
ProjectManager is a project management software that has features to help create a more accurate project cost estimate. Our 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. All of this data is collected on one page.
Start by creating a project and then go 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 Costs 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’ll impact 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. Break that down into the number of resources needed for each activity on a daily basis and you’ll be able to create a schedule with detailed resources, including duration and estimated costs.
FAQs About Project Cost Estimation
Here are some of the most frequently asked questions about project cost estimation online.
What Is Project Cost Analysis?
A project cost analysis is used to determine the costs and benefits associated with a project. It’s a process used to determine if the project is feasible.
What Is a Project Cost Breakdown?
A project cost breakdown is the process by which a project manager estimates what will need to be spent in order to deliver a project. A cost breakdown structure is used during the project cost estimating process to ensure all costs are accounted for.
Why Is Project 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 cost breakdown structure and project estimating techniques.
The project budget collects 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 a success will be thought through during the cost estimation process.
- Project Estimation Techniques: A Quick Guide
- Time Estimation in Project Management: Tips & Techniques
- Calculating Estimate at Completion (EAC)
- Parametric Estimating In Project Management
- What Is Job Costing? When to Use a Costing Sheet (Example Included)
When estimating costs on a project, you want to have the best tools to help you calculate a more accurate budget. ProjectManager is online 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.