Project Cost Estimation Methods Explained

If you want to deliver your project successfully, you need to estimate the project budget correctly by using different types of cost estimation methods. While creating a baseline budget, you need to consider delivering the project with the highest possible value and making a respectable profit. However, it is difficult to balance both your profit and the value of the product. Because all the time the client wants to receive more but pay less. Likewise, contractors always want to do less but earn more. As a project manager, it is your responsibility to deliver the project on budget with a respectable profit. In this article, we will discuss the cost estimation techniques and the importance of the cost estimation process in project management and provide you some useful tips.

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Estimating the Project Budget

In project management, an estimate is an approximate calculation of the effort and costs to complete the task or the project. From this aspect, an estimate provides a guide of how much it will cost to deliver something. Therefore, it should be made before starting a project.

Project managers often tend to make over-estimations to stay on the safe side. They add additional costs to the budget to ensure that the project will not go over budget. Although this is an easy and safe option, it includes risks. The client may find the cost too expensive and give up.

Sometimes project managers create budgets that are not enough for the projects. That results in difficult discussions of needing more budget for the project.

Getting the right balance between high and low estimations enables you to manage the risks of the project and maintain good relationships between the parties. Because conflicts between the parties often arise from too high or low estimations.

Note that it is difficult to manage a cost estimation process that involves various parameters and uncertainties. As a project manager, while creating a project budget, you have to make accurate forecasts and guess lots of things. If your estimations are wrong you will find yourself in big trouble.

However, if you follow some basic steps while creating your project’s budget and combine it with a statement of work, you will create your project’s budget easily and properly.

How to Estimate Project Costs?

Project cost estimation is a stressful process for many professionals. Because every cost estimate is unique. As a project manager, you need to calculate the cost of each deliverable considering the labor and equipment’s future performance without making copies and pastes.

You need to make a project cost estimation before starting your project. Below are the reasons why you need cost estimates.

You need to know your cost and what you’re going to charge the clients.
Cost estimation provides clarity to each party involved in the project.
Cost estimation techniques help to breakdown the project into major steps and tasks. You can assign a milestone for an important task and track the performance.
Cost estimation helps to create a resource and a funding plan. You can detect the bottlenecks of your project and determine when you run out of cash.
Since the estimates involve information regarding the task, allocated resources, rates, duration, and mark up, they can be used for dispute resolution between the parties if any dispute occurs.

Types of Cost Estimation Methods in Project Management

There are many tools and techniques used in the cost estimation process in project management. Below are the common types of cost estimation methods.

• Analogous Estimating
• Bottom-up Estimating
• Expert Judgment
• Parametric Estimating
• Three-Point Estimating

Analogous Estimating

Analogous estimating is a rough estimation technique that estimates the cost of a project by analyzing the data of a past project. Although it is a quick method, it does not provide a straight estimation.

Bottom-up Estimating

In bottom-up estimating, you estimate the cost of each deliverable to estimate the overall cost of the project. It provides an accurate estimation.

Expert Judgment

Expert judgment is a simple technique that is based on historical data. In this technique, professionals provide their knowledge to estimate the cost of the project.

Parametric Estimating

Parametric Estimation Technique uses historical records as well as statistical data to estimate the cost of the project. It provides accurate results.

Three-Point Estimating

Three-point estimating uses three estimates (Most Likely, Optimistic, Pessimistic) to estimate the costs.

Tips for Conducting an Effective Project Cost Estimation Process

Below are some helpful tips to perform the project cost estimation process successfully.

1. Know the Project Objectives

The first thing to do before starting the estimation process is to gather information regarding the project. Understand the objectives of the project and the client’s requirements to guess the resources to be allocated.

2. Have a Preliminary Project Schedule

A preliminary project schedule involves information regarding the milestones and the duration of major project deliverables. Having a preliminary schedule helps to forecast resources and their working calendar as well as forecasting indirect costs.

3. Decide the Type of Project Cost Estimation Method

Decide which method are you going to use for cost estimation. If you need a very rough estimate, you can decide to use an analogous estimation technique instead of a bottom-up estimation. Note that more accurate methods are costly and time-consuming.

4. Break Down the Project into Meaningful Sections

No matter what type of estimation method you are going to use, you need to break down the project into meaningful sections to see the whole picture.

5. Create a Checklist

Create a checklist and ask questions regarding your assumptions.

6. Check and Correct the Mistakes

Once you have completed the cost estimate, check it to avoid mistakes. Check the rates, formulas, and quantities to make sure that they are correct.

7. Know the Importance of Cost Estimation Process in Project Management

Know the importance of cost estimation in project management to create correct project budgets.

Summary

Once you have completed your project estimate, it becomes a project budget if the client approves it. And the project budget shows the total cost allocated by the client.

Making proper estimations, creating project budgets, and controlling costs are essential to project success. Creating a proper project budget is an important factor that affects almost everything within a project. Note that conflicts between the client and the contractor often arise from wrong estimations. In this article, we talked about the importance of cost estimation in project management. You can use the comments section to add or share anything regarding cost estimation in project management.