Project Cost Estimation: Step-by-step Guide and Best Practices


project cost estimation

Every project manager, at one point in his management, will need to go through project cost estimation. The cost planning builds on this and tries to achieve the most accurate estimate of the total project costs. How this works and why such a cost estimate is not only useful but necessary, you will find out here!

Why Is Detailed Budget Useful?

As with all plans, the cost plan also says it can only be an estimate. Because the real expenses in the project will definitely deviate from your plan. And of course, over time, you’ll need to make adjustments to your plan to meet the changing situation.

Nevertheless, a detailed cost planning based on your work packages is not only useful but also urgently needed. Because only with this cost planning, you can later compare target and actual values, and only then you will get the opportunity for financial monitoring and thereby also for controlling your project.

A detailed cost plan is essential not only for the management of your project. Even in the planning phase, it is vital. Because your influence on the project costs at the beginning of the project is still most significant. The further your project progresses and the more money you’ve already spent, the less you can influence the cost.

So, if you recognize as early as possible, where the cost drivers hide in your project, then you can still counter and search for savings and cheaper solutions.

More goals of Project Cost Estimate:

  • Improvement of cost transparency for all project areas
  • Identification of cost drivers and the associated possibility of cost structure optimization
  • Strengthening cost awareness
  • Cost optimization through cost control by reducing complexity in the project
  • Cost reduction by designing budgets

1. Project Cost Estimation: Step-by-step guide

1.    Represent The Project Structure

Create your project structure plan with project phases, work packages, milestones, etc. and determine the responsible persons.

2.    Define Labels And Categories

Define labels and categories for resources, cost elements, units, and so on.



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3.    Name Partners And Resources

Determine which partners and people are involved (departments, suppliers, distributors, customers or other partners and experts) and what resources the partners bring; for example plants, machines, tools, products, appraisals, trades, travel to meetings, rooms, catering.

4.    Define Cost Rates

Determine the cost rates for personnel, equipment, travel, etc. You calculate in your project or determine the applicable cost rates; if the cost rates change during the project due to price increases or salary increases, you also record this.

5.    Plan Resource Requirements And Quantities

Plan the resource requirements for all resources needed and used throughout the project, such as personnel, equipment, products, services or travel; Assign these individual work packages to your work plan and determine at what time the resources are used in the respective scope.

6.    Show Total Costs And Individual Costs

With this, you have compiled and calculated the total costs for your project. These can be further differentiated and represent individual costs using a cost report. In it, the project costs can be identified individually; For example, for work packages, partners, cost element, period (year or month).

2. Best Practices

Many projects are considered unsuccessful because the estimated expenses for their realization are very inaccurate. The underestimation of the project complexity does not benefit anyone, but often, it is only human to want to deliver the desired something faster. You do an excellent job as a project manager and can complete a project if you make sure your team understands well what the customer needs and what it will cost to develop what you want.

One of the best prerequisites for making a reasonable effort estimation is to invest enough time in the analysis and to understand the requirements and the proposed solution. A balance is necessary: ​​if you analyze too little, the estimated solution remains risky and unclear; If you explain too long, your team will spend time in discussions rather than the delivery of results. You need enough analysis to let your team discover all the risks and find a robust solution.

To get better at cost estimation of projects, you can follow the following advice:

  • The cost estimate is an activity that must be performed regularly during the project. In the initial phase, you need a high-level effort estimate to determine the feasibility of the project. Later, you must act careful and refined analysis and effort estimation. You must resist the temptation to do a cost estimate WITHOUT detailed requirements and thorough analysis. If management asks for quick information about the potential costs, provide a ‘best guess’ number, but make it clear to the management that this is not an accurate and binding calculation!
  • Use workshops with the team and clients to illustrate and understand the requirements and to discuss the proposed solution. Make sure that everyone involved agrees WHAT needs to be delivered, that is, estimated. With a prototype, you can prove your concept and validate not only the customer requirements but also the technical solution. While the customer (s) tell you what he needs and wants, you need to analyze all the essential requirements, break down the effort into manageable pieces, and demonstrate as much as possible or demonstrate it as a prototype.
  • Involve experienced specialists in the analysis and cost estimates. Brainstorm with the people who will be working on the project. Let different teams assess the same task and compare the results. Significant differences in the numbers indicate ambiguity in the approach. Add up expenses or invest more time in the analysis of identified problems.
  • Quantify the unknown in your effort estimation and compensate with adequate buffer. Do not forget that every estimation has some inaccuracy, especially in the earlier stages of the project because of the more significant number of unknowns.
  • Please keep in mind that unexpected things happen and the requirements are often much more complex to implement than expected. Do not just do the effort estimation for the ‘sunny path’ scenario of the project! Be pragmatic and realistic about the effort estimate and ask the others for their efforts in the ‘best case’ and ‘worst case’ cases.
  • Consider all project phases and activities: analysis, design, build, unit test, integration test, performance test, user test, rework, configuration management, release, handovers, post-project support, training and documentation, and project completion. A good practice is also budgeting for change requests. If you have not already done so, you will need to spend extra time on management activities such as project management, team management, technical management, and test management.
  • Use tools and techniques for estimation. Examine and experiment with different tools and methods for effort estimation; try to understand how they work and if they can generally help you with better and more accurate estimates of the project’s workload. The tools will help you to consider all aspects of the project and will automatically add extra effort, the more inexperienced your team is, and the more complex the solution or technology is.
  • Create the effort estimate in points or working hours, not calendar days. No team is 100% effective! You can use a separate conversion factor and convert your efforts into calendar days. This will make it easier for you to adjust the accuracy of the effort estimate in the later stages of the project and to measure the effectiveness of your team. The transformation of expense into calendar days is based on the number of productive hours a member of your team works on the project.
  • Schedule a factor for incidents that you cannot predict, such as unexpected problems with the proposed solution, suppliers, or unanticipated new or expensive project resources. Add these to your effort estimation. Do not forget that all calculations with factors in the course of the project can change.
  • Document your effort estimates and how you calculated them. Give clear WHAT you have estimated, what assumptions they made and especially important WHAT is not part of the project and the effort estimate. This will not only help you in the regular adjustment of your effort estimation but also in improving the process of estimating project expenses.

3. Project Cost Estimation Tools

It is essential for the projects managers to have all project-relevant data, documents, and information at a glance. For the best possible overview and control of projects, some excellent software solutions are available. With the help of these tools, it is often possible to create, plan, organize, and manage projects as well as manage and monitor projects that are currently available or planned for the future.

Some of these hands-on project management tools provide a concise dashboard where all the essential tasks, data, documents, appointments, personal details, correspondence, and other material can be seen at a glance and easily edited.

InLoox for Outlook

InLoox is a handy project management tool that integrates with the well-known and widely used Microsoft Office Outlook software platform. The stand-alone program, InLoox has an easy-to-use interface that makes it easy to plan costs and manage your projects.

Wrike – The Classic

The Software-as-a-Service (SaaS) project management solution Wrike is one of the most extended and most widely used project management tools. Wrike is especially popular with agencies, creative professionals, or companies with a broader non-corporate reach to a global workforce. Wrike’s capabilities enhance the communication and performance of teams working in different locations. Projects can be broken down into individual tasks, assigned to the corresponding employees or responsible persons. In-house projects or projects for customers can be controlled and monitored on time with Wrike. Up to 35 different applications, such as Gmail, Microsoft Office365, Salesforce, and more, can be integrated into Wrike.

Asana

Asana is a web-based project management software of the two former Facebook employees, Moskowitz and Rosenstein. The company was founded in 2008 in San Francisco, California, with the release of the software in 2011. Asana is focused on teamwork and simplifying communication for project planning, editing, and control. Big advantages of Asana are the cost-free in a basic version and the ability to integrate the software in many other tools from different vendors, such as Salesforce, Microsoft teams, Dropbox, tray.io, Everhour, Chrome extension, OneDrive, Google Drive and many more.

AceProject

AceProject is a web-based project management software whose interface is designed excellently. The program can be booked in five different extensions, from a free basic version to a gold version with an infinite number of users per month. AceProject provides a clear dashboard that can be operated quite intuitively. Various help tools are available. With timesheet integrations, project data can be visually processed and timed and monitored within specific timelines.

Podio – Diverse Project Management Tool

Podio a highly customizable project management software designed to facilitate team communication. On the interface, uniquely, many supportive tools and extensions can be integrated. It is possible to use personalized integrations or web forms. Various apps for customizing and supporting different business workflows can be added to the base version of the software. In addition to the user-friendly interface, a blog with lots of information and tips on how to use it and more will be provided.

MS Project and Portfolio Management

The project management software MS Project and Portfolio Management, which is integrated into the Microsoft Office package, is regarded as the classic of modern project management programs. The software is divided into the areas of project management, portfolio management, and resource management. To use the program, a local, as well as a cloud-based solution, are available. With the help of the cloud, the software and the stored data can be accessed anywhere in the world with Internet access.

4. Project Cost Estimation Techniques

Expert Judgment: Along with historical information, expert judgment provides a valuable perspective on the environment and information from previous similar Projects. It can also be used to determine if it is convenient to combine estimation methods and how to reconcile the differences between them.

Analogous Estimate: Uses the actual cost of previous similar projects as a basis for estimating the cost of the current project, which is sometimes adjusted based on observed differences in the complexity of the project.

Generally, it is a less cost and faster method than others, but on the contrary, it is less accurate.

Parametric Estimation: Consists of using historical information to estimate future costs. Get higher levels of accuracy.

Upward Estimation: Estimation of the costs of the work components. The cost of each work package or activity is estimated, with the highest possible degree of detail, so that the cost is summarized in higher levels.

Estimation Of Costs

The MOPE method uses three estimates to define an approximate range of cost of an activity:

  • More likely (M)
  • Optimist (O)
  • Pessimist (P)
  • Expected (E)

Cost estimates based on this equation can provide greater accuracy. These values clarify the range of uncertainty of the cost estimates.

Analysis Of Proposals For Tenders (Or Sellers): Analysis of how much the project may cost, based on the proposals of qualified vendors or suppliers.

Group Decision-Making Techniques: Approaches based on teamwork. The application of group creativity techniques (brainstorming, nominal group, secret voting, repeated consultation with experts or Delphi, mental maps, affinity diagrams and decision analysis by multiple criteria) are handy in the estimation of Costs. Especially if the composition of the group allows to improve the accuracy and precision by formally mixing specialized experiences

Cost Estimates Of Activities: The direct work of resources, materials, equipment, services, facilities, information technology, and special categories. Such as an allocation for inflation or a reserve for cost contingencies.

Final Words

To analyze the project costs, the project baseline must be drawn up, the work packages described, and resource and risk planning completed. In the first step, cost primary groups should be created, into which the corresponding costs are later summed up. The items “Personnel costs” and “Material costs” are superordinate and can be subdivided as desired.

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