Estimating Project Costs

Paul Naybour

Cost management is one of the most important elements of managing any project. There is nothing worse than running out of money half way through a project. As a project manager, it is your responsibility to manage project costs and this covers the scopes of budgeting and cost estimations. It is up to you to make sure that the project does not stray outside of the financial borders that have been defined during the budgeting process.

First of all, you will find that the vast majority of project management training courses cover project costs. You will learn about the different techniques used to budget effectively and stay within the limits you have established.

Common mistakes that can be made

Let’s begin by taking a look at some of the most common mistakes project managers make, which can result in inaccurate estimates.

  • Giving single data point estimates instead of range estimates
  • Providing estimates under pressure in project meetings
  • Dividing tasks between more than one resource
  • Not adjusting the estimate once there have been changes in scope
  • Failing to build in contingency cost
  • Assigning resources at more than 80 per cent utilisation
  • Starting with a set amount of money, and then forcing the project cost to fit within this
  • Not understanding what is required to complete a piece of work

All of the above can lead to inaccurate estimations. Forcing your project costs into a pre-determined amount of money is one of the biggest mistakes, yet it is a mistake new project managers often make. It is important to be realistic. Estimate the real cost of the project, and if the money allocated doesn’t match up to this, it is time to have a serious conversation with your stakeholders.

project meeting - discussing progress, tracking project metrics

What methods can be used for project estimation?

Now you know what not to do, let’s take a look at some of the estimation methods you have at your disposal. Firstly, let’s be frank – estimating projects is not any easy task. This is because the only time you really know how much a project is going to cost is when it is complete. There are also typically changes to the project schedule and scope, which will impact costs incurred.

Before you can use one of the project cost estimating techniques that we reveal below, you need to have completed a number of processes. These are as follows: you must define scope, determine your work breakdown structure, ensure activities are sequenced, estimate activity resources, and estimate the duration of activities. This information will prove vital when determining how much the project is going to cost.

Now, you can decide what type of cost estimation tool you are going to use. We are going to go over three common options – bottom-up estimation, resource course rates estimation, and analogous estimation.

Bottom-up estimating

Let’s begin with bottom-up estimations. With this technique, you will need to aggregate singular estimates for every task in the Work Breakdown Structure. You then need to perform this calculation for all activities. This is probably one of the most common estimation methods used when deriving cost estimates, and it offers a good level of accuracy for project costs in all types of project. Because this approach uses estimates from a task level, it is crucial that you make precise task estimates. Some of the best practices that you should use include leveraging the people that will actually do the work, as well as including Subject Matter Experts in the estimation procedure.

Resource cost rates estimating

In every project, resources are required. With the application of resource cost rates to the Estimate Activity Resources process, you can decipher the full cost for all of the resources on your project. This is another popular approach used in projects.

Analogous estimation

Last but not least, we have an analogous estimation, which involves estimating from a closed project, and using this to determine estimates for the new project. Basically, if you have completed a similar project previously, you can use the estimates from this to get a good understanding of the costs for your current project. The similarities between the two projects will determine the accuracy of any analogous estimation.

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Top tips to help you estimate costs more accurately

Accuracy is so important when estimating project costs, and we have some top tips to help you boost the accuracy of your estimations.

  • Produce contingency plans by ensuring deliverables are prioritised from the very beginning into categories that are ‘nice to have’ and ‘must have.’
  • Think about a phase-based approach for nebulous situations. In this case, requirements gathering and estimating should be the first phase.
  • Ensure the project rollout is planned and estimated from the very start, so that you do not end up with a chaotic scramble on your hands when it comes to the rollout. For example, you could propose utilising an approach that is minimally disruptive, such as a phased implementation or a pilot programme.
  • Consider organising and performing the work in ways that are more efficient and straightforward.
  • Propose adjusting one of the project’s scoping criteria if the proposed schedule or budget seems inadequate. The four project scoping criteria ae as follows: features, quality, schedule and cost.
  • To accompany your calculations, you need to identify a set of assumptions, constraints, and caveats. These should bound the conditions under which your estimates are meaningful, so anything that happens out of these constraints is deemed out of scope.
  • To arrive at an estimate, make sure you use more than one method. Don’t merely settle on one of the approaches that have been given above. Instead, use a number of techniques, and then look for a midpoint amongst all of them.
  • To determine whether a pending project is more or less complicated than a previous one, you need to use a ‘complexity factor’ as a multiplier.
  • Carry out a detailed task analysis of the work that is going to be done.
  • Create and use documents for planning, for example, project plans and specifications.
  • You should also maintain an ongoing database for ‘actual hours’, which will record the time that is spent on every aspect of the project. This data can be used to help you estimate future projects while also identifying the historically accurate buffer time that is required realistically to carry out the work.

project costs

Tips on managing project costs

Accurate estimates are one thing, but you then need to stay within these estimates, which is just as difficult, if not more so. Of course, as project manager it is your responsibility to keep on top of this, ensuring your project does not go over budget. Below, we have some great tips on how to manage project costs successfully.

Consider extensions

A project extension may sound like the worst possible scenario, however, you would be surprised by how often it is not as bad as you think. Talk to your project sponsor or client if costs are mounting. Even if they were previously fixed about milestones, they may be willing to move the deadline once they know why. There can even be monetary benefits associated with delivering your project over an extended period of time. For example, it may mean that you can do more of the work in-house or that you can spread the costs out. Being transparent with your sponsor won’t hurt, and it enables you to explore how flexible they are on the subject.

Evaluate resources

This may seem like an obvious point, but it is so important to make sure you have the correct resources in place for your project. For example, if you have the right people working on your project, then it is going to be money well spent. You will have invested well, ensuring you do not need to spend more money on revising and repairing situations because your team members have let you down. You also need to make sure that resources are allocated effectively and that they are working as well as they can for the good of the project.

Read the fine print

Next, you need to ensure that you read the fine print carefully when it comes to your contracts. A lot of project managers are guilty of paying more money for added-value services that they do not really require. Often, they are paying for things that they are already doing themselves.

Get the best tools for the job

To track resource allocation and keep on top of your expenses, you will need project management software that is robust, flexible and effective. You need to manage recurring expenses while maintaining a money trail. Using successful software enables you to schedule regular payments and ensure that everything is organised effectively.

Learn how to negotiate well

For most projects, you are not going to be responsible for all of the deliverables. There are going to be third-party suppliers and vendors, and perhaps even contractors, who you need to rely on too. These relationships are critical when it comes to cost management, and they are very much open to negotiation. Remember, you have the power in these negotiations. It is not uncommon to request a discount, especially if you are buying goods or services in bulk. If you are the first business to use a product from a supplier, you can offer to provide a case study or a reference, and this can lead to a reduction in price.

You also need to consider the pricing structure carefully. There are often areas where costs can be cut. For example, you may want to consider a payment structure where there are phased payments, rather than you having to pay everything upfront. This will help you to manage your business’s cash flow.

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You need to generate transparency when it comes to your project costs and relaying them to senior management. Include key numbers and cost metrics into your project reports. If your costs are not on track for some reason, this should be viewed as an urgent issue – one that needs to be assessed, discussed and resolved with a steering committee.

Ensure forecasts are updated regularly

It is important to cater to any adjustments that have been made by amending your forecasts on a monthly basis. Changes could come from the estimates being lower or higher than the forecast, or they could come from the actual running costs being lower or higher.

Calculate metrics

You also need to calculate cost metrics and make sure you update them at the conclusion of each reporting period. You need to look at how much money you had expected to spend by this point of the project, and compare it to how much money you have actually spent. Make sure cost metrics are incorporated in your project reports.

Record actual costs

Last but not least, it may sound very obvious, but you do need to make sure you record actual costs. Check the actual amount of money that has been accounted for at the close of each month in regards to your project. The finance department will typically provide you with this figure. So that you can directly compare this amount to your budget, and you should record it in your spreadsheets, reports etc.

You should now have a better understanding with regard to estimating project costs. There are numerous factors that you need to take into account; while budgeting needs to happen early on in the project process, there are numerous steps that need to be carried out first. This includes defining scope and ensuring activities are sequenced. Once you are ready, you can then use one or several of the methods that have been mentioned above to estimate project costs effectively. Also, don’t forget to take note of the tips provided and also what not to do when estimating expenses.

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