Your Guide to Cost Estimation in Project Management
October 11, 2022at7:00 AM
Cost estimation is one of the most important things you need to get right in project management — otherwise, planning your project, creating proposals, and talking with clients will be for nothing. That’s because project cost estimation helps you predict how much you should charge a client. And if you get it wrong, you will suddenly be tied to a project that drains your company of resources with little to no profit.
This article will explain everything you need to know about cost estimation in project management, including how to estimate the costs of a project correctly.
What is project cost estimation?
A project manager estimates project cost to predict how much a project will cost to complete, including calculating time, resources, and other expenses. It’s done way before a project is even started or accepted by a company. The calculated figure is used to create a quote for a client and to see whether there are enough resources to complete a project on a realistic budget.
Cost estimation in project management is vital to companies because it determines whether an organization or team can take on extra work and whether the project will bring in revenue.
How to estimate the costs of a project
When a project manager is preparing a cost estimation for a project, there are several factors they consider, including who will be working on it, the time required, and equipment costs. Calculating costs doesn’t need to be complicated. In fact, the easiest way to break up expected costs is to place them in two categories:
Direct costs: These costs are associated with a project, like expenses and resources. They tend to cover anything that is directly related to any task or milestone for the project.
Indirect costs: These costs are not tied to a specific area during a cost estimation. They can include things your company pays continuingly, like specific software or materials.
After the direct and indirect costs have been calculated for a project, the project manager will need to look into the expenses that may not be obvious. These are typical assumptions and can provide a cushion in case costs run over because of meetings or hiring another contractor.
Three methods for cost estimation in project management
Three straightforward methods can help you calculate the costs of a project. These include:
The bottom-up estimation method: This process forecasts how much a project will cost by breaking down individual tasks and estimating how much each will cost.
The 3-point estimation method: This method relies on the Program Analysis and Review Technique. It considers the time you’ll spend on the project, along with general costs and timelines. It then asks you to predict three different outcomes for the project — the best outcome, the OK outcome, and the bad outcome.
The parameter estimation: This relies on past project data to help make your new estimation more accurate. You can start by estimating how much time you think your team will spend on each task and then dig out data from similar projects in the past and compare them.
Find out the best project management methods for your business with help from NFA Consulting.
As a business owner, it’s important to choose the best project management methods for your business. Getting dedicated expertise from NFA Consulting can give you the informational resource you need to get the most out of your team, performance, and projects. Get in touch to learn more about how we can help you.