How To Conduct Project Cost Estimation: A Complete Guide

By Indeed Editorial Team

Published 24 September 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Industries use cost estimation in project management to forecast the financial and other resources required to complete a project within the specified scope. Cost estimations also assist industries to determine the feasibility of the project. If your work involves preparing cost estimations for clients, it can prove helpful to learn more about this process. In this article, we define project cost estimation, explain its importance, outline the steps to make a cost estimation, share the various techniques, discuss its challenges and list the criteria of good cost estimation.

What Is Project Cost Estimation?

Project cost estimation is a forecast of the cost of the resources required to complete a project. A project manager may use the estimated cost to get initial approval for a project. Estimating a project's cost is the primary aspect of project cost management, which involves the planning, monitoring and control of the project's expenses. A project cost estimate can define a project's attributes, identify its tasks, account for unanticipated costs and revise estimates in response to project modifications. In an estimate, costs may include workforce, resources, equipment and facilities.

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Why Is It Important?

Estimating a project's costs enables a business or group to make informed decisions regarding the project's requirements. A company can determine which of multiple projects is the most financially feasible by calculating the cost estimate for each option. Using cost estimates throughout the various phases of a project, a project manager can determine the size of the required investment. At later stages of the project, management can refer to the initial cost estimate to determine whether the project is over or within the assigned budget.

A company can reallocate its resources to better serve the project's requirements based on the budget's status. This may also assist the project management team in anticipating the project's performance after completion. It may be possible for management to alter the project's approach to improve its overall outcome.

How To Make A Project Cost Estimate?

Following are the steps you can follow to make a project cost estimate:

1. Mention the purpose of the estimate

Establishing the parameters of the estimate can act as a working guide. You can plan the estimate's level of detail, audience and scope. For instance, if the project cost estimate is for a client outside the company, you can provide precise details to help the client understand what their budget includes. If you present the estimate within the organisation, you can acknowledge the resources that your colleagues are already familiar with rather than explain them in greater detail.

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2. Explain the attributes of the project

Creating a description of a project and its characteristics can help determine the essential resources to complete it. You may define the project's objective, timeline, risks, uniqueness or adaptability. This may help you determine what to include and exclude from the estimate. For instance, if the goal of a project is to construct a road in three months, you can include the necessary resources in your estimate.

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3. Make a plan for the estimate

You can modify your plan for the estimate to meet its current requirements and revise it as you learn more about how the estimate works. You can make a cost-estimating team and describe their approach to the project. Creating a timeline for the estimate and a schedule for your team to adhere to can help you complete the cost estimation of a project.

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4. Decide your method for the estimate

You can choose an estimation method suitable for your team and the project. Create a checklist of what this strategy entails to help you develop the estimate. For instance, the company can use a previous road-construction estimate as a guide for a current project involving a similar road.

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5. Manage data collection

You can do research on data-collection options to determine which software or tool is suitable for your team. These tools can help you maintain a data log and monitor its evolution throughout the project. You can use online software to store project data and define teams, objectives, costs and tasks. For instance, you can use a spreadsheet to gather pertinent data and investigate sources regarding road construction. This information may enable you to analyse cost drivers and trends that you can factor in when making your estimate.

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6. Record the estimate

During each project step, keep a record of the initial cost estimate and any additional cost estimates calculation. You may share this with the team to keep everyone up-to-date on the project's development. You can record any changes to the estimate and review them at the project's conclusion to reflect on how your budget or resources changed for future estimates.

7. Present estimate to the management

After calculating the cost estimate, you can present it to your management team to get the project's approval. You may provide as much or as little information regarding the estimation procedure as necessary. You may present the estimate to the project's stakeholders if the project is for a company's client to convey the budgets and the expenses that may occur.

Techniques For Calculating Cost Estimation

There are multiple methods for estimating the cost of a project. Along with these methods, you can use project management software to define your teams, tasks and objectives and to facilitate the cost estimation process. Here are some methods for estimating a project's costs:

Analogous estimating

Analogous estimating uses cost figures from previous projects or portions of a project to estimate the cost of comparable projects. Usually, analogous estimation employs historical data to estimate the expected resources for a current project. Depending on a project's scale, scope or complexity, you may modify the historical data. This data can create from the same company if they regularly do similar projects. You can adjust the estimate for inflation, the resources required and the project's complexity.

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Bottom-up estimating

Bottom-up or analytical estimating calculates the cost of each task and then combines the results to estimate the project's total cost. Bottom-up estimation is a flexible technique and may be the most accurate estimation method if a comprehensive list of tasks for the entire project is available. This method may become time-consuming if the project is too large or complex.

Parameter estimating

Parameter estimating determines the duration of each task. Then, multiply the hours by the labour cost, which is typically the employee's hourly wage. This enables you to assign a cost to each task and add them up to estimate the project's total cost. Usually, parameter estimation is most effective for projects with fixed task durations. Despite their apparent similarity, parameter estimating focuses on the duration of a project's individual tasks, whereas bottom-up estimating focuses on the cost of each task.

Three-point estimating

Three-point estimation identifies a project's optimistic, pessimistic and most probable cost estimates. The optimistic estimate of a project's costs assumes that no unforeseen expenses may arise. The pessimistic estimate assumes the cost of a flawed project. Lastly, the most realistic cost estimate for a project is the most likely estimate. After calculating these costs, you can use a formula to estimate the total cost of the project. The most prevalent formula is the average of the three estimates, where the project cost estimate equals the sum of the optimistic, pessimistic and most likely estimates, divided by three.

What Are The Challenges Of Project Cost Estimation?

As cost estimation is only a prediction of a project's expenses, there is uncertainty when attempting to calculate it. This uncertainty is because you can only determine the project's cost after its completion when you can calculate the resources consumed collectively. It can get difficult to estimate the cost of a one-of-a-kind or extensive project because the specific expenses may be more difficult to determine. You can avoid some of these obstacles by collaborating with your team and employing the proper method when estimating project costs.

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Criteria Of A Good Project Cost Estimate

Here are some criteria that you can use to evaluate how beneficial a project cost estimate is:

  • Accuracy: A project cost estimate is useful if it is accurate. You can achieve precision by selecting the most appropriate estimating technique, revising estimates throughout the duration of projects and preparing for unexpected costs.

  • Documentation: It is essential to record the assumptions underlying an estimate. Documentation can prevent misunderstandings and help others to comprehend an estimation's justifications.

  • Credibility: Typically, you estimate the cost of a project based on facts or previous experience. When calculating expenses, you can increase the credibility of your estimate by incorporating expert opinion and historical data.

  • Verification: You can verify whether the mathematical operations used for estimating the cost of the projects are accurate. You can rely on the estimate's documentation to confirm the accuracy of these calculations.

  • Risk identification: You can identify and plan for risks in project cost estimates. Efficient management often overestimates these risks to ensure that there are sufficient funds in the budget to cover if there are urgent requirements.

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