Businesses need to conduct project cost estimating to ensure that they stay within budgets. A project cost estimations involve gathering empirical data, analyzing them and forecasting an estimate. The estimate includes risk contingency funds and takes into account unexpected factors. A good project cost estimation ensures that a business doesn’t have to worry about their budget and can expect timely delivery of the project. Here is everything you need to know about determining project costs.
A business budget contains a summation of all the financial investment the business is putting towards one or more projects. Without knowing the right figures that need to be invested, a business may underestimate or overestimate the amount they need to provide.
The project management team needs to ensure timely delivery of the project, and without the right funds, this won’t be possible. Projects also carry risks, and unexpected costs can appear from time to time. To ensure that the project budget contains enough funds to ensure the success of the project, a project cost estimation is necessary.
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What is a Project Cost Estimation?
A project cost estimation involves gathering data of variables related to the project. These variables can include
salaries and wages, materials costs, labour costs, inflation, security, support, and other factors.
By isolating the variables related to the project, a business can gauge the amount needed to be invested into the project to ensure that funds for all variables are met.
There are two main kinds of costs associated with a business budget:
Direct Costs
These are costs that are directly related to the successful completion of the project. They include:
- Labour: Salaries and wages of project management team, hired workers, outsourced professionals etc.
- Materials: Supplies and equipment required to develop and/or deploy the project.
- Technical: Software and hardware needed for the project.
- Facilities: Applicable in case a commercial venue or industrial centre needs to be rented for the project.
- Transport: Hiring transportation services.
- Travel: Travel tickets, accommodation costs etc.
- Contingency: Details funds related to factors such as inflation, risk management and project security costs.
Indirect Costs
These involve factors related to the successful completion of the project, but aren’t directly related to the project. The factors are:
- Management Team: Salaries and wages of managerial team.
- Accounting services.
- Legal services.
- Project security.
- Project support.
- Utilities and bills.
How Do You Estimate Project Costs?
Working together with the project management team will help your business find accurate investment numbers. You can ask the team to outline specific tasks related to the project, develop a timeline, and note down financial figures that will help them deliver the project in time.
Taking rough guesses however, is an inefficient way of calculating project costs. Thankfully, statistical models and data-driven decision making can help you forecast accurate business budget figures.
Here are four methods you can use to estimate the cost of a budget:
Analogous Estimation
Also known as ‘top down’ estimation, in this method, historical structures are analysed to gauge what similar projects have cost in the past.
The idea is that the cost of a similar project would reflect what a future project would cost. However, for this model, inflation and the current economy need to factorized as well.
The team should study previous projects that fall within the same domain and understand the financial breakdown of those projects. Then, map out the same cost structure for the upcoming project, taking into account price fluctuations over time.
Analytic Estimation
Also known as ‘bottom up’ estimation, this method involves breaking down the project into a work breakdown structure (WBS). A WBS includes individual units of work. These units are then estimated separately to find an accurate cost estimation. Historical data is used to separate the units, based on previous project models.
Simply put, divide the project into individual units and add up figures that each unit will require.
Parametric Estimation
This kind of estimation is primarily used for projects that have repeatable tasks. Similar to analytic estimation, the project is broken down into individual units.
However, while analytic estimation deals with historical data, parametric estimation divides repeated tasks. Then, the cost of each unit of work is counted and recorded.
Three-Point Estimation
Like the name suggests, the project is divided into three kinds of costs. They are:
- Optimistic Costs
- Pessimistic Costs
- Most Likely Costs
Optimistic costs are forecasts for best case scenarios, while pessimistic costs are associated with unexpected costs and risk mitigation. Most likely costs are those areas where expenditure may or may not occur, with the assumption being that funds will be required.
This form of estimation is ideal for risk management and ensuring that the project management team doesn’t run out of funds. Each of the three points are analyzed using data, with the objective being that all scenarios involved with he projects are analyzed ahead of the project.
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