Key takeaways
- Project cost estimation is a key element of effective resource management. It is the process of identifying and calculating the costs required to deliver a project on budget and in line with pre-defined goals
- A project cost estimate will need to consider direct, indirect, fixed and variable costs, as well as factors such as the complexity of the project, any compliance requirements, and resource availability
- Accurate project cost estimation is important for ensuring projects are delivered in line with a client’s financial expectations, and for maximizing profitability
- There are different methods for estimating project costs in professional services, including parametric, top-down, bottom-up, and analogous estimation. Expert judgment, where project managers draw on past experience, may also be used to estimate total spend
- Using software as part of the project cost estimation process helps to automate forecasts by drawing on historical data to make informed, data-backed estimates
Project cost estimation is an integral part of the project planning and resource management process, and it plays a key role in ensuring efficient resource allocation. In this guide, we explore the importance of project cost estimation for professional services firms, and the factors that influence it, and look at the different estimation techniques. We also explain how Dayshape can help to automate and improve your organization’s project cost estimates.
Contents
1. What is project cost estimation?
2. What is a project cost estimate?
3. Why is accurate project cost estimation important?
4. Types of project costs
5. Other factors influencing project cost estimation
6. 5 common project cost estimation methods
7. Benefits of accurate project cost estimation
8. Project cost estimation software: what to look for
9. Who is responsible for project cost estimation?
10. What is cost benefit analysis in project management?
11. What is a project cost breakdown?
12. What is cost control in project management?
13. Estimate project costs with Dayshape
What is project cost estimation?
Project cost estimation is the process of identifying the costs required to deliver a project in line with goals and KPIs. Budget needs to be discussed prior to cost estimation, but the process is key to determining the total finances required.
Project cost estimation provides project managers with a framework to refer back to once work is underway. It’s an essential stage of the project planning process, and is an integral part of resource management.
What is a project cost estimate?
A project cost estimate is a prediction of the total cost of a project. Project cost estimates will take into account the cost of all required resources, including people, equipment, materials and technology, as well as overhead costs, such as administrative and operational expenses.
The purpose of a project cost estimate is to provide a forecast of the financials and other resources required to deliver a project successfully. Stakeholders will review the cost estimate to assess the project’s feasibility, before progressing with resource planning and allocation.
The project cost estimate will be referred to throughout the project schedule to ensure continued goal alignment and cost control.
Why is accurate project cost estimation important?
Accurate project cost estimation is essential for assessing project feasibility, and for ensuring efficient resource allocation. It supports overall budgeting and provides a framework for professional services firms to identify potential financial risks. Getting project cost estimates right can also lead to greater profitability, impacting a business’ bottom line.
What’s more, making sure project cost estimations are as accurate as possible is important for informing future estimates that rely on historical data; if these are drawing on poor estimates, then future projects and company reputation may be impacted too.
Types of project costs
There are different types of expenses to consider when estimating project cost. These include:
- Direct costs: these are costs that are directly attached to the delivery of a project, such as material and equipment costs
- Indirect costs: this includes overhead costs that still need to be paid for, but aren’t specifically related to the project; for example, rent and utilities
- Fixed costs: these are expenses that will remain unchanged regardless of how project delivery pans out, and they may be direct or indirect. Fixed costs may include set-up costs and equipment licenses, for instance
- Variable costs: these are costs that will vary depending on how the project progresses, such as the price of materials or hourly wages
Other factors influencing project cost estimation
There are various factors that can influence a final project cost estimate. These can include:
- Resource availability: effective resource planning is crucial to efficient project delivery. If insufficient resources are available, or if resource conflicts are likely, this can impact the overall estimate
- Project complexity: it can be challenging to accurately estimate costs for particularly complex projects with many moving parts. The more complex the project, the more stringent cost estimation needs to be. Continuous monitoring will also be required once work begins, and costs adjusted as necessary
- Regulatory requirements: compliance and regulatory requirements need to be considered when drafting a project cost estimate in the professional services sector. If specific permits or licenses are necessary to adhere with legislation, this may impact the budget required and time taken to complete the project
5 common project cost estimation methods
There are different methods for estimating project costs, with each offering its own advantages. The most common project cost estimation techniques include:
1. Parametric estimation
Parametric estimation is a widely used project cost estimation method. It uses statistical modeling to estimate project costs by analyzing data from previous projects, while taking variables into account. Parametric project cost estimation is regarded as one of the most accurate methods, and it’s also adaptable, allowing estimates to be adjusted in line with project complexity.
2. Top-down estimation
Top-down estimation begins with an overall project cost estimate influenced by the budget available, before the project is divided into individual tasks. This technique is relatively quick, and it can be useful in the early stages of project planning before exact requirements and specificities are known.
Top-down cost estimation is most useful when conducted by experienced project managers who can draw on their own past projects to make informed cost estimates.
3. Bottom-up estimation
Bottom-up estimation follows the opposite approach to the top-down method. Bottom-up cost estimation begins with a detailed breakdown of each task, its requirements and associated costs, before combining these to reach an overall estimate. This can be more effective than top-down estimation, but it’s also more time-intensive. It also requires involvement from multiple teams, which can help to support more accurate resource allocation further down the line.
4. Analogous estimation
Analogous estimation reviews historical data from similar previous projects to forecast estimated spend for an upcoming project. This is a quick technique, but it’s not always the most accurate, as individual projects can differ significantly, even if they appear similar at the outset. Despite this, analogous cost estimation can be an effective way to identify potential risks, drawing on insights from past projects.
5. Expert judgment
Expert judgment is another common method of cost estimation. This technique draws on experts’ knowledge to estimate anticipated project costs. This method isn’t necessarily data-driven like other types of cost estimation, but it is informed by previous real-world experience.
Expert judgment may be the favored approach when historical data is not available, and can be beneficial in early stage planning. Stakeholders often like to seek the opinion of experts they trust, so this can be a valuable method in that sense.
Benefits of accurate project cost estimation
Accurate project cost estimation is integral to preventing overspend and managing expectations. Getting cost estimation right can have benefits for both the organization delivering the work and the client. The advantages of precise project cost estimation include:
- Increase efficiency: precise estimates help to inform more effective resource planning and scheduling, supporting efficient project execution
- Budget management: carefully calculating project cost estimates enables close cost control, helping to keep the project on track and prevent overspend
- Effective resource allocation: cost estimations enable resource managers to allocate resources in the most efficient and cost-effective manner
- Better-informed decision making: project cost estimates can be used to evaluate project feasibility, inform strategic planning, and support decision making
- Enhanced risk management: accurate cost estimates play a key role in assessing a project’s risk level from a financial perspective. Looking closely at the costs involved in every stage of a task presents an opportunity to review associated risks, so mitigations can be considered
- Greater profitability: estimating the cost of a project as closely as possible can help to enhance profitability by minimizing the risk of overspending. Close tracking and monitoring are also key to ensuring maximum profitability for professional services firms
- Better manage stakeholder expectations: accurate estimations build trust with stakeholders and clients alike. Clear cost estimates provide transparency into expected spend, and help to manage client expectations
Project cost estimation software: what to look for
Software can be used to automate project cost estimation, drawing on historical data to enhance accuracy and save time. Key features to look for in project cost estimation software include:
- Budgeting and demand capture. Dayshape is the only resource management software that enables budgets to be built and teams to be assembled simultaneously, with automated controls to maximize profitability
- Access to real-time project financials to help prevent cost overruns and enhance profitability
- Detailed reports that provide real-time insights into performance to support ongoing cost control and monitoring
- AI and automation to enhance and streamline processes to free up more of your time to focus on personalized client management and project delivery
- Seamless integration capabilities with your existing tools. Dayshape integrates with platforms including Workday, OpenHR, SAP, and Dynamics 365
- Customization options. Dayshape offers customizable dashboards, enabling you to analyze performance and track trends in real time to adjust spend as necessary
FAQs
Who is responsible for project cost estimation?
Project managers are usually responsible for leading project cost estimation within professional services firms, but they may be supported by finance managers or analysts to ensure all departments are aligned on spend. Other teams, such as resource management and procurement, will contribute to the overall estimate, but it is typically project managers who will manage the overall process.
What is cost benefit analysis in project management?
Cost benefit analysis, or CBA, is a key part of the project planning process, and involves comparing the estimated costs to their predicted benefits. Cost benefit analysis is used to assess the value of a project, but it can only take place once a project cost estimate has been compiled. CBA is an important tool in calculating estimated return on investment in the professional services sector, and it also plays a key role in identifying potential risks, supporting the wider project planning process.
What is a project cost breakdown?
A project cost breakdown is a detailed itemized breakdown of all costs anticipated within a project. Splitting expected costs out in this way helps to inform the overall project cost estimate, taking into account direct, indirect, fixed, and variable costs. Project cost breakdowns are not only important for estimating total spend, but also for tracking individual costs throughout the life cycle of a project.
What is cost control in project management?
In project management, cost control involves monitoring spend once a project is underway to ensure budget alignment, and to prevent spending from straying too far from the original project cost estimate to manage client expectations.
Cost control tracks actual expenses against the budget and initial estimates to manage spend, evaluate risks, and identify opportunities for potential cost savings.
Estimate project costs with Dayshape
Gain deeper insights into your project’s financials, manage spend more closely, and make more accurate project cost estimates with Dayshape. Transform the way your organization estimates project costs by:
- Immediately see the impact of resourcing decisions on project profitability
- Utilizing data-driven insights
- Accessing real-time project financials
- Building budgets while assembling the best team for the task
- Allocating resources more effectively
- Seamlessly integrating existing tools
Book your Dayshape demo today, or contact our team to find out more.
