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.
1. What is project cost estimation?
2. What is a project cost estimate?
3. Why is accurate project cost estimation important?
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
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.
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.
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.
There are different types of expenses to consider when estimating project cost. These include:
There are various factors that can influence a final project cost estimate. These can include:
There are different methods for estimating project costs, with each offering its own advantages. The most common project cost estimation techniques include:
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.
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.
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.
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.
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.
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:
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:
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.
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.
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.
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.
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:
Book your Dayshape demo today, or contact our team to find out more.