A Quick Guide To Project Cost Estimating
No matter whether your business is designing a logo or building an entire website from scratch, one of the most important parts of a successful project is getting the cost right.
To properly plan for tasks and navigate who will get them done, you must determine how much the project will cost and if the price tag fits your client’s budget. To nail this process, you need to know what deliverables your team is responsible for and track costs once the project is up and running.
Unfortunately, most businesses do not do a good job at estimating the cost of their projects. According to PMI's 2018 Pulse of the Profession report, 28% of all projects are derailed because of inaccurate cost estimates.
The good news is, accurate project cost estimating isn't rocket science as long as you've got a good process in place. By listing your tasks, calculating costs, and tracking a project's progress, you can create accurate estimates and make sure your budgets don't balloon out of control.
In this piece, we're going to breakdown what project cost estimating is and provide a five step process you can use to get it right. 👌
What is project cost estimating?
Project cost estimating is when a business predicts the overall cost of a project by accurately outlining its scope of work. It requires looking at the tasks, duration, and resources required to forecast a project's total cost to deliver. The closer the estimate is to the actual cost of a project, the more likely spending will stay in the green once the project starts.
Although cost estimation may not be the most exciting part about planning a project, getting the budget right can mean the difference between it being a success or a disaster. With the number of projects suffering from scope creep rising, team leaders need to use in-depth, early planning and accurate cost estimation to make sure every project they take on is profitable.
As project cost estimating relies on tying costs to a scope of work, the process must outline how long tasks will take and who will get them done, in addition to vigilantly tracking the project. Project cost estimating doesn't simply stop when a project starts—it must be monitored and adjusted as it progresses.
How to accurately estimate the cost of a project
Estimating the cost of a project requires breaking it down into individual tasks and figuring out which team members will be doing what. Once a project is up and running, the key goal is to make sure you don't overspend and derail your budget!
Estimating the cost of a project is a process which can be broken down into five steps:
- Compile a list of tasks and the resources required to complete them
- Identify and allocate resources to tasks based on your team’s capacity
- Estimate the task length to create a project schedule (with some buffer)
- Calculate the project cost based on a chosen estimation method
- Use project cost estimating tools to track budgets in real time
Step 1: Compile a list of tasks and the resources required to complete them
The first step of project cost estimation is figuring out what tasks and resources you need.
The easiest way to do this is to break the project down into smaller, individual tasks. For example, if your agency has been asked to build a website from scratch, you'll need to list out tasks for every stage of the project around:
💻 Front-end/back-end development
🐛 Testing/Bug fixes
Obviously, the task list will be different for every project. But the first step will break the project down into individual tasks, so when you assign them to team members with hourly rates, it'll be easier to calculate how much each of them will cost.
The only way to do this is to make sure you and your client are on the same page, and that your scope of work is an accurate reflection of what they want out of the project. As Up at Five's Trudy MacNabb tells Shopify, non-technical parts of a project must also be considered at this stage.
“This includes emails, in-person meetings, phone calls, and generally managing the client—you want to build those hours into your budget as well. Don’t underestimate the time it takes to manage a project effectively. Scope creep happens in all areas of a project, not just from a technical perspective."
While not every estimate turns into a project you'll end up working on, if the client does end up hiring you,you'll be glad your cost estimate is accurate come invoicing time.
Step 2: Identify and allocate resources to tasks based on your team’s capacity
Next, you need to make sure that you have enough people with the right skill sets to complete the tasks.
This comes down to team capacity. One of the biggest issues that team leaders struggle with is recognizing whether their team has space on their calendars to take on new tasks or not. This is likely the result of inadequate capacity planning, which helps determine if there are enough people to get a project done based on availability and skill sets. By using capacity planning, you can also find out:
- If you will need to delay or cancel a project in your pipeline because you don't have enough people or the right skill sets do get a project done on time
- If you'll need to look for outside help like contractors or freelancers to fill the skill/availability gap to keep a project on track
Are you sensing a pattern?
It's vital that you have the right number of people and the necessary amount of time to get a project done. DesignLi's Laura MacPherson says successful projects are successful because teams are equipped with highly skilled people that know how to get stuff done.
"As Jim Collins says, you need to get ‘the right people on the bus, the wrong people off the bus, and the right people in the right seats.’ When you’re choosing your team members, look for people who are specialists at what they do and who have a history of producing work on time and working with others in a team environment to accomplish a common goal. The people you select will make or break your project."
Once you've identified the skills and availability of your people, it's time to get to the crux of project cost estimating—calculating the length and costs of those tasks.
Step 3: Estimate the task length to create a project schedule (with some buffer)
It's natural for team leaders to underestimate how long tasks will take. But when it comes to project cost estimation, we must get real.
"In order to protect yourself from these sorts of scenarios, it’s better to overestimate a client when it comes to time and allow for a margin of error. For instance, in Vintage we tell clients that it should take 1.5 times longer than what is usually needed. If we finish the job faster, then we’ll exceed clients' expectations once again. If difficulties do crop up, we would get the project done on time anyway."
However, there's an even better way to plot the duration of a project accurately, and that's by using time tracking. Before Impression started using time tracking, they had no way of logging their team's daily hours or see their estimates vs. actuals. “If a project has pivoted scope, or perhaps client feedback is taking longer than expected, this usually has a domino effect on the remaining time and phases scheduled,” says Managing Director, Charlie Hartley.
“The calendar view and being able to map out everyone’s time has been invaluable for us. We’re able to see the full team’s activity for any given day, or weeks ahead, including who’s in and out of the office, who is booked up with meetings, or is away on holidays."
Pro-tip: Working your team at a 100% utilization rate will lead to burnout. An ideal utilization rate is 80%, leaving your team some free time to catch up on emails or brainstorm with colleagues. If you want to learn more about how to calculate resource utilization, check out our guide here. 📖
Step 4: Calculate the project cost based on a chosen estimation method
Here is where your data comes into play.
If you have kept records of similar projects your agency has already completed, you can use them to analyze how long each task took and how much it cost you. Without data, you'll need to create rough estimations, so reach out to your team and ask them to help you decide how long each task should take.
Remember, it's better to be honest about your estimations and how long you think each task on your list will take. If you don't allocate enough time to each task, it can chew into your project's profit margins!
Three methods of project cost estimating
The project's scope should dictate the budget, not the other way around. Here are three calculations you can use to make sure your project cost estimate is accurate.
1. Ballpark estimate
A ballpark estimate will give you an approximate value of a project based on speculation.
Does your client know their budget? If not, a ballpark calculation will give you a rough estimate to offer your client to see if they can afford a project before it kicks off. Usually, this calculation is a combination of similar projects you've done in the past as well as any expenses unique to the particular project.
Let's say your client needs a website built and your team has done similar projects in the past for $10k. Using the ballpark estimate, the cost might range from -25% to +50% ($7.5k - $15k).
Simple, right? Yep. Although it's not the most detailed way to estimate the cost of a project.
2. Parameter estimation
A parameter estimation uses past data to give you a more reliable estimate of a project's overall cost.
First, calculate how much time will be spent on each task on your list. Next, add a cost figure by multiplying the hours of each task with each team member's hourly rate.
Task Duration × Employee's Hourly Rate = Task Cost
Once you have calculated the cost for every task, add them all up to reach an estimated total.
Although this method is more time consuming than a ballpark figure, it's also more accurate. It works best for projects that have concrete start/end points for tasks, like social media management.
Pro-tip: Resource scheduling software is a great way to calculate task costs reliably and efficiently. Set the billable hourly rate for each of your team members so you can quickly see the cost of assigned tasks against your project’s total budget. It also removes the risk of any human error of manually entering data into a spreadsheet!
3. Three-point estimation
A three-point estimation is a way to calculate a project's cost based on likely, optimistic, and pessimistic cost projections.
The benefit of a three-point estimation is that it ties a project's costs to uncertainties and risks, which allows you to plan for "worst-case" scenarios.
Let's take our earlier example of building a new website, which costs around $10k. Your costs could look like this:
💰 Likely cost: $10k
😃 Optimistic costs: $7.5k
😟 Pessimistic costs: $15k
These three figures become a basis for building an average estimate. Simply add them together and divide by three:
10,000 + 7,500 + 15,000 = 32,500
32,500 ÷ 3 = 10,833
As a result, the average project estimate is $10,833.
Make sure that if you're using the three-point estimation, you're still accounting for time buffers and overheads. Futur's Chris Do reiterates the importance of accounting for overheads in a project cost estimate, saying it's key to turning a profit. He says it's essential to mark up costs and not underestimate how long a job will take while remembering to budget for other things like software costs.
Step 5: Use project cost estimating tools to track budgets in real time
Finally, it's crucial to keep track of a project once it kicks off.
It's normal for a project to hit speed bumps, and if you're not keeping on top of changes as they happen, it can completely derail a project and throw your budget out of whack!
Using a resource management tool, you can track a project's budget automatically—from kick off to completion. For example, Float helps team leaders track their project spend in real time when allocating hours to a project. The hours will be shown as "capacity hours," and each time a team member logs hours worked on the project, they are deducted from the budget to give you an accurate estimate of how much time is still available:
Want to use the dollar figure instead? No problemo! Float can do that, too. Just add in the project's budget, and it will track spending based on your team's billed hours and individual hourly rates.
Not only does this mean no more manual spreadsheets to track spending (and we are not sad about that), Float also alerts you when you're in danger of going over budget.
Before Impression started using a resource management tool to plan its projects, they were having difficulty tracking their team's billable vs. non-billable time.
“We were shocked by the gaps and lack of accuracy in our own data—it was then and there that we decided that something needed to be done. We rely on our reports in Float to let us know when we’re on track with project budgets or to give us a heads up if we’re looking to run over.”
You can also use tracking to check the profitability of a project once it's done. VCFO does this when its team spends time sourcing talent for finance, HR, accounting, or c-suite professionals. Recruiting director Vita Trevino-Garcia says using resource management software helps them calculate whether their overall project fee was profitable.
For example, if one of VCFO's sourcers spends 10 hours looking for a professional, and another spends 5 hours on the same search, the company has spent a total of 15 hours on the project. Trevino-Garcia says once the right hire has been placed with their client's company, they look back to see how much time was spent sourcing the hire and if they made a profit. If they paid their sourcers $40/hr, their overall project costs total $600. They then match that figure with the one they charged their client. "This gives us a very clear picture of our ‘cost of hire’ for every placement," says Trvino-Garcia.