Project cost estimating is the process of predicting the total cost of the tasks, time, and resources required to deliver a project’s scope of work.
Unfortunately for project and resource managers, humans can’t see into the future 🔮 and that’s what makes cost estimation for projects a daunting task.
But even if you’re not a clairvoyant, there are several methods and tools to help you create cost estimates that will be close to the project’s actual cost. We’ll cover them below, including:
- What a project cost estimate is
- How to create one
- Methods and tools for cost estimation
Plus, we’ll also give you an example of how one of our customers figured out how to estimate costs for a new project.
What is cost estimation in project management?
Project cost estimation is the process of forecasting the financial resources required to complete a project successfully. It involves analyzing various factors such as labor, materials, equipment, overhead, and other expenses associated with the project to come up with an estimate of the total cost.
Cost estimation is a critical aspect of strategic project management as it provides stakeholders with valuable information for decision-making, budgeting, and resource allocation.
It helps ensure that projects are completed within budget constraints and enables project managers to identify potential cost overruns or risks early in the project lifecycle.
Imagine you’re a digital agency owner about to send a proposal to a client to revamp their website. Your main question is probably: How much is this going to cost us? Well, one way to figure that out is by looking back at a similar project you’ve tackled before: how long it took, who was involved, and what they charged per hour.
If you’ve been storing all this project info in a dedicated resource management tool, accessing these details should be a breeze.
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5 project cost estimation methods & techniques
You can estimate how much a given project might cost in different ways. Here are five cost estimation techniques and who they might work best for—but remember, this list is not exhaustive.
1. Analogous estimate
Analogous estimation is a top-down approach that uses historical data from similar past projects to estimate the cost of a new one.
Let’s say you want to estimate the cost of an advertising campaign for a new Netflix film: you’d look at the cost analysis of a past project that is similar in size and scope and make some adjustments based on changes in equipment, inflation rates, and resource costs.
This cost estimation technique is best for you if you have a reliable record of the cost and duration of past projects.
2. Bottom-up estimate
Bottom-up estimating is where you estimate the cost for individual tasks or components of a project and then sum them up to get to the total project cost.
It involves creating a work breakdown structure and including overheads for contingencies.
This cost estimation technique is best for projects with a well-defined scope and list of tasks.
3. Parameter estimate
Parameter estimation is a method that makes predictions or estimates based on specific characteristics or data points. It’s like making an educated guess using known factors or measurements.
For instance, a paid ad agency estimates that reaching the target audience on a specific platform might cost $4,000 based on past campaigns and the client’s objectives. So they project that creating multiple ad variations could cost $10,000, and they sum up these estimated costs to provide the client with an overall estimate for the advertising campaign.
Parametric estimation works best when you have a lot of information from similar projects in the past.
4. Three-point estimate
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 say you’re to find the cost of building a new website. Your estimate 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.
Three-point estimates are best for where there’s a lot of uncertainty or variability in the tasks or projects.
5. Ballpark estimate
A ballpark estimate will give you the approximate value of a project based on the combination of similar projects you’ve done in the past and 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).
Ballpark estimates are best used when there’s limited information available like at the start of a project.
How to create accurate cost estimates using a dedicated tool
The cost estimation process we will outline below is best suited for you if
1. You are running a professional service business, not an internal project
2. You have some idea of how much things cost based on historical data
If you don’t have any historical cost data, you can skip to the section below this one to see how to estimate costs for new projects. Note that we will be using our tool, Float, throughout this example; if you are using a different tool (or none at all) some parts of this may not be applicable, but the overall approach remains the same. Here is how you can create accurate estimates:
1. Gather data from past projects
Start by collecting data from past projects that are similar in scope, size, and complexity to your current project. This data should include total costs, duration, resources used, and any other relevant information.
To find similar projects in Float, here’s what you would do:
- Head over to the Project tab in Float
- Toggle the project view options to “Archive” and voila, all your old projects will apply
If you don’t have any projects in Float, you can sign up for a free 14 day trial, import your project details in, and get started. You can learn how to get set up with this guide.
2. Identify variables and adjust costs
A few things (or a lot) might have changed since you worked on other similar projects. Before estimating costs for new projects, look for any changes from previous work like higher billing rates or pricier software like VFX instead of CGI.
Aside from cost, consider how durations might have to change. Check if certain phases in past projects took longer than expected and adjust for new projects accordingly.
You can easily check for variations in duration by heading to the Report page in Float and comparing the actual and scheduled time spent on tasks.
3. Create a tentative project to calculate the estimated costs
By now, you should have a good idea of the people, duration, and billing rates you need for the new project.
To get a good idea of how much will cost, create a tentative project in Float. You can do this by simply selecting Tentative on the project menu.
Then, allocate your team’s time to the project and set your budget type and billing rates. You can use placeholders if you plan to hire freelancers.
Because the project has been marked tentative, the new allocations will not affect your team’s time schedule.
Once you are done setting up the project, head over to the project report to check for the total estimated cost.
4. Review the estimate with your team
Verify the estimate with stakeholders, experts, or team members to ensure its accuracy. Different team members might notice things that were initially overlooked. This process helps uncover any missed details or factors in the initial estimate.
A real-life cost estimate example for new projects (without past data)
One of our customers, a marketing and communications company, took on a project they had never worked on before (we’re not going to share their name to protect their privacy 😉)
Since they had not done similar projects in the past, they anticipated a learning curve and expected to spend more time than initially scoped due to several potential client revisions.
To accommodate this uncertainty, they added buffers—increasing the estimated cost by 50% and extending the project duration from 30 to 45 or 50 working days.
These measures allowed them to manage additional costs caused by a slower pace and multiple rounds of client feedback.
Use resource management software to track and control costs in real-time
When your project budget gets a thumbs up, there lies a new challenge of cost management and control. The things to pay attention to never end!
This is where a dedicated resource management tool can help you not just make estimates, but also track spending as it happens, ensuring that you always know how much money is available and when you’re running out of funds.
And, yes: you can also do this in a spreadsheet. But if you track your projects in Float, you can just click on a project and see the entire budget. Ta-da!
Depending on the budget type you choose, you can either see the budget displayed in hours or currency.
You can see how much was spent per project phase and the remaining budget.
You can also keep tabs on your team’s hours and individual rates. And if there are cost overruns, Float alerts you by showing how much over budget your project is.
If you’re ready to take control of your project costs, sign up for a free trial today.
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Some FAQs about project cost estimation
What factors influence cost estimates?
Several elements can influence cost estimates. These cost elements include:
- Scope of work
- Labor cost
- Material costs
- Equipment costs
- Project duration
- Market conditions
- Location factors
- Inflation rates
- Contingency allowances
Who performs project cost estimation?
Cost estimating can be performed by various individuals or teams depending on the nature and size of the project. This may include project managers, cost estimators, engineers, financial analysts, and other relevant stakeholders.
How can businesses choose tools and software for estimating costs?
Choosing the right estimating software depends on several factors, including the specific needs of your organization, the complexity of your projects, your budget, and the features you require.
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