Project cost estimation: steps to prepare the optimum estimation

Posted on Mar 26, 2023 at 10:03 PM

Estimating the project's cost and preparing an appropriate budget for both the company and the customer is an art of operation in management. The client wants more for a small payment, while the company seeks to increase the profit margin.

In this article, you can find out the cost and importance of the project and the most important technologies used in it and its types, and how to prepare an accurate estimate that meets the ambitions of both the company and customers.

What is the project cost estimation?

The cost estimate of the project is a process or management technique in which all resources, time, and tasks needed to complete the project are identified and controlled. The accurate cost estimate ensures that the company can remain within the acceptable scope of the budget once the project is started.

The cost estimate for the project is an integral part of project management. It is the Director's responsibility to balance the budget to cover all tasks required to complete the project and to use appropriate assessment techniques to conceptualise the project's scope and thus determine the costs of each job.

The project budget combines direct and indirect expenditures to estimate the total cost of delivery over time while meeting quality expectations, which means considering all the requirements for the project's success during the costing process.

Knowledge and knowledge of the project's scope help in the planning phase and throughout the life cycle, especially during the implementation, monitoring, and management phase.

What are the essential techniques for costing the project?

There are different types of costing techniques that the manager can adapt the method he needs to determine the costs, including:

• Similar rating:

This estimate generally depends on the financial budgets of previous successful projects and their application to the current project. This technique is helpful in the early stages of project development, where a lot of accurate data and details still need to be clarified, and the manager needs to prepare a preliminary budget scenario. Still, it later requires adjustments to suit the project more.

• Upward rating:

By adopting an upward cost estimate, the cost of each separate task can be accurately calculated, allowing for a clearer picture of the overall budget, in which case the Director can determine whether or not new aspects of the project can be funded, with each section or team already having resources and staff that can be allocated to the project.

• Barmetry Recognition:

This type uses algorithms, modelling, statistical relationships, and other variables to predict future costs and calculate budget estimation. For example, the square foot is used in engineering construction operations.

It is quite the opposite estimation. While the exact estimate compares with the current and previous budgets, the parameter estimate depends on the algorithms and mathematical formats for costing, which means more accurate calculations.

• Three-point rating:

This type benefits project managers in preparing accurate cost estimation through three scenarios, namely:

• Optimistic estimation: Determining costs based on the best or most optimistic scenario.
• Most likely estimation: Determining costs based on the most likely scenario.
• Pessimistic estimation: Determining costs based on the worst or most pessimistic scenario.

The scheme or project manager will add all costs from the previous three scenarios and divide the output by three to obtain the final estimate. This estimate will avoid the results of excess optimism and consider emergencies that could hinder continuity and progress.

What are the steps for preparing the project cost estimation?

By following the following steps, the best project cost estimate can be created, namely:

• Target Setting:

The first step begins with determining the objective or purpose of establishing the estimate, the level of detail required within it, who will receive the assessment, and the project's scope.

• Plan Development:

At this stage, the task force responsible for developing the estimate should be assembled to outline the techniques, set the timetable, and determine who is responsible for establishing the independent cost estimate.

• Specification of characteristics:

The objective of appreciation, work system, and performance characteristics, including tables, strategies, system configurations, technological techniques, and relationship with existing systems, are described. Security, support, testing, risk, deployment, production, maintenance, and all similar legacy systems must be remembered.

• Identification of techniques:

This step determines the structure of the division of labour while selecting the most appropriate assessment method for each structure element and checking costs. Finally, a checklist must be prepared.

• Identification of rules and assumptions:

In this step, you must determine what matters should be included in the estimation and what are excluded from it and select all assumptions.

• Estimating for each point:

During this stage, a cost model must be developed by estimating each division of labour structure element.

• Conducting sensitivity analysis:

It is checked in this step how sensitive the costs are to the circumstances and variables.

• Conducting risk and uncertainty analyses:

Costs, schedules, and all technical risks related to each division of labour structure component and how they are managed, monitored, and followed up continuously must be studied and determined.

• Documentation and submission of the estimate to the Department:

After all analyses and tests have been completed, each step of the assessment process must be documented, after which it must be submitted to management for evaluation and approval.

• Updated cost estimate:

The estimate should be updated upon any new change and reported.

What are the top tips for preparing the project cost estimation?

The following tips help improve the accuracy of cost estimation and include:

• Ensure that the budget is appropriate for the scope of the project:

A low-cost estimate may be attractive for many businesses, but problems that need additional funding can arise during the implementation phase. If that funding is not secured, it may need to adjust the project scope and implement only tasks that remain within the potential.

• Inclusion of emergencies:

The best solution for any project is to take into account the additional costs when budgeting to avoid subsequent adjustments to the scope of the project, including emergencies can ensure that you do not stop when facing funding problems.

• Allocate sufficient time for accurate assessment:

Speed in the preparation of the estimate has caused some unwanted errors, with the possibility of excluding the budget for critical activities that would make the project successful; in this case, the successful experience and strategies of previous projects are more beneficial than relying on testing new systems, especially in the event of limited time.

• Compare the current project with previous projects:

Suppose a team is committed to a project based on previous experience. In that case, the team can complete the work at a specific time with great confidence due to its position and earlier completion of a similar project, but this is only sometimes useful. Some projects require more time and activate cost control techniques and staff to finish them.

• Breakdown of estimation:

Preparing a high-level estimate may provide only some of the information about the budget. Still, team members need to know their shares of it to perform their tasks accordingly, so splitting the estimate into detailed tasks and providing all the details within it is helpful for both the workers and the project manager to avoid a budget shortfall in the middle of the project.

To sum up,

By adopting one of the techniques above to estimate the project's cost and pairing it with some specialised training courses such as Project Cost estimation online Training, you can ensure accuracy in preparing a budget suitable for both the work and the project team.