What Is Cost Estimation In Project Management?
Effort, scope and cost are the three cornerstones that form the basis of the project cost estimation process. To make realistic estimates, you must examine the project from all three aspects.
Lena Software
06 Sep 2022
Effort, scope and cost are the three cornerstones that form the basis of the project cost estimation process. To make realistic estimates, you must examine the project from all three aspects.
Cost estimation is the process of estimating the resources required to complete the project within the agreed time and scope. It is essential for finalising a project and making sure it turns out as planned.
Why Is Project Cost Estimation Important?
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First of all, project cost estimation allows you to decide whether to even start the project or not. You may consider not starting the project at all or narrowing the scope, rather than beginning work only for insufficient budget to cause it to be abandoned.
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Cost estimation provides an insight into how the project will unfold and prevents you from going into it blind. If potential risks are identified, you can put in additional support and make sure it is fully-costed before work begins.
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Estimating costs makes it easier to assess your budget accurately and helps you align your available resources with the workflow.
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Estimating costs ensures stakeholders are on the same page and helps them understand the areas needing flexibility and the differences that may occur as the project progresses.
Preparing a cost estimate should include drawing a roadmap and identifying milestones. As the name suggests, this is only an estimate. It is not possible to provide an exact cost for many projects as there are too many variables that could occur. Therefore, this process should be reviewed by selecting comparison points throughout the project. This helps increase your control over the project and prevent benchmarks from being overlooked.
Key Components Of A Cost Estimate
A project's cost estimation can be categorised in several ways, but there are two basic types:
Direct Costs: Costs that go directly into the project such as labour, materials, equipment, etc.
Indirect Costs: The ongoing costs of the organisation that are partially allocated to the project such as quality control, security costs and utilities.
Classifications as broad as direct and indirect costs are usually insufficient when producing a cost estimate for a project.
Instead, costs should be separated into more specific categories:
Materials and Equipment: The cost of resources required to produce the product
Labour: The cost of the employees who will participate in the project in terms of wages and time
Service: Works that need to be provided from outsourced companies
Facilities: Cost of using and renting workspaces or tools that the company does not own
Risk: The cost of the contingency plan required to minimise potential risks
After the cost estimations are completed and approved by the stakeholders, you should use project management software to compare the process to your estimation. This will help make sure you remain on the right track and help you manage your workforce effectively.
Even with the best prepared projects, changes are inevitable. To find out how to manage change requests effectively, read our next blog.
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