If you are a project manager, you would be more competent in the planning and managing aspects of a project. However, it is equally important that you are able to estimate costs so as to successfully close projects within a specified budget. The stakeholders and investors in your project have certain expectations of making profits. A project manager’s task would be to determine ways to get the maximum returns on investments. If you estimate project costs accurately, you will be in a better position to manage within the budget.
The following are the main benefits of estimating project cost:
- It helps to gauge the feasibility of the project while comparing the anticipated benefits versus the anticipated costs.
- It helps to analyze whether sufficient funds are available to run the project.
- It serves as a benchmark to ensure that financial resources are utilized in the best possible manner.
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Project Budget will include direct costs as well as indirect costs. Direct costs can take the form of salaries of team members, travel expenses, machinery and equipments for the project, raw materials and sub-contracts supporting the project. Indirect costs involve employee benefits, rent, furniture and fixtures and administrative costs.
The 4 major techniques of project cost estimation are mentioned below:-
This method is used to estimate project costs when you have very little detail about the project. Therefore, this technique may not give a reliable and accurate estimate. It is also called as Top-Down Estimation. In the Analogous Estimation, the project cost is estimated by comparing it with similar projects previously completed within the organization. You will have to select a project which is the most similar to your project and use sound judgment to determine the cost estimate of your current project. This technique is the least time-consuming and does not cost much to arrive at an estimate.
The only difference between Analogous Estimation and Parametric Estimation is that Parametric Estimation uses historical, statistical data to calculate cost estimates. This method involves taking different variables from similar projects in the past and applying them to your current project. Note that the measurement should be scalable in order to be accurate. For example, if in a previous construction project, the cost of concrete per cubic meter was $100, then to calculate the cost of concrete for the current project you need to multiply it with the total construction area in cubic meters. In the same way, requirements of man-power and materials can be calculated and thereby the inherent costs.
This technique aims at reducing the biases and uncertainties involved while making estimating assumptions. So, instead of having just one estimate, three estimates are determined and then aggregated to arrive at the Three-Point Estimation.
The three different estimates are determined as follows:
- Most Likely Cost (Cm):Considers a normal scenario where everything goes as per the plan.
- Pessimistic Cost (Cp):Considers the worst scenario and assumes that everything goes wrong.
- Optimistic Cost (Co):Considers the best scenario and assumes that everything goes better than what was planned.
The PERT Estimate Formula is: Ce = (Co + 4Cm + Cp)/6 where Ce = Estimated Cost
Cost estimates derived using this formula are more accurate than the previous two techniques since the biases, uncertainties and risks are done away with.
This technique is the most accurate, costly and time-consuming method of cost estimation. Here, the cost of every single activity is estimated and then added up to arrive at the total project cost. For this purpose, the project manager has to first list out all the activities, tasks and other requirements in great detail before beginning the cost estimation. However, this technique can be used only when every detail about the project is available.
We have seen the various ways in which cost can be estimated. But, a project manager has to use his sound judgement to determine the most suitable technique depending on the availability of historical and statistical data as well as the time to calculate the most accurate cost estimate.