To be best at their roles, project managers perform a number of duties throughout all the stages of the project life cycle. All the phases of the project life cycle are critical for the delivery of a successful project, but the planning phase is the most important of all as it specifies the different frameworks to complete the project on time. These frameworks are scope, timelines and budget.
The budget of a project can affect almost all aspects of the project. An incorrectly set budget can lead to wrong asset allocation, unrealistic anticipations, and maybe ultimately to a failed project.
It is a must that the cost estimation in project management has to be accurate if you want the project to be successful.
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Table of Contents
What is Cost Estimation?
When a business estimates the total cost of a project by precisely defining the scope of work, it is known as cost estimation in project management. In this process, it is necessary to look at the tasks, duration as well as resources required to predict the overall cost of a project.
This might not be an interesting part of your work to estimate cost, but if you do it accurately, then it can make a great difference between a successful project and one that fails.
Many projects fail because of continuous or uncontrolled changes to their development and a timeline. Thus, team leaders need to be more vigilant during the planning and forecasting stages to make sure that their project cost estimates are correct and that they are only taking on work that is financially viable.
The cost estimating of a project depends on relating costs to a scope of work. Project managers also need to work on outlining how much time the task would take to complete and who will do it along with carefully tracking the project.
Estimating the cost of a project does not end when the project starts; you need to monitor as well as adjust it as it progresses.
Why is Cost Estimation in Project Management so Important?
In order to be a successful project manager, you must adhere to three things: time, scope and budget. Project managers who are unable to stay within the budget can soon find themselves losing their projects because you already know that nobody wants to work with someone who is continuously going over budget.
One best way that ensures that your projects stay on budget is that you need to get really good at estimating how much a project will cost. Cost estimation enables you to accomplish what you promise to accomplish within the financial restrictions imposed by executives and stakeholders.
When it comes to setting up a project’s parameters, precise project cost estimating must come first as one of the defining elements for a successful procedure.
Reasons for Wrong Project Cost Estimates and Its Effects
Often it happens that project cost estimates turn out to be inaccurate. The main reason for this is that cost estimates are made during the proposal process as during the proposal process, you know the least about the project. Apart from it, there can be many other aspects that can jeopardize the quality of cost estimation in project management.
The following are some frequent traps to avoid that can jeopardize the accuracy and reliability of your estimates:
1. Costing Data of Past Similar Projects
It is normal practice to look into expenses incurred in a previous similar project while you determine the project budget. Although it is considered to be an easy as well as established technique to get an estimate of the project budget, keep in mind that this method has its own flaws.
As you know that every project is unique, so it is a good idea to use different costing approaches for each project.
2. Shortage of Competent Resources
Most organizations lack a costing and estimation department and there is a team assigned to estimate the project cost during the bid phase of the project. It is also certain that not all the members of the team receive proper training in costing.
Cost estimation done by incompetent team members can lead to many mistakes in project costs. Therefore, the costing team needs to be competent enough that they can comprehend the consequences of their acts of omission and commission.
3. Dividing One Task Among Multiple Persons
If there is more than one person working on a task, then distinct protocols must be established; hence requiring more planning as well as management time. But this is usually overlooked. So, it does not only result in delaying the task but also increasing the possibility of overshot deadlines as well as estimates. Ultimately you will find that splitting a task among numerous team members proves to be more expensive than you initially anticipated.
4. Not Analyzing the Lessons Learned from Past
Companies not using the effective practices of documenting what they have learned before the project closure of the previous projects can experience inaccuracy in their cost estimations. Moreover, companies usually repeat the same errors over and over again.
If you include the same team for costing and project execution, then it will not help in solving the problem as they might not remember each area of cost overrun. It might also be that they are unable to comprehend the causes for increasing expenses. So, they would not be capable of implementing corrective as well as preventive measures when they develop costs.
You must analyze lessons learned from the previous project for cost overrun. Estimate the likelihood of recurrence and include enough contingencies to meet any unexpected surprises.
If the extra expense was because of incorrect technical specifications. Then a great way to lower the cost of a new project is to approach the customer to revise the technical specifications.
5. Impacts of Project Schedule on Incorrect Cost Estimates
This can be quite expensive if you ignore the project schedule. Keep in mind the overall execution schedule while developing the project expenses. If the procurement activity is expected to begin after 6 months from the start of the project, then market conditions are anticipated to prevail during that time. Adjust the expenses with a relevant element that is able to account for cost increases.
6. Some Other Effects of Incorrect Cost Estimations in Project Management
Project cost estimation errors have serious consequences for any project. The below section gives an overview of the other most common consequences of incorrect cost estimates.
- Cost projections that are incorrect can severely reduce project margins.
- The project could face numerous delays.
- Cost estimates that are incorrect may result in a project being shelved.
- Due to significant cost irregularities, the organization may elect to discontinue the project.
- The quality of deliveries may be affected by incorrect cost estimates.
- Overall client satisfaction can fall.
What are The Best Cost Estimation Methods to Avoid Inaccuracies?
Cost estimation of a project requires splitting it down into individual tasks as well as determining which team member can do what. Once the project is in the process, then make sure that you have an objective in mind of not overspending as well as derailing your budget.
Cost Estimation is a procedure that can be divided into 5 steps:
1. Make a List of Tasks and the Resources Required to Complete Them
The first stage in estimating project costs is determining which tasks and resources are required. Breaking down the projects into smaller individual tasks is the simple way to do it. For instance, if your agency has to create a website from scratch, then you can create a task list for all the stages of the project.
However, the task list for all the projects will differentiate from each other. As the first step will be to divide projects into individual tasks, it will make it easier for calculating how much every project will cost when you assign them to your employees.
There are many tools available online that can help you in the cost estimation in project management and PoofHub comes among the best. ProofHub is a work management and team collaboration tool that can help you in the cost estimation of your projects.
ProofHub’s custom fields feature assists you in tracking budgets as well as costs related to your project or workflow. Using ProofHub, you will also be able to divide your projects into multiple tasks lists and can create a task list for all the phases of your projects. The custom field not only enables you to easily manage finances but also helps you to keep such information confidential. ProofHub even lets you limit access to these fields and restrict the visibility to some particular people, thus making sure that you have the finances of your projects secured.
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Assign Tasks Based on the Capacity of Your Team
After the first step, you need to ensure that you do have enough people who have the right skills to finish the tasks on time.
One of the most difficult issues that managers can face is when it all comes down to identifying whether their team has the time on their calendars to start new projects. This all happens because of the inaccurate planning. An accurate and defined planning can help to determine if there are enough people to finish projects on time according to their availability as well as skillets. With the help of capacity planning, you will also be able to figure out:
- If you have to delay or cancel any project in the workflow as you lack enough people or the people with the right skill sets to deliver the project on time.
- If you need to recruit contractors or freelancers to address a talent or availability gap in order to keep your project on the right track.
So, it is crucial for you that you recognize the right people for your projects to get the project done. When recognizing the right people for the job, look at the people who are experts at a particular kind of work and have a history of delivering the work on time and working with other team members to achieve the common objectives.
Once you have recognized the skills as well as the availability of your people, then the next thing comes down to the most important and difficult part of project cost estimating; calculating the length as well as the expenses of those tasks.
1. Add Buffer and Use Time Tracking
It’s common for team leaders to underestimate the time required to complete projects. However, when it comes to project cost estimation, it’s critical to be realistic – for the sake of your project and, more crucially, your team.
It can help by adding a buffer to a project’s planned duration to compensate for unforeseen delays and other circumstances such as sick leave.
However, there is a better technique to precisely track the duration of a project, and that is to use time tracking. With ProofHub’s time tracking feature, you can add timesheets, set time estimates, track time manually or using timers, and can access all of your time data at one central place.
ProofHub also allows you to create custom reports of your employees as well as projects and you can also see logged hours pulled right from your timesheets and this all is possible in one time tracking software.
2. Be Honest Regarding the Estimates
If your organization has records of similar projects completed on time in the past, then you can use them to figure out how long each task took and how much it cost. Without data, you’ll have to make guesses for estimations, so ask your staff to assist you in determining how long each task should take.
Keep in mind that being honest about the estimates and how much time each task can take on your list is the best way. If you don’t give each assignment enough time, it will eat into your project’s profit margins.
3. Utilize Project Cost Estimation Tools to Track Budgets in Real-Time
Finally, after the project has started, it is critical to keep track of it.
It’s natural for a project to meet roadblocks, and if you don’t stay on top of them as they occur, then they might entirely derail the budget of your project.
Using a management tool like ProofHub can help you in cost estimation as managers will be able to track their projects in real-time. Whether you want to calculate in dollars or any other currency, ProofHub lets you do it.
On the other hand, using Excel spreadsheets for larger projects you can experience more inaccuracies as estimation of cost starts to go in the wrong direction when you are in the middle of the project. Moreover everyone cannot agree on what the estimated baseline was. These issues become really serious when the project starts to slip away from your hands.
But with the help of ProofHub, you do not have to use any spreadsheet to estimate the cost of your projects as its custom fields let you have accurate cost estimation in a really easy way without any hassle.
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Conclusion
Cost estimation in project management aids you in the recording and tracking of expenses incurred in the project. However, it is not as easy as you think because there are a lot of managers out there who make inaccuracies while estimating the cost of projects. The reason behind it might be that they are using the wrong tool or their methods of cost estimates are not effective enough like explained above in the article.
But you need to keep in mind that the success of your project relies on the quality of estimates. For quality estimates you can use the above-mentioned methods because the better the quality of your estimates are, the more accurate your estimations will be.
