What Is Cost Estimation in Project Management?
Have you ever struggled to put together a budget for a project? Using cost estimation can help to stay within scope.
There are a lot of different moving parts to every project, and staying within budget is a crucial element to a successful outcome. But how do you develop the actual costs for that budget? What goes into it and how do you know what to account for?
There are different material and labor needs for every project. And since those labor and material needs cost money, trying to keep those costs as low as possible can be difficult. You want your project to be a success and that’s why cost estimation can play a big role.
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What Is Project Management Cost Estimation?
You want all of the different parts of your project to come together smoothly and work with your budget. So while keeping your costs low is ideal, it can sometimes pose some challenges. That’s where using an effective cost estimation will help stay within the project scope.
By forecasting accurate cost estimates you can avoid any possibility of scope creep. Using cost estimation takes into account all of the different resources needed to complete your project. Everything from the labor and different materials needed.
Using that information, you’re able to determine expected costs for your project. You can identify any areas for improvement or figure out if the numbers work in a different way for your project needs or building costs. If your budget comes in too high you can make adjustments to focus on what you can afford.
How Does the Cost Estimation Process Work?
The more complex your breakdown structure, the harder it might be to estimate future costs. But there are two main costs that go into the cost estimation process. Direct costs and indirect costs.
Direct costs can get attributed to things like project departments, any equipment you need or materials used. It can also include areas like hiring or a third-party contractor or vendor.
Indirect costs include areas that your business as a whole uses. Certain overhead costs like risk control or the utilities that you might need to pay.
Some of the most common types of expenses include:
- Any equipment you had to buy or maintain for your project.
- Hardware and software like different computer resources
- Using specialized equipment or services
- Any resources needed to make the product or service
- The labor cost to complete the project
- Outsourcing any work to a third party like a vendor or contractor
Why Is Cost Estimation Important?
One of the biggest factors in the success of your project is your ability to stay within budget. But it can be easy for unexpected situations to creep up and require resources to be allocated somewhere else. An effective cost estimate of the time and resources needed for your project will help avoid those situations.
It can be easy to underestimate what might be needed. So seeing all of the different cost estimates for your project will help you build a stable foundation to build off of. Your estimates will become far more accurate and you can ensure that individual tasks are completed.
You can do this because you’re able to accurately plan what’s coming. The tasks for the project are assigned and you have the resources that you need in place. You can then efficiently schedule work for staff and assign different project timelines.
The relationship that you have with your clients can also improve since everyone is on the same page. They understand what’s coming and the detailed cost estimates. So there will be no surprises and your working relationship will continue to grow.
When you understand the tasks and the timelines that go along with them you can also improve your resource management. Since you have identified any deliverables and needs, you can allocate resources more effectively.
It can be overwhelming trying to balance all of the different costs and needs of a project. Not only do you want to make sure you have everything in place, but you also want to make sure it aligns with your budget. There’s a lot that can go into detailed estimates for project management.
Here are a few other things to consider when you’re preparing an estimate:
- Have a clear breakdown of all of the work that you will complete as part of the project
- Know exactly when the work will be completed and the details of what it will include
- All of your company and customers information
- Any relevant terms of doing business with your company like any payment terms or if a deposit is required
- Any taxes that will get charged
The best thing that you can do to find the most accurate estimates is to have as much information as possible. When you better understand exactly what’s needed and when it's needed, you can plan accordingly. You will have a much better sense as to how much everything will cost and where you can spend most efficiently.
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