Best Methodologies to Estimate Project Costs

Estimating project costs is one of the most fundamental components of the project management process. If inaccurately measured, the project will soon find itself riddled with budgetary constraints and mis-allocated resources. For project managers, it important to understand the best tactics for proper cost estimation and best practices to manage the work and complete the job.

Although technologies are available to streamline the cost planning process, provide real-time project feedback and collaboration efficiency, the best practices often come from those who have experienced troubled projects and can offer first-hand advice for proper budget allocation.

Think granular

According to James Stull, industrial mechanical project manager, PMs will benefit from breaking the project down to materials, equipment rentals, subcontractors and self-performed labor items. Doing so allows you to put a price tag on each item to determine project costs. PMs should then apply overhead and profit amounts before submission.

Plan through completion

PMs must differentiate between “current estimated cost” and “cost projected to completion” according to senior product manager Ben Loveday. The latter should to take into account price escalation and future market conditions, latent conditions, design error and estimates for the effects of extension of project time. Alternatively, “current estimated cost,” which are project-specific, can only be determined by a project-specific cost risk analysis, necessitate a view where the scope of the project progressively chages through design phases, including an estimate review process at planned points in the project program.

One step at a time

Boston-based Software Product Development Leader Gary Rucinski advises breaking the project down into three steps, which we translated to be broadly applicable, beyond software projects:

1. Estimate the major modules that need to be developed

• Translation: Estimate the major components of the project that need to be produced from scratch (engineering schematics, design specs, models, published materials, etc.).

2. Find existing software modules with functionality and complexity similar to the modules required for development

• Translation: Find analogous, comparable components from completed projects that have similar parameters.

3. Use historical data to find out how much the existing modules took to develop or reverse engineer the cost/effort using a software cost estimation model

• Translation: Almost the same as above – use actual cost and time information from completed project components to create a model to estimate the resources required for the planned project.

Having a cost model like this would allow you to do “what if” analysis to assess risk, changes in scope, etc.

Tap your project peers/expect setbacks

A PM that does not maximize available information from others working on the project are not only wasting time estimating costs, but are likely to witness more project setbacks than those who take advantage of the information from their peers.

Ray Sheen, instructor at Worcester Polytechnic Institute, recommends three key components to this process:

1. Outage Management: Get the most up-to-date engineering drawings and specs and then get firm quotes on everything. PMs should pre-position all equipment and material to avoid unexpected costs or schedule problems due to availability during the outage. From here, take whatever your estimated outage labor cost is and add 30% to deal with the unexpected that happens during the rush of the outage.

2. Process improvement projects: These have a tendency to grow and morph based on the root cause analysis. Set an “average cost” budget based on the past few similar projects, and as the project unfolds, the project tollgates to manage scope to fit the budget.

3. Software application projects: PMs must institute rigorous testing of any systems that integrate modules developed from multiple sources. Expect problems and build into the estimate time and money for debugging and retesting.

Think Ahead: Track Time and Put it to Use

Lesson learned from the project management office of a major health insurance provider:

Although it’s good to use status reports and the information from completed projects to estimate and re-estimate project costs, adding another layer of rigor really makes it possible to predict costs with accuracy. The project management office of a major health insurance group started tracking time within its project management software tool to make sure the hours spent by each individual involved on a project were captured and match up against status reports (automatically generated each week). With the new information, they made a leap from padding project cost estimates at nearly double the actual amount, to predicting with close to exact numbers. When estimates are so far off, it is an impediment to funding and completing projects. When estimates reflect reality, it’s immensely easier to know when to green-light projects (or can them) and proceed with confidence.

Bottom Line

Project cost dilemmas are inevitable, but proper procedures to minimize the impact and maximize accuracy are available, both in the form of technologies and through first-hand advice on best practices from veteran project managers.