How to Make Accurate Project Cost Estimation

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how to do accurate project cost estimation

Project cost estimation is an essential part of project management, as it provides a basis for project planning and funding. Accurate cost estimation helps to ensure that a project will not run over budget, and it can also help to avoid scope creep by identifying potential cost overruns early on.

This is the third article in our Back to Basics Proteus Project Management Guide. Our aim is to give an overview of the tools and techniques commonly used in energy sector project management over a series of digestible, easy to read posts.

There are a number of estimation techniques that can be used for accurate project cost estimation, but the most important thing is to use the technique that is most appropriate for the project in question. For example, if a project is at the early stages of the project life cycle, a rough order of magnitude estimate may be sufficient. However, if the project is nearing completion, a more detailed bottom-up estimate may be required. The accuracy of cost estimation can also be improved by involving key stakeholders in the estimation process. By taking these factors into account, cost estimation can be made simpler and more efficient.

How easy is it to get project cost estimation wrong?

As a project manager, one of your key responsibilities is to estimate the cost of the project yet, this can be one of the most challenging parts of the process.

It involves predicting the amount of financial resources or the number of work hours it takes to complete a project. It is important to get this estimate right because it can impact the project’s budget and timeline. If you overestimate the cost, you may not have enough money to complete the project. On the other hand, if you underestimate the cost, you may end up going over budget.

Sadly, getting accurate project cost estimation wrong is all too easy. There are a number of factors that can contribute to this, including scope creep, lack of necessary information, unrealistic assumptions, and unforeseen circumstances.

1. Scope creep, in particular, is a major problem – as the scope of a project expands, so too does the amount of time and money that it will take to complete it. And once the snowball effect takes hold, it can be hard to get things back on track.

2. Lack of necessary information is often a major issue, as is the negative impact of office politics on decision-making. In addition, when multiple projects are utilising the same resources, it can be difficult to accurately estimate the costs. Consequently, it is essential to identify and address potential roadblocks in the estimation process in order to ensure accurate and reliable estimates.

3. Another roadblock is the negative impact of office politics. When different departments are vying for limited resources, accurate cost estimation can be difficult. Finally, lack of buffer and contingency can also impact cost estimation. If there is no allowance for unexpected expenses, the estimate may not be accurate. Consequently, these roadblocks can have a significant impact on the accuracy of cost estimation.

4. Unrealistic assumptions can lead to optimistic estimates that do not take into account potential problems that may arise during the project. Unforeseen circumstances, such as bad weather or delays in supplies, can also lead to increased costs and schedule delays. As a result, it is important to account for both known and unknown factors when making cost estimations for a project.

The good news is that there are ways to avoid these pitfalls. By taking the time to understand the scope of a project thoroughly before beginning work, making realistic assumptions about timelines and costs, and being prepared for the unexpected, it is possible to produce accurate estimates that will help ensure the success of your project.

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How to make an accurate cost estimation

There are a few things you can do to make cost estimation simple and efficient.

First, split up the project into a set of deliverables and give an idea of the scope of work. This will help you to better understand all of the tasks that need to be completed.

Second, estimating the time required to complete each task. This will allow you to get a more accurate estimate of the overall project cost.

Finally, don’t forget to factor in project contingencies. These are costs that are not part of the project’s normal work but may be required if unexpected events occur.

It is essential to base your estimation on data, rather than assumptions. This will ensure that your estimation is accurate and will give you a better chance of meeting your project deadlines and budget. To get accurate data, you will need to track the progress of similar projects and collect information about the resources that were used. This data can then be used to create a model that can be used to estimate the time and cost of your project. By relying on data, you can be confident that your estimation is accurate and that your project will be successful.

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Cost estimation methodologies

Throughout any industry that relies on selling time and resources, project time and cost estimation is essential at each level of the project. There are many different estimation methodologies that can be used, and the most appropriate approach will depend on the specific project. Some common estimation technique include bottom-up, top-down, analogy, parametric modeling, and three-point estimation. Each approach has its own strengths and weaknesses, so it is important to select the methodology that best fits the particular project. This is particularly true for highly complex engineering or construction projects. With experience, estimators develop a feel for which approach is most likely to produce accurate results in a given situation. However, no matter how experienced an estimator is, there is always some uncertainty inherent in any estimate. As a result, it is important to use multiple estimation techniques and compare the results in order to arrive at the most accurate estimate possible.

Analogous estimation is the process of using past project data to estimate the cost of a current project with similar characteristics. It’s often used when there is little data available about the current project. Analogous estimation is considered a high-level estimate. 

Parametric estimation is more precise than Analogous estimation. Parametric estimation uses mathematical models to estimate the cost of a project. The model is built using historical data and statistical analysis. Parameters are then used to calculate an estimate for the current project. 

Three-point estimation is the most precise cost estimation technique. It accounts for optimism, pessimism, and most likely scenarios when estimating the cost of a project. First, an optimistic estimate, a pessimistic estimate, and a most likely estimate are determined. These three estimates are then used to calculate the expected value of the project using the weighted average method. Three-point estimation account for more risk than Analogous and parametric estimation techniques making it more accurate.

Bottom-up estimation is considered to be the most accurate technique for estimating project time and cost. It involves estimating the cost of certain activities performed as part of a project and then aggregating them to obtain the cost of the whole project. Bottom-up estimation can be performed by a project manager with the assistance of team members (or a department) responsible for completing the estimated piece of work. This technique is particularly useful when there is a high degree of uncertainty surrounding the project, as it provides a more accurate picture of the potential cost and time required. However, bottom-up estimation can be very time-consuming, so it is important to weigh up the benefits before deciding to use this technique.

Why using project management software can improve cost estimation

Overall, accurate project cost estimation is achieved through the use of a variety of tools and methods. Project management software is one of them. It allows you to take into account all the necessary resources, costs (direct and indirect), as well as risks and dependencies when estimating the project. In other words, you get a more accurate representation of your project and can better manage its costs.

In addition, using project management software provides you with a number of other benefits, such as: 

– better control over the project budget; 

– improved resource utilization; 

– reduced costs associated with scope changes; 

All in all, if you are looking for a way to improve the accuracy of your project cost estimation and management, you should definitely consider using project management software like Proteus. It allows you to cost highly complex projects, breaking work into a detailed tree including tasks, deadlines, files, and communication. If you want to learn more about how Proteus can help your business run smoother and more efficiently, read our datasheet.

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About Xergy and Proteus

Xergy Group’s Proteus work management solution is designed to work with your existing systems and to scale and evolve as your business evolves. Created by project management leaders, for the diversified engineering consultancy sector. Proteus delivers an end-to-end work management software platform with detailed workflows from the early opportunity stage through to project delivery, compliant with common project management frameworks and ISO standards.

How to get Proteus?

Proteus’ project management software is a cloud-based system designed for businesses of all sizes to handle projects of unlimited complexity. Each Proteus feature is aimed at making bottom-line improvements by improving proposal win rates, resource utilization, streamlining workflows, providing quick and efficient access to resources, and reducing overheads.

One of the unique advantages of Proteus is that we offer a free onboarding consultation service to ensure the company account is set up according to your company’s needs. This makes getting your company up and running on Proteus quick and easy. Get your free Proteus demo here.

We recommend getting setup on a free trial. Proteus operates under a software-as-a-service (SaaS) model. We offer Enterprise packages and flexible pricing solutions: contact our team to learn more.

We designed Proteus to be simple, and that means you can get up and running on Proteus without an IT team or support from a programmer. You will want to spend a bit of time configuring the admin console so that you have everything set up to suit your company structure, but it’s very intuitive, and you don’t need a PhD in IT. However, we want you to get the best out of what is a brilliantly powerful tool, so don’t hesitate to ask for our support. We have a team of customer success experts who are ready to help you with the configuration process, so get in touch today by completing the form below.

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