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Cost Estimation Hacks for Your Project
Cost estimation is one of the most important parts of a project. It ensures that projects are delivered within a stipulated timeline, within the financial limits, and with the required quality. Thus, in this article, we will discuss tips on how to approach your project's cost estimation and estimation techniques that you can apply during the process.
What is Project Cost Estimation?
Project cost estimation is the process of forecasting or predicting the costs, time, and resources required to complete a specific project. Cost estimations take all forms of direct and indirect costs into account to arrive at a detailed budget for a project. For example, direct costs could range from labor to costs of equipment. On the other hand, indirect costs are tilted towards expenses like quality control. To arrive at an estimate for a project, these predicted costs are aggregated to arrive at a total amount that would serve as the overall budget.
Why is Cost Estimation Important for Your Project?
On many fronts, cost estimation is the backbone of a good project. This is because it largely determines the success or failure of a project. Regardless of this, cost estimations are important for the following reasons:
  • Budget Creation

    For many project managers, budgets are instrumental from the point of kick-starting a project to the point of its completion. This is because budgets create certainty of a project's cost limits. This way, you would be able to decide whether you have the requisite financial capacity to undertake a project. Also, in cases where a client is involved, carving a budget from the cost estimate would help ensure that the project's requirements are streamlined to the client's financial expectations.

  • It Ensures Project Longevity

    When you embark on a project without a proper cost estimate, you run the risk of cost overruns. There is equally a higher probability that you will over-allocate resources to tasks. This could lead to resource wastage. On other occasions, your costs may increase to the point where you would be unable to continue the project. In essence, a near-accurate project estimate would ensure that you create a cost benchmark and stick to it throughout the project's lifetime. This way, there is a minimal risk that you would get stuck or abandon the project halfway.

However, despite the significance of cost estimation, many businesses get it wrong. According to PMI's 2021 Global Management Survey, over 35% of global projects failed due to budget losses. In addition, about 34% of global projects also experienced scope creep. Scope creep is a situation whereby persistent deviations are made from the initial goals of a project. Scope creeps are one of the major consequences of poor cost estimation.
Approaching the Cost Estimation of Your Project
The process of cost estimation is often tasking. This is because many factors have to be considered before a final estimation can be made. For example, a software house like YouDigital develops cost estimates depending on factors like duration, complexity, and number of resources. Nevertheless, the following steps can be used to arrive at a near-accurate estimation for your project.
1
Ask important questions

This is the most important part of the cost estimation process but it is often overlooked. Before attempting to create an estimation for a project, it is important to ask questions relating to the type of project, the client's expectations, the project's size, and other questions about what the project entails. Getting clarity on these questions will give you significant headway on how to approach the other steps in the cost estimation process.

2
Divide the Projects into Smaller Tasks

After getting to know what the project entails, the next step would be to divide the project into different tasks. This task division is dependent on the nature of the project. For example, the task division for creating a Minimum Viable Product (MVP) would be different from that of a comprehensive surveillance system.

3
Allocate Tasks and Attach Costs

As these tasks are divided, they should be roughly assigned to members of the team. Subsequently, costs should be attached to each task based on the total hourly rates required to complete them.

4
Estimate the Task Duration

From the list of tasks, attempt a rough estimation of the timeline that you will require to complete the project. At this point, it is important to note that the purpose of cost estimation is to get a near-accurate cost prediction for a project. Thus, you must be realistic in your expectations. More importantly, create room for timeline adjustments. In essence, if the estimated time is a month, you can add a week to the estimation to make up for unforeseen circumstances or delays. This way, the team can deliver projects on time.

5
Calculate the Total Cost

After going through the steps mentioned above, you can proceed to calculate the total cost of the project. Various techniques can be used to calculate the total cost of the project. We will discuss these techniques subsequently.

Methods of Project Cost Estimation
There are three major techniques of cost estimation. They are:
  • Ballpark Estimate

    Unlike other methods of estimation, the ballpark estimate gives a rough estimation based on a cost range. This estimation is calculated by taking potential costs into account and analysing costs on previous projects. For example, the ballpark estimate for the creation of an MVP for a startup could range from $35,000 to $50,000.

  • Parameter Estimation

    The parameter estimation is solely based on previous data. Thus, if you previously worked on a similar project, you can use the previous costs (in addition to other unique costs) to arrive at a parameter estimate. The unique costs can range from inflation considerations to project-specific costs.

  • Three-point Estimation

    his estimation method calculates the average of three cost estimations. These estimations are called the pessimistic, optimistic, and likely cost estimations. The pessimistic estimation entails the cost incurred when certain risks occur. The optimistic estimation is the cost that a project will incur in the best-case scenario. Finally, the likely estimation is a middle-ground cost that takes both the pessimistic and optimistic costs. After arriving at these three estimations, add them together and divide them by three. The outcome is your three-point estimation.

Conclusion
It has been established that proper cost estimation strongly determines the outcome of a project. Thus, before embarking on a project, ensure that you are intentional about getting a near-accurate estimation.

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