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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.
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.
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:
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.
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.
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.
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.
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.
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.
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.
There are three major techniques of cost estimation. They are:
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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