8/25/2021 A Quick Guide To Project Cost Estimating

RESOURCES / A QUICK GUIDE TO PROJECT COST ESTIMATING

A Quick Guide To Project Cost

Estimating
How to accurately estimate the cost of a project and 3 methods for
project cost estimating

Kimberlee Meier
1st September 2020

Project cost estimating is the process of predicting the total

cost of the tasks, time, and resources required to deliver a
project's scope of work.

Whether you're in the business of design, development, engineering, or other

professional services, one of the most important parts of successful project
work is delivering on time, to scope, and within budget. It requires accurate
forecasting, precise planning, and progress monitoring. Project cost estimating is
a process applied by project managers to help with these predictions.

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To properly plan for tasks and navigate who will get them done, you must
determine how much the project will cost and if the price tag fits your client’s
budget. To nail this process, you need to know what deliverables your team is
responsible for and track costs once the project is up and running.

Unfortunately, most businesses do not do a good job at estimating the cost of

their projects. According to PMI's 2018 Pulse of the Profession report, 28% of all
projects are derailed because of inaccurate cost estimates.

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The good news is, accurate project cost estimating isn't rocket science as long
as you've got a good process in place. By listing your tasks, calculating costs,
and tracking a project's progress, you can create accurate estimates and make
sure your budgets don't balloon out of control.

In this piece, we're going to break down what project cost estimating is and
three estimation methods to help get it right. 👌

What is project cost estimating?

Project cost estimating is when a business predicts the overall cost of a project
by accurately outlining its scope of work. It requires looking at the tasks,
duration, and resources required to forecast a project's total cost to deliver. The
closer the estimate is to the actual cost of a project, the more likely spending will
stay in the green once the project starts.

Although project cost estimation may not be the most exciting part of your work,
getting the budget right can mean the difference between your project being a
success or derailing. With the number of projects suffering from scope creep
rising, team leaders need to be diligent in the planning and forecasting stages to
ensure that their project cost estimating accurately, and taking on work that is
actually viably profitable.

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Source: Success of Disruptive Times, PMI

As project cost estimating relies on tying costs to a scope of work, the process
must outline how long tasks will take and who will get them done, in addition to
vigilantly tracking the project. Project cost estimating doesn't simply stop when a
project starts—it must be monitored and adjusted as it progresses.

Accurate project cost estimating with resource management software

Rated #1 on G2 for resource management, Float helps teams to accurately forecast their
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How to accurately estimate the cost of a project

Estimating the cost of a project requires breaking it down into individual tasks

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and figuring out which team members will be doing what. Once a project is up
and running, the key goal is to make sure you don't overspend and derail your
budget!
Project cost estimating is a process that can be broken down into five steps:

1. Compile a list of tasks and the resources required to complete them

2. Identify and allocate resources to tasks based on your team’s capacity

3. Estimate the task length to create a project schedule (with some buffer)

4. Calculate the project cost based on a chosen estimation method

5. Use project cost estimating tools to track budgets in real time

Step 1: Compile a list of tasks and the resources required to

complete them

The first step of project cost estimation is figuring out what tasks and resources
you need.

The easiest way to do this is to break the project down into smaller, individual
tasks. For example, if your agency has been asked to build a website from
scratch, you'll need to list out tasks for every stage of the project around:

📋 Research/planning

🎨 Design

💻 Front-end/back-end development

📝 Copywriting

🐛 Testing/Bug fixes

🚀 Launch

Obviously, the task list will be different for every project. But the first step will
break the project down into individual tasks, so when you assign them to team
members with hourly rates, it'll be easier to calculate how much each of them will
cost.

The only way to do this is to make sure you and your client are on the same
page, and that your scope of work is an accurate reflection of what they want
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out of the project. As Up at Five's Trudy MacNabb tells Shopify, non-technical

parts of a project must also be considered at this stage.

“This includes emails, in-person meetings, phone calls, and generally managing
the client—you want to build those hours into your budget as well. Don’t
underestimate the time it takes to manage a project effectively. Scope creep
happens in all areas of a project, not just from a technical perspective," says
MacNabb.

While not every estimate turns into a project you'll end up working on, if the
client does end up hiring you, you'll be glad your cost estimate is accurate to
come invoicing time.

Step 2: Identify and allocate resources to tasks based on your

team’s capacity

Next, you need to make sure that you have enough people with the right skill
sets to complete the tasks.

This comes down to team capacity. One of the biggest issues that team leaders
struggle with is recognizing whether their team has space on their calendars to
take on new tasks or not. This is likely the result of inadequate capacity planning,
which helps determine if there are enough people to get a project done based on
availability and skillsets. By using capacity planning, you can also find out:

If you will need to delay or cancel a project in your pipeline because you don't
have enough people or the right skill sets do get a project done on time

If you'll need to look for outside help like contractors or freelancers to fill the
skill/availability gap to keep a project on track

Are you sensing a pattern?

It's vital that you have the right number of people and the necessary amount of
time to get a project done. DesignLi's Laura MacPherson says successful
projects are successful because teams are equipped with highly skilled people
that know how to get stuff done.

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"As Jim Collins says, you need to get ‘the right people on the bus, the wrong
people off the bus, and the right people in the right seats.’ When you’re choosing
your team members, look for people who are specialists at what they do and
who have a history of producing work on time and working with others in a team
environment to accomplish a common goal. The people you select will make or
break your project."

Once you've identified the skills and availability of your people, it's time to get to
the crux of project cost estimating—calculating the length and costs of those
tasks.

Step 3: Estimate the task length to create a project schedule (with

some buffer)

It's natural for team leaders to underestimate how long tasks will take. But when
it comes to project cost estimating, it's important to be realisic — for your
project's and even more importantly your team's sake.

Vintage's Art Director, Olga Shevchenko, says it's crucial to put a buffer on a

project's estimated length to account for unexpected delays and other situations
like sick leave.

"In order to protect yourself from these sorts of scenarios, it’s better to
overestimate a client when it comes to time and allow for a margin of error. For
instance, in Vintage we tell clients that it should take 1.5 times longer than what
is usually needed. If we finish the job faster, then we’ll exceed clients'
expectations once again. If difficulties do crop up, we would get the project done
on time anyway," says Shevchenko.

However, there's an even better way to plot the duration of a project accurately,
and that's by using time tracking. Before Impression started using time tracking,
they had no way of logging their team's daily hours or see their estimates vs.
actuals. “If a project has pivoted scope, or perhaps client feedback is taking
longer than expected, this usually has a domino effect on the remaining time and
phases scheduled,” says Managing Director, Charlie Hartley.

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“With Float, the calendar view and being able to map out everyone’s time has
been invaluable for us. We’re able to see the full team’s activity for any given day,
or weeks ahead, including who’s in and out of the office, who is booked up with
meetings, or is away on holidays."

Pro-tip: Working your team at a 100% utilization rate will lead to burnout. An ideal
utilization rate is 80%, leaving your team some free time to catch up on emails or
brainstorm with colleagues. Check out our guide and learn more about how to
calculate resource utilization 📖

Step 4: Calculate the project cost based on a chosen estimation

method

Here is where your data comes into play.

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If you have kept records of similar projects your agency has already completed,
you can use them to analyze how long each task took and how much it cost you.
Without data, you'll need to create rough estimations, so reach out to your team
and ask them to help you decide how long each task should take.

Remember, it's better to be honest about your estimations and how long you
think each task on your list will take. If you don't allocate enough time to each
task, it can chew into your project's profit margins!

Forecast and track your project costs in real time

Float is a resource management software with powerful cost forecasting and reporting
features. Trusted by 3,500+ of the world's top teams to plan, schedule, and track project
work.

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Step 5: Use project cost estimating tools to track budgets in real

time

Finally, it's crucial to keep track of a project once it kicks off.

It's normal for a project to hit speed bumps, and if you're not keeping on top of
changes as they happen, it can completely derail a project and throw your
budget out of whack!

Using a resource management tool, you can track a project's

budget automatically—from kick off to completion. For example, Float helps
team leaders track their project spend in real time when allocating hours to a
project. The hours will be shown as "capacity hours," and each time a team
member logs hours worked on the project, they are deducted from the budget to
give you an accurate estimate of how much time is still available:

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Want to use the dollar figure instead? No problemo! Float can do that, too. Just
add in the project's budget, and it will track spending based on your team's billed
hours and individual hourly rates.

Not only does this mean no more manual spreadsheets to track spending (and
we are not sad about that), Float also alerts you when you're in danger of going
over budget.

Before Impression started using a resource management tool to plan its projects,
they were having difficulty tracking their team's billable vs. non-billable time.

Founder and managing director Charlie Hartley says that they were shocked by
the gaps and lack of accuracy in their own data—which is why they decided that
something needed to be done.

“We rely on our reports in Float to let us know when we’re on track

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with project budgets or to give us a heads up if we’re looking to run

over.”

Charlie Hartley, Impression

20+ Yorkshire, UK

Budget tracking can also help to check the profitability of a project once it's
done. VCFO does this when its team spends time sourcing talent for finance, HR,
accounting, or c-suite professionals. Recruiting director Vita Trevino-Garcia says
using resource management software helps them calculate whether their overall
project fee was profitable.

For example, if one of VCFO's sourcers spends 10 hours looking for a

professional, and another spends 5 hours on the same search, the company has
spent a total of 15 hours on the project. Trevino-Garcia says once the right hire
has been placed with their client's company, they look back to see how much
time was spent sourcing the hire and if they made a profit. If they paid their
sourcers $40/hr, their overall project costs total $600. They then match that
figure with the one they charged their client. "This gives us a very clear picture
of our ‘cost of hire’ for every placement," says Trvino-Garcia.

Three methods of project cost estimating

A project's scope should dictate its budget, not the other way around. Here are
three calculations you can use for accurate project cost estimating.

1. Ballpark estimate
A ballpark estimate will give you an approximate value of a project based on
speculation.
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Does your client know their budget? If not, a ballpark calculation will give you a
rough estimate to offer your client to see if they can afford a project before it
kicks off. Usually, this calculation is a combination of similar projects you've done
in the past as well as any expenses unique to the particular project.

Let's say your client needs a website built and your team has done similar
projects in the past for $10k. Using the ballpark estimate, the cost might range
from -25% to +50% ($7.5k - $15k).

Simple, right? Yep. Although it's not the most detailed way to estimate the cost
of a project.

2. Parameter estimation
Parameter estimation is a data driven approach to project cost estimating. It
uses past data to give you a more reliable estimate of a project's overall cost.

First, calculate how much time will be spent on each task on your list. Next, add
a cost figure by multiplying the hours of each task with each team member's
hourly rate.

Task Duration × Employee's Hourly Rate = Task Cost

Once you have calculated the cost for every task, add them all up to reach an
estimated total.

Although this method is more time consuming than a ballpark figure, it's also
more accurate. It works best for projects that have concrete start and end points
for tasks, like social media management.

Calculate tasks costs with resource scheduling software

Resource scheduling software is a great way to calculate task costs reliably and efficiently.
Set the billable hourly rate for each of your team members so you can quickly see the cost
of assigned tasks against your project’s total budget. It also removes the risk of any human
error of manually entering data into a spreadsheet!

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Table of contents

3. Three-point estimation
A three-point estimation is a way to calculate a project's cost based on likely,
optimistic, and pessimistic cost projections.

The benefit of a three-point estimation is that it ties a project's costs to

uncertainties and risks, which allows you to plan for "worst-case" scenarios.

Let's take our earlier example of building a new website, which costs around
$10k. Your costs could look like this:

💰 Likely cost: $10k

😃 Optimistic costs: $7.5k

😟 Pessimistic costs: $15k

These three figures become a basis for building an average estimate. Simply add
them together and divide by three:

10,000 + 7,500 + 15,000 = 32,500

32,500 ÷ 3 = 10,833

As a result, the average project estimate is $10,833.

Make sure that if you're using the three-point estimation, you're still accounting
for time buffers and overheads. Futur's Chris Do reiterates the importance of
accounting for overheads in a project cost estimate, saying it's key to turning a
profit. He says it's essential to mark up costs and not underestimate how long a
job will take while remembering to budget for other things like software costs.

How do you Estimate the Cost of a Project?

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Ready to start accurately estimating the cost of your

projects? Float provides a live view of your team's capacity,
billable rates, and actual hours worked, so you can forecast the
cost of project work with confidence. Start your free trial here!

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Forecast project costs with the #1 rated resource

management software
More than 3,500 of the world's top teams rely on Float to plan their projects, track budgets, and
keep work on track

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