Estimating project costs: simple, but getting it right is absolutely vital

 

1 – Estimating project costs: determining the deliverables

When you start a project, you have to select the deliverables that will need to be produced. It is wise to divide a project into deliverables that do not extend over too great a period of time. It is more difficult to estimate a large block of work than several small ones. Moreover, working over a shorter period of time makes it easier to plan the project and monitor it.

 

For each of the selected deliverables, you must determine the cost driver(s) that have the greatest impact and attache the relevant effort metrics to them. You must clearly understand what types of resources will be required to achieve each deliverable. The portions of the estimated effort to be expended by each type of resource are then analyzed. Finally, the hourly rates for each of the resources should also be determined.

 

Calculating the costs of a project requires good planning. It is preferable not to do it at the last minute to prepare it, but also, not to do it alone. Who should you call upon? Experts (ideally as part of the project team). Involve these experts of each component of the solution, based on their strengths. They can help you put numbers on your deliverables. Project teams stick to an estimate once they have participated in its preparation. They are also less likely to doubt its feasibility.

 

2 – How do you estimate the costs of a project?

In a project cost forecast, a certain level of contingency must be applied. Since an estimate is a calculation based on what is known, costs can vary according to events and changes. It is suggested that a contingency percentage be assigned for each of the components assessed in the estimate. It is preferable to work this way rather than using a single percentage for all components. This ensures that the individual risks of each component are better accounted for.

 

However, the credibility of an estimate depends as much on its precision and accuracy as on consensus. Consensus must be built between the members of the expert group that prepared the assessment and the project promoter. This consensus is one of the foundations of the commitment between the project team and the promoter. In the context of a project involving third parties, the consensus reached lays the foundation for the contractual agreement.

 

Often the cost anticipated in the calculation is higher than expected. In such cases, do not rush to reduce your pricing or calculation because the total amount seems too high or because it doesn’t suit everybody. If you did your calculations rigorously and are confident in your approach, defend your estimate against criticism. You may be able to narrow the scope of the project or change its approach. You may be able to spread the project over a longer period of time.

 

3 – How do you analyze the accuracy of the cost estimate?

The validation of an estimate can be done by comparing it to others that are prepared independently. If possible, have more than one cost estimate for your project drawn up simultaneously by independent teams. You can also compare your forecast to the actual costs of another project comparable to yours that has been successfully completed.

 

After this analysis, you will be able to find out the variances between the evaluations and make any necessary corrections. This is why it is important to keep a history of previous project costs. You will be able to use this information in the preparation and validation of cost estimates for a new project.

 

Your estimates must be prepared and documented in sufficient detail to effectively manage potential change requests. It will be easier to assess the impact of a change in scope if the assumptions that support them are clearly stated. A detailed calculation of deliverables also makes the preparation of the project plan simpler.

 

Your estimates must be prepared and documented in sufficient detail to allow for efficient management of possible future change requests. It is easier to assess the impact of a scope change if the hypotheses your estimates are based on are clearly stated. A detailed estimate regarding the deliverables that make up the project also makes preparing the project plan easier.

 

To sum up, it is relatively easy to prepare good cost estimates for a project. Underestimates, on the other hand, are extremely harmful. Therefore, it is justifiable to spend the required time and substantial effort into preparing high-quality estimates.

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Jean-François Desroches is Program Manager at PlanAxion Solutions.
He can be reached at jean-francois.desroches@planaxion.com