Estimating costs as accurately as possible can mean the difference between getting projects up and running quickly vs. encountering delays or cancellations. Cost estimation strategies help project managers forecast the resources necessary for each step of a project and ensure that projects stay on track.
This article takes a deeper dive into what a cost estimate in project management is — and some trusted strategies and tips for estimating the cost of projects. We’ll also highlight monday.com features that can help you better manage project finances.
What is a cost estimate in project management?
A cost estimate in project management is a clear calculation of how much it will cost to get a project completed from start to finish.
It is usually a required step in the budget approval process — companies use this information to determine whether to approve a project and to allocate funds for its completion appropriately.
Cost estimates must consider both direct and indirect costs. Direct costs include products and tools — such as software — used to complete a project. If the organization must hire individuals to work on the project, including contractors, related expenses might also fall under direct costs.
Indirect costs may include accounting and payroll, office equipment, utilities, and other overhead costs already incurred in day-to-day operations. Indirect costs can increase when implementing a new project, so they must be included in the budget.
Why is cost estimation important?
Getting approval for a project requires justification for the resources that the team will need to complete activities. Companies have overall budgetary restraints to consider. When money becomes devoted to one project, it is no longer available for other initiatives. As a result, project managers must ensure that they estimate costs accurately.
Cost estimation sets the stage for a budget that will provide adequate funding to complete a project on time and in accordance with quality standards.
Going the extra step and assigning budgets to various activities helps the team stay within the larger budget and avoid wasteful spending. It also helps project leadership understand where overages might occur so they can move resources as needed to cover costs.
Understanding some common cost estimation strategies can help you create the most accurate budgets possible for your projects. You can implement each of these strategies using a work management platform like monday.com.
4 Common cost estimation strategies
There are some standard estimation techniques that project managers can use to determine the costs of a project.
Analogous estimating
Analogous estimating involves looking at budgets for similar past projects and applying the costs to a current endeavor. Analogous estimation works well early in the project process, as you may not have as much information as you’d like about the current effort and need to rely on previous experience. However, the budget may require adjustments later because each project is different.
Bottom-up estimating
Estimating costs using the bottom-up method enables project managers to calculate amounts for each task, which can provide a better picture of the total budget. The planner or project manager can determine if funding exists to cover some aspects of a new project, since teams or departments may already have staff and resources to allocate toward the project.
Parametric estimating
Parametric estimating uses the statistical relationship between data like construction square footage to calculate a budget estimate. The parametric estimate process allows a project manager to calculate the costs based on previous data and uses statistical modeling to predict future costs.
In contrast with analogous estimation, which compares the cost of similar projects, parametric estimating uses algorithms or formulas to calculate costs, resulting in more precise estimates.
For example, using a parametric estimation to determine the cost of building a house involves a construction project manager looking at the historical data on construction time for specific work units. Examples of units or parameters include square footage, the time it takes to frame the structure, labor costs per hour for brick masons, how long it takes a concrete finisher to pour a cubic yard of concrete, and the time it takes to install plumbing.
Three-point estimating
Using the three-point estimate helps project managers obtain more accurate estimates by determining costs based on three scenarios:
- The best-case estimate or optimistic scenario
- The most likely estimate or scenario
- The worst-case estimate or pessimistic scenario
The project manager adds the amount from each estimate and divides the total by three to arrive at the final estimate. Three-point estimating helps the team avoid being overly optimistic and accounts for contingencies that could get in the way of progress.
Pair one or more of these strategies with some tips for estimating project costs in the section below to improve your accuracy and help create a budget that works for the business and the project team.
Tips for estimating project costs
- Make sure the budget fits the scope of the project: A low estimate may look impressive, but issues can arise during the project that require additional funds. If there isn’t enough funding to finance a project, the team may need to adjust the project’s scope and implement what’s affordable based on resources.
- Include contingencies: It’s better to budget for additional costs from the outset than to alter the scope of a project later. Planning for contingencies ensures the project doesn’t stall due to funding issues.
- Allocate adequate time to estimate accurately: Trying to complete an estimate quickly can lead to errors, and the budget may exclude activities essential to project success. Relying on experience and past successful projects may be preferable to testing new estimation strategies, especially if there is limited time, but do ensure that the numbers on the budget page are backed by something.
- Compare the current project to past efforts: For example, team members may commit to project activities based on experience. A team creating a training curriculum may feel confident they can complete the work in three months based on a past project. However, if the last curriculum contained only 12 modules and the current project requires 36 modules, it will require more time and personnel to complete.
- Detail the estimate: A high-level estimate may not provide enough information for the budget. Remember that team members are responsible for each activity, and they will need the resources to do their part. When estimating a project, breaking it down into individual tasks and providing adequate details helps project managers avoid budget shortfalls in the middle of a project.
monday.com’s comprehensive and customizable Work OS makes it easy to plan, budget for, and execute projects.
How monday.com can streamline your cost estimations in project management
Since many project estimates contain some common elements, a project template can help project managers get the work done without reinventing the wheel. The Budget Tracker Template from monday.com can greatly simplify the process of creating a budget for cost estimations. Some key features of the template include:
- Easy-to-create columns: Add monthly expenses, start date and more with just a few clicks.
- Rapid data entry: Once your columns are in place, you can quickly enter key information.
- Quick calculations: Formula columns perform the math for you to eliminate arithmetic errors.
- All-in-one record-keeping: Attach files directly to the budget for easy reference.
- Effortless sharing: Send the budget to team members to keep everyone up to date
- Multiple views: Choose from more than 12 different views, so you can see data in the way that makes the most sense to you.
- Automated functions: Receive notifications when your budget gets approval or updates are necessary.
FAQs for cost estimates
The following are some frequently asked questions about cost estimates in project planning.
What is a cost planner?
A cost planner, also known as a cost estimator, determines how much a project will cost. Throughout the project, the cost planner is responsible for using cost management strategies to ensure that costs do not exceed the budget. One of a cost planner’s responsibilities is to prevent scope creep that can eat into a budget and cause cost overruns. When there is a risk of cost exceeding an approved budget, a cost planner may need to evaluate the project’s scope and take corrective action to keep the costs within the budget.
What skills does a cost estimator need?
Most cost estimators need a bachelor’s degree or experience in a specific field. A cost estimator who works in the construction industry might have a degree in engineering or construction. A cost estimator that works for a business might have a degree in business or finance.
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