Costing of projects and budgeting for the project are some key functions of project management. Realistic cost estimates for the projects for the project are considered to effectively plan and manage funds in the project, whereby sound budgeting goes from good resource allocation to keeping the project aligned with the budget. We discuss the various techniques for estimating project costs and the critical measures in building the project budget.
Estimating Project Costs
1. Analogous Estimating
This estimating technique refers to the use of data from previous similar projects in estimating the current project’s cost. Cost estimates on the previous performance can then be derived by considerations of similar scope, complexity, or resources, customary of other projects to the new one.
For example: it would make sense that if a past project of web development costs $50,000, the same amount could be used as a reference for a similar new project.
2. Bottom-Up Estimating
Bottom-Up estimating requires estimating parts or work packages in high detail, and then aggregating their estimates to arrive at the total cost for the project. Although this is a more time-consuming approach, it normally provides better accuracy.
For example: for software development, costs for required activities such as requirements gathering, design, coding, testing, and deployment are assessed independently and summed up to compute the overall project cost.
3. Parametric Estimating
This technique applies statistical models with historical information to cost relationships among various project dimensions such as size, duration, or resources. Thus the models generate cost estimates based on the measurable variables.
Example: In construction, you would use a parametric model to estimate costs based on the area of the building, depending on the number of floors and the level of complexity.
4. Three-Point Estimates
Optimistic, pessimistic, and most likely estimates within a certain value are created for each task using this strategy. The most balanced yet realistic cost estimate that can be achieved will be determined through this method’s calculation of the weighted average of these three estimates.
Example: For a marketing campaign, the optimistic estimate could be 4 weeks and $50,000; the pessimistic estimate would be 8 weeks and $80,000; while the most likely estimate might be 6 weeks and $65,000. These will give the expected cost using the PERT methodology.
Phase 1: Identify Project Costs
Identify costs from all parts of the project such as direct costs like labor and materials, equipment, and indirect costs such as overhead and administrative costs. Identify both incurred one-time as well as recurring costs throughout the entire project lifecycle.
Phase 2: Cost Categorization
Categorize costs into personnel, materials, equipment, subcontractors, contingencies, and so on. This will further help in tracking and managing the expenses in a better way.
Phase 3: Cost Estimation
Estimate costs to each category following the cost estimation techniques as outlined earlier. In doing this, make sure both fixed costs (salaries) and variable costs (like consumption of materials) are estimated and all possible expenditures accounted for.
Phase 4: Resource Allocation
Identify the resources needed for each task and allocate the necessary resources to those tasks based on their availability and cost. This is an important step to allocate gifts towards the end of each project.
Phase 5: Cost Aggregation
Add into the total project cost all cost items in each category. This will be the overall budget that will rule the financial management throughout the project.
Phase 6: Budget Allocation
Divide the total budget into project phases or work packages. In this way, the project will not be short of funds at one point or another during implementation.
Phase 7: Contingency Plan
Make a contingency reserve for unforeseen happenings or risks that may need funds. It is common to earmark a certain percentage of the overall budget—most likely, 10%—for contingency.
Phase 8: Ongoing Monitoring and Control
A constant watching of expenditures against the budget is necessary. This would need the project manager to adjust the budget or reallocate resources when the same goes off the track.
Example of developing a project budget:
Take a construction project for example- the project to build a commercial office space. The estimated costs for different categories are as below.
- Labor: $500,000
- Materials: $200,000
- Equipment: $100,000
- Subcontractors: $150,000
- Overhead: $100,000
- Contingency Reserve: 10% of total cost.
Accumulated Estimated Cost Till Date:
The total estimated cost of this project amounts to $
500,000 as labour, $200,000 as materials, $100,000 on equipment, $150,000 as subcontractors, and $100,000 for overhead making up a total of $1,050,000. The total amount of $1,155,000 includes a reserves contingency of 10% valued at $105,000.
Such costs will be allocated in this budget by the project’s manager for different parts of the project such as foundation, structural, internal works, and finishes, to make sure that they properly fund each of these parts and thus facilitate the operation of the project without any hindrances.
Tracing the expenditure by the project manager during the run of the project is done by comparing with the budget figures so that necessary adjustments in time make the works of the project adherent to budgets and resource use.
Conclusion
Estimating project costs and building the project budget require identifying all possible costs, using different methods of estimation, classifying costs, and ensuring effective resource allocation for each category. Also, contingency planning, along with continuous follow-up of the budget, is a very important element that makes a project financially feasible. Effectively managing these phases will enable project managers to thoroughly plan, execute, and control every financial aspect of a project to lead it to successful results.
