What are the steps to estimate project costs?

1 Define project scope

The first step to estimate project costs is to define the project scope, which is the set of goals, deliverables, features, and functions that the project aims to achieve. The project scope should be clear, specific, and measurable, and should align with the market demand, the site conditions, and the regulatory requirements. The project scope will determine the type, size, quality, and complexity of the project, which will affect the cost estimation.

2 Identify cost components

The second step to estimate project costs is to identify the cost components, which are the main categories of expenses that the project will incur. Depending on the project type and scale, these may include land acquisition, soft costs, hard costs, operating costs, and selling costs. Land acquisition involves purchasing or leasing the land where the project will be developed. Soft costs refer to planning, design, engineering, permitting, financing, legal, marketing, and other professional services. Hard costs are those related to construction such as materials, labor, equipment, and subcontractors. Operating costs refer to maintaining, managing, and operating the project after completion such as utilities, taxes, insurance, repairs, and maintenance. Finally, selling costs encompass commissions, fees, advertising and closing costs associated with selling or leasing the project to end-users.

3 Estimate cost drivers

The third step to estimate project costs is to estimate the cost drivers, which are the factors that influence the cost of each component. These cost drivers may include land value, unit costs, quantities, and rates. Land value is determined by market demand and supply, zoning regulations, and site characteristics. Unit costs reflect the average cost of each unit of measurement for the soft and hard costs, such as per square foot, per hour, per item, or per percentage. These can be derived from historical data, industry standards, quotes from vendors or contractors, or online databases. Quantities are based on the project scope, design drawings, specifications, and schedules; these can be calculated using software tools, spreadsheets, or manual methods. Lastly, rates such as interest rate, inflation rate, discount rate, or other financial factors that affect the cost of financing can be obtained from lenders, investors, or market sources.

4 Calculate cost estimates

The fourth step to estimate project costs is to calculate the cost estimates, which are the expected or probable costs of each component and the total project. The cost estimates can be calculated by multiplying the unit costs by the quantities, and adding the land acquisition, operating, and selling costs. There are various ways to express these estimates, such as current costs (based on current prices and rates at the time of estimation), future costs (based on projected prices and rates at the time of completion, accounting for inflation or escalation), and net present value (NPV) (which discounts the costs to present value, accounting for the time value of money and opportunity cost of capital).

5 Adjust cost assumptions

The fifth step to estimate project costs is to adjust the cost assumptions, which are the inputs, parameters, or variables that are used to estimate the cost drivers and the cost estimates. The cost assumptions should be realistic, reasonable, and consistent, reflecting the best available information and data. However, these assumptions may be subject to change, uncertainty, and error, so they should be reviewed and updated regularly. You can adjust the cost assumptions by performing sensitivity analysis (changing one or more cost assumptions and observing the impact on the cost estimates), scenario analysis (creating different scenarios or cases of the cost estimates), or risk analysis (identifying potential risks or uncertainties that may affect the project costs).

6 Add contingency

The sixth and final step to estimate project costs is to add contingency, which is a reserve or buffer that covers unexpected or unforeseen costs that may arise during the project. Contingency is usually expressed as a percentage of the total cost and is based on the complexity, uncertainty, and risk of the project. It should be realistic, adequate, and transparent, and should be adjusted as the project progresses and cost estimates become more accurate. The contingency can be allocated to design, construction, or owner contingencies. Design contingency covers changes or errors in design, engineering, or specifications due to incomplete information, evolving requirements, or unforeseen conditions. Construction contingency covers changes or errors in construction materials, labor, or equipment due to delays, disruptions, variations, or defects. Owner contingency covers changes or errors in financing, management, or operation of the project due to market fluctuations, regulatory changes, legal disputes, or operational issues.

7 Here’s what else to consider

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