How to Estimate Project Costs

Estimating, one of the corner stones of successful project budget planning and control, get it wrong and your plans are immediately unrealistic and doomed to fail. But, annoyingly, estimating is not a precise science or a simple “one size fits all” technique. In fact, it is both an art and a science. Here, we will look at what estimating is, some of its pitfalls, and a few practical techniques you can use to create better estimates for your project.?

The?Association for Project Management?(APM) ‘s definition of estimating is:?

A forecast of the probable time or cost of completing work

Let’s pick that apart. “A forecast” means looking into the future. “Probable time and cost” means what we think is most likely to be true. So, in other words, estimating is looking into the future to try to figure out what we think will happen. It is guesswork! Estimating is a fancy word for guessing what something will cost or how long it will take to do.?

That doesn’t sound very good… you’re telling me my project plans and budgets should be based on guesses???

Well… in a word: YES. Because you don’t have an option. You will never get to a point where you have absolutely knowledge of what something costs or how long it takes to do until you have actually done it. And we (project professionals) know that it is unacceptable to move forward with projects without plans. So in order to be able to make plans we have to make some guesses and assumptions.??

The key is to take care to make those guesses as educated as possible by gathering sufficient information and using tried and tested techniques. AND (very importantly): never lose sight of the fact that estimates are guesses. We might be wrong, so we need to be self-critical and continuously review and revise our estimates throughout the project.??

Who estimates???

The project manager is responsible for ensuring estimating is done, but that does not mean the project manager is expected to have the knowledge and experience to be able to estimate everything by themselves.?

The best thing to do is to go ask an expert in the relevant subject matter, and ideally go ask the person who will do the actual job because they are most likely to have the best knowledge and insight.??

When do we estimate??

Estimating has to happen at several points in the project. Right at the start there needs to be estimating of expected costs and benefits, as well as overall durations. If there are no estimates then the organisation cannot make a decision about whether or not the project should continue.??

During planning there must be detailed estimates on which the project manager can build budgets and schedules. Without those estimates, the plans are effectively just lists of tasks.?

During project delivery, the project manager must revisit and revise the estimates based on knowledge and lessons learned about how work is progressing and what things actually cost. And, this must be compared to new estimates for the work remaining. All of this is necessary to continuously verify and validate that the project is feasible.?

Techniques for project cost estimation

There are many techniques for producing estimates and you will likely need to use several of them through the life of your project. What technique you choose at a particular point will depend on in what stage of the project you are at and what level of accuracy you need to achieve.??

Early in the project – high level, ball park, “top down” estimates?

Picture the early project (initiation or concept stage), perhaps your aim is to write the business case or pull together information to go in?the business case.??

At this point you have very little information about what the project will involve. You do not know the exact tasks, or the exact equipment, material or facilities you will need to buy or rent. And at this point you actually do not need very detailed knowledge or a very detailed or accurate estimate. You also do not want your team to spend a huge amount of time investigating information before you have decided that the project is worth pursuing.?

What you need is an indicatory or high level estimate, enough to enable the right decision makers to make a call on whether the idea is worthy of being turned into a project. This kind of estimate can have many names, for example “high-level”, “indicatory”, “ball-park” or “top down”.??

A common technique, and good practice, is to use information from a previous similar project. This technique is often referred to as either?Comparative Estimate?(because we compare this project to a previous one),??Analogous Estimate?(because it is based on a story of another project) or?Historical Estimate?(because it is based on a historical example).??

Let’s use a simple example:?if our project is to arrange a large industry conference. How much will that cost? A good starting point will be to look for examples of similar conferences in the past (perhaps you or your company has arranged a similar conference from which you have lessons learned?). We find out that a previous, very similar, conference cost ￡50,000 to arrange. We make some adjustments for inflation, increased cost of catering etc and thereby land on an initial indicatory estimates of ￡55,000-75,000 for our conference. This is not perfectly accurate but it is enough for us to make a decision about whether or not to continue the project. If my budget is maximum ￡52,000 then I know already I need to rethink, perhaps re-scope the conference or not pursue it at all.???

If your project is to build not one conference perhaps a series of conference you may want to use a combination of the comparative technique and one called?Parametric Estimating.??

Say your project is to arrange 10 conferences. Knowing what one previous conference cost to arrange you can now multiply that by 10 and make some adjustments for inflation etc.???

Parametric estimating can also be used for smaller things. Perhaps you are trying to figure out an indicatory budget for speakers. You do some research and figure out that a normal fee is ￡1000 per speaker. You need 10 speakers for the conference so your initial budget estimate is 10 x 1000 = ￡10,000.??

Planning stage – detailed, analytical, bottom up estimates.?

In the early project stage we can get by with a high level estimate. As we move further into the project however, we need a lot more detail, because we need to get to greater level of accuracy in our overall estimates.?

In order to do this, we need to stop looking at the project as a whole and instead look at its components (i.e individual tasks or deliverables). A good rule of thumb is that the smaller the task or deliverable, the easier it is to estimate it with a high degree of accuracy.??

For example, if I ask you “how long will it take to arrange the conference”. You might say “Eeehmmm, maybe 2-12 months?”. Ok, that’s not very accurate and it is not very useful for creating a reliable plan but it is probably the best you can do with that limited information. How about if I ask “how long will it take to design the brochure for the conference”? (assuming you have some experience of designing a brochure) you might say “That will be 2 days”.?That’s quite different, that is an estimate I can use to build my plans.??

Techniques for creating more detailed (and therefore presumably more accurate) estimates are:?

Bottom up/ analytical?

The first step to creating a bottom up/ analytical estimate is to identify all the deliverables we will create and all the work to create them.??

A good tool for this is a Product Breakdown Structure (PBS).?

A PBS is a hierarchical breakdown of all the components that make up the project’s product (in our example that is the conference). Starting with the entire product (conference) then breaking it down into its main deliverables, and then breaking those deliverables into smaller components.???

A PBS for the conference might look something like that:?

Once you have your PBS you focus first on the lowest level components. This is the level you want to estimate at. The smaller you have managed to break down your product the easier it will be to estimate with accuracy.??

Once you have estimates for individual components you can add them all up, working from bottom up through your PBS. This might take some time to do but assuming you have identified all components and done the calculations correctly it should give you a very accurate project cost estimate.??

By starting at the bottom and adding up the costs of the components we identify the cost of each deliverable. And by adding those up we find that the Project Cost Estimate is ￡61,540.??

This fits within the initial high level estimate of ￡55,000-75,000 so we are probably quite happy with that number!?

?But…?you might say..?how do you get to the point where you have an estimate for every single component???

This is where you need to go and speak to relevant experts. To get an estimate for the cost of Multimedia you need to go speak to the Sound and Video equipment company, the Sound Engineer and the DJ.??

What if the experts can’t give me a straight answer or one definitive answer??

This is quite common, and in fact it could even be good practice for you to ask for a range of estimates that you can then analyse using either Three-Point of PERT techniques.?

Three point estimating technique?

In a three point estimate you analyse 3 data points: The Best Case Scenario (“Optimistic” or “O”), The Worst Case Scenario (“Pessimistic” or “Pw”) and the Most Likely (ML).??

You then add up all three values (O + ML + P) and divide them by 3.??

So if your Sound Engineer tells you:??

If all goes perfectly it should cost ￡1,500, but worst case I will need to charge ￡2,000, however I think it is most likely it will cost ￡1700.?

Your three point calculation will therefore look like this:?

It might make sense here to round that figure up so you get ￡1,750.?

PERT?

PERT (Program Evaluation and Review Technique) takes the three point formula one step further and gives more weighting to the Most Likely Value.?

The logic is that if the expert says that something is most likely, we should give that more weight in our analysis.?

In PERT we also work with O + ML + P but you multiply the ML value by 4. Then you divide the total value by 6.??

In our example the PERT calculation would look like this.?

Because the numbers we were working with are so small you might decide that you are still warranted to use the ￡1,750 estimate from the basic three point estimate or maybe you make the call to round down to an even ￡1,700.??

If you are working with bigger numbers the difference could be thousands of pounds.?

Project Delivery/ The Deployment Stage?

You might think that once the plan is signed off no more estimating is needed. This is incorrect.?

Because estimates are in effect guesses there is a probability that you might have been wrong. If you do not discover that you were wrong and adjust the project plans and budgets accordingly you may end up with a failed project.??

So, throughout Delivery you must review your project’s progress and compare it to what you had estimated.??

For example, for our conference we had estimated that travel and accommodation costs for our speakers would come to ￡8000. However, we have now confirmed 5 of 10 speakers and already we have spent ￡7000 on their travel and accommodation – and there are 5 speakers left to confirm!?

This is an indication our estimates were incorrect.???

The first thing we have to do is understand why. Had we missed an increase in hotel costs? Had we forgotten that several of our speakers have to pay a visa fee to enter the country???

Once we know those facts we can then re-estimate what the total cost will be and update our budget accordingly.??

Summary:

Estimating at its heart is guess work, but that does not mean we should take it lightly. The key is to take care to make those guesses as educated as possible by gathering sufficient information and using tried and tested techniques. AND (very importantly): never lose sight of the fact that estimates are guesses. We might be wrong, so we need to be self-critical and continuously review and revise our estimates throughout the project.??

Do you want to learn more key project management techniques? Check out our APM accredited Running Successful Projects for an introduction to practical project management, or our Project Management for?Practitioners?for more advanced project management with preparation for the APM PMQ exam.?