Why estimation is important in project management

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Return to Blog Homepage. What is Cost Estimation in Project Management? By Tim Stobierski November 11, What is Cost Estimation? Analogous Estimating Through analogous estimating , a project manager calculates the expected costs of a project-based upon the known costs associated with a similar project that was completed in the past. Parametric Estimating In parametric estimating , historical data and statistical modeling are used to assign a dollar value to certain project costs.

Bottom-Up Estimating In bottom-up estimating , a larger project is broken down into a number of smaller components. Upon acceptance, the service provider is contractually obligated to complete the work at the specified price based on the terms that are outlined in the quote unless the scope of the work changes and a new quote is presented and agreed upon. An estimate, on the other hand, is not contractually binding.

Clients understand that the prices outlined are subject to change as the project progresses to reflect a greater level of detail about required resources, scope, or timelines. Generally speaking, estimates are particularly useful when:. An estimate is much more than a simple list of project costs.

Cost estimates detail every component of work that is required to bring the project to life by outlining the assumptions that underlie each cost, inclusions and exclusions, and associated risks. What you decide to include on the estimates you provide to clients will depend on your unique business, but generally estimates for service businesses should include the following:.

Your estimate should include a breakdown of all costs involved in the project. There are two main categories to classify costs:. Cost elements included in estimates will vary from business to business, but the most common costs to consider for service businesses include:. When presenting an estimate to a client, ensure you account for your service markup.

Your estimate should also include all relevant information about the project that provides context for the costs listed and the project deliverables. Consider including the following when preparing your estimate:. Estimating software provides a quick and easy way to create detailed estimates so you can respond to queries efficiently and provide prospects with the right information from the outset.

The key to creating accurate estimates is leveraging previous job data and learning from past projects. With WorkflowMax all-in-one job management software, you can track and manage every aspect of your project and use that data to create and send more accurate estimates or quotes. Start today. Elsewhere, it may depend upon the expertise and choice of the project manager in charge.

Let us have a look at the key techniques for the estimation of project costs. The analogous estimation technique makes use of the past results to estimate the costs of a current project. The managers compare the actual earlier costs in a similar project and prepare current estimates on its basis incorporating the latest prices. Thus, they use historical data along with their judgment to prepare a fresh estimate.

This technique is especially useful in cases where we do not have much information about the current project in hand. Or where it is a routine type of project. In this technique, correct entry and storage of past cost data in a database are essential.

Any company cannot use this technique if past data is not available or is incorrect. Also, each project is different from the others. The project managers cannot solely rely upon past results to prepare an estimate of the current project costs. Hence, this technique is useful when only rough estimates are sufficient to prepare project cost estimation. And there is no much change in the structure and condition of the project. The parametric estimation technique makes use of past data as well as statistical models to estimate project costs.

The accuracy in this technique is higher than analogous estimation because of the use of statistical modeling, algorithms, and equations.

However, we need more data initially for the estimates to be accurate. This method first identifies the cost per unit of items that the managers will need in the project. We then multiply this unit cost with the total number of units that were consumed in similar other previous projects.

We will also find out the hourly rate of human resources and multiply it with the man-hours taken up in similar other previous projects. The managers will then make use of algorithms and equations to scale the historical cost to the current project in hand. In this estimation technique, we break down a project into many smaller components. The managers will then make a cost estimate for each of these smaller parts. This approach magnifies each process, task, or part of a project, which helps to prepare an accurate estimation of the project cost.

This method is of use when the requirements in a project are specific, expectations are clear and the project managers have details of the individual costs of each and every element. If your company has carried out similar projects in the past, you can use their budgets as a template. If you're building a new factory, the cost of other factories built in the same area gives you some guidelines.

Bottom-up analysis. Break down the resources you need into the smallest units and calculate the costs. This detailed approach can produce accurate estimates, but it requires a lot of time and number-crunching. Three-point estimation. This approach starts with three budget estimates covering the best-case scenario, worst-case scenario and the most likely scenario.

Then, you use a mathematical formula to derive a cost estimate. Whichever method you use, it's depressingly easy to mess it up with just a few simple errors. Crunching numbers by hand. Project estimates are complicated. They'll be more accurate with software than if you try to figure everything out on paper or in your head.