What Is Cost Estimation in Project Management?
A project lives and dies by its budget. Just think: a project can only come together with all the necessary materials and labor, and those materials and labors cost money. And in this new economic reality, businesses are looking to pay less and less for those materials and labor while maintaining—or even increasing—quality and scope. So how do you put together a budget that will bring the project to fruition while keeping costs to a minimum? That’s why proper cost estimation is important.
Cost estimation in project management is the process of forecasting the financial and other resources needed to complete a project within a defined scope. Cost estimation accounts for each element required for the project—from materials to labor—and calculates a total amount that determines a project’s budget. An initial cost estimate can determine whether an organization greenlights a project, and if the project moves forward, the estimate can be a factor in defining the project’s scope. If the cost estimation comes in too high, an organization may decide to pare down the project to fit what they can afford. (It is also required to begin securing funding for the project.) Once the project is in motion, the cost estimate is used to manage all of its affiliated costs in order to keep the project on budget.
Elements of cost estimation in project management
There are two key types of costs addressed by the cost estimation process:
- Direct costs: These are the costs associated with a single area, such as a department or this particular project itself. Examples of direct costs include fixed labor, materials and equipment.
- Indirect costs: These are costs incurred by the organization at large, such as utilities and quality control.
Within these two categories, some typical elements that a cost estimation will take into account include:
- Labor: the cost of project team members working on the project, both in terms of wages and time.
- Materials and equipment: The cost of resources required for the project, from physical tools to software to legal permits.
- Facilities: the cost of using any working spaces not owned by the organization.
- Vendors: the cost of hiring third-party vendors or contractors.
- Risk: the cost of any contingency plans implemented to reduce risk.