3 Ways to Create a Project Cost Estimate

March 29, 2018 Shelbi Gomez

By Shelbi Gomez

Estimating project costs is key to keeping your budget on track, but how do you build an estimate that is useful and somewhat accurate? While it would be nice if it were possible to estimate once and be done, the truth is that the key to a valuable project estimate is to continually revisit and update it.

Projects rarely go exactly according to plan, and as a project progresses and changes, so will the cost. When you learn new information or add something new to your scope, you should also adjust your cost estimate.

See "Keep Your Project on Budget with EAC (Estimate At Completion)" to learn more about managing budgets.

Most project managers use one of three methods to estimate project cost, depending on the situation and type of project. You will probably also find yourself using more than one of these at different stages in the project. The most important thing is that you end up with a cost estimate that fits the criteria discussed later on.

1. Analogous Estimating

Analogous estimating uses information about similar past projects to determine how much you’re likely to need for your current project. Look at how much the project cost, adjust for inflation or for new resources you have and won’t need to spend money on, and use that as a basis for your cost estimate.

This is a great estimation technique if you work on similar projects often. Similar projects give you a benchmark to ensure you’ve accounted for every task and variable.

However, just because a project looks similar on the surface doesn’t mean that it is actually a truly comparable project. Costs—both in time and money—for tasks such as website work or design can vary widely depending on the scope of the project. Keep in mind those differences when you’re using this method and recognize it won’t be as reliable as other methods.

2. Parametric Estimating

In parametric estimating, the foundation of your estimate is based on frequently performed tasks that have relatively fixed and/or predictable costs. Once you know how much a task costs and how many times you’ll have to repeat that task, it’s simple to build a detailed estimate you can be confident in.

This is one of the best ways to estimate costs for technical or repetitive projects, but it isn’t as reliable for creative projects, which usually have too many variables and unique tasks you have to take into account.

For example, if your project involves a graphic designer creating a series of posters, it might take them more time to create one poster than another. And because the end product is subject to people’s tastes and opinions, you might have to spend time redesigning some of them. So even though the task type (designing a poster) is repeated, there’s too much possible variation to make parametric estimating effective.

3. Bottom-Up Estimating

The most accurate—and most time-consuming—estimation technique is called bottom-up estimating.

To build a bottom-up estimate, you need a completed work breakdown structure, then you meet with the people who will be completing the work and have them estimate how much time each task and phase will take. Not only are they able to give you the most accurate idea of the time required, they’ll also be more invested in the timeline if they had a hand in creating it.

This works for almost any kind of project. Whether it’s a project you’re familiar with or one that’s brand new to your team, using this estimation technique results in a detailed and accurate picture of the project’s costs.

The caveat here is that you can’t really use bottom-up estimation early in the project planning stage. You have to wait until you have a fleshed-out list of all the tasks that your team is responsible for.

Cost Estimate Criteria

Whichever approach you use, there are a few ground rules that are universal to good cost estimates. These guidelines can also help when you’re deciding which technique to use; if you’re using parametric estimating but your cost estimate isn’t meeting the criteria below, you might want to try analogous or bottom-up instead.

Your cost estimate should:

  • Be accurate: More than anything, an accurate project cost estimate sets your team up for success and aligns your expectations with your stakeholders’ expectations. Cost estimates become more accurate as you learn more about the project and get closer to its execution.
  • Communicate your confidence level: Since project cost estimates change, you need to make it clear to everyone involved how confident you are in whatever iteration you’re presenting. Is it an early estimate, or is it based on a detailed project plan, scope, and similar past projects?
  • Be credible: Your estimate needs to be built on credible sources, such as similar past projects, detailed research of the costs, and your own experience as a project manager. Use data—don’t rely on a gut feeling.
  • Include documentation: While you develop your estimate, keep track of your research. This will come in handy if you need to answer questions about the estimate, provide credibility, or backtrack and make changes.
  • Detail risks: Every project has risk, and your cost estimate should include allowances for the ones in your project. Not including these almost guarantees that your project will go over budget, and it will probably raise red flags for the people reviewing your estimate.

Estimating project cost is part art and part science. You’ll learn a lot from estimating and refining your estimates over time. Even though each project is different, you’ll gain confidence as you work through several projects and make your process more efficient.

Remember: there’s more than one way to create an estimate. Use your knowledge of the project and all its moving parts to decide which technique will help you build an estimate you’ll be confident in.

See our post "6 Tips to Better Resource Management" for more insight into managing finances as a project manager.

About the Author

Shelbi Gomez

Shelbi is an experienced public relations professional with experience in both agency and corporate marketing environments. She currently guides brand awareness, market research, analyst relations, and customer content. She has nearly a decade of BtoB and BtoC experience helping companies tell their stories in the changing media landscape — in traditional media outlets, social media, and now through content marketing.

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