Cost Estimation In Project Management: How to Estimate Project Costs

Cost Estimation In Project Management: How to Estimate Project Costs

Cost estimation is essential for project management success, as it takes into account direct costs, indirect costs and other factors to calculate a budget that meets the financial commitment necessary for a successful project. It is the summation of individual cost elements, using established estimating methods and valid data, to estimate the future costs of a project. Credible cost estimates include clear identification of tasks, broad participation in preparing estimates, availability of valid data, standardized structures for the estimates, provisions for program uncertainties, recognition of inflation, excluded costs, independent reviews of estimates, and revision of estimates for significant program changes. The project manager is responsible for making the most accurate project budget possible by using a work breakdown structure (WBS) and cost estimation techniques to visualize the project scope and assign costs to each project task.
Having a cost estimation process is essential for project managers to achieve the goals and objectives of the project set forth by executives and stakeholders. Knowing the project scope will help project managers estimate the overall cost of delivering the project on time and meeting quality expectations. There are several cost estimation techniques that can help with developing a more accurate cost estimation, such as analogous estimating, parametric estimating, bottom-up estimating, and three-point estimating. Reserve analysis determines how much contingency reserve must be allocated, and cost of quality uses money to wrangle uncertainty.