What Is Cost Estimation? An Ultimate Guide To Refer

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An estimate approximates the project’s total cost; the quote is more of the exact measure. Even before a contractor proceeds with executing or planning the execution, they need to provide estimates. These estimates consider the rough scope of work, the approximate timeline for completion, the total workforce required, and finally, the project’s cost.

Estimates are core to efficiency and help improve the phases and attain milestones. Most businesses that struggle with deliveries have an inefficient planning and estimation system.

As part of this article, we will explore what is cost estimation for a project? We will also talk about a business’s process to arrive at a realistic cost estimate.

What Is Cost Estimation?

Cost estimates are core to project management. As a project manager, you are entrusted with managing the costs, identifying the approximate budget, and creating the quote. You will also need to ensure minimal to no cost overruns for your project.

It is essential to know what cost estimation is at this point.

This is the process of identifying the total costs associated with the project. Say you are working on a construction project. As a project manager, you need to ensure sufficient funds to purchase all the required goods and materials. The costs need to be minimized while maintaining project quality.

That’s where cost estimates play a pivotal role. It helps predict the costs reliably, considering all aspects of the project. In the case of our construction project, the building material, resource hiring, labor, and vendor costs are to be included. These costs will also include purchases, hiring, and retention costs.

With the correct estimate and scope, you can define the budget for the project. If your project involves a complex, you know what all things are included. For instance, you will need to have gardens designed and constructed. You will also need a sports section for the complex.

What Is The Purpose Of Cost Estimation?

It helps calculate both the direct and indirect costs involved with project management. It gives you the complete scope to merge timelines, efforts, and prices for the project to determine if it is profitable. It also helps know if you are managing the right kind of labor. Lastly, it helps determine if your project will make a difference or not.

Here we will talk about the purpose of estimating costs and deriving a budget before planning or executing the project.

  1. Better Understanding of Project Costs

    better understanding of estimation

    The cost estimation helps the project managers, and other people involved complete visibility into the costs, resource requirements, and other management elements. The stakeholders find it easier to make decisions if there is a detailed understanding of the overall project costs.

    As the name suggests, the estimate is an approximation and is subject to change. However, the forecast cannot be too far off from reality. It, therefore, helps know what would be the profit and overall incurred cost for the project.

    Some of the costs involved in projects include:

    • Direct Cost

      These costs are interlinked with the project. They include material cost, labor cost, hiring cost, and others.

    • Labor Costs

      These include the total wages you will pay the laborers for their efforts and time. you will have to calculate this separately

    • Indirect Costs

      These costs impact the project’s budget, but they are not directly connected with your project scope or work. The administration costs, maintenance, infrastructure, and overhead expenses are calculated under this head.

  2. To Avail Better Funding

    For a construction project to be successful, you need funders. It is not possible to raise these vast funds all by yourself. That’s why you need someone to back your project.

    However, if you don’t have an estimate for the project in terms of timeline, plan, and cost, you may not get the funds.

    An estimate helps investors know what you plan to achieve, how long it will take, the total laborers you plan, and the rationale behind the project. It also gives a scope to the project and offers you an insight into the profitability.

  3. Determine the Materials Required

    determine the materials requirement

    This is very important when you are in a contracting business, especially in the construction industry. You need to ensure you have the suitable materials required for your project. It is equally essential to identify low-cost and high-quality materials.

    The cost estimation will give you an insight into the spending allowed for each material, even the smallest screw or bolt needed for the project. As a result, you will approach the vendors accordingly.

  4. Know the Tools Needed

    In the planning phase, you also need to know the tools and equipment you require to finish the project. The cost estimates play a pivotal role in identifying the tools and ensuring you have the right equipment by your side.

    Let’s take a bridge construction project. You will need cranes, trucks, blades, and drilling machines to construct the space. How do you get to this part? When you observe the estimate sheet correctly, you will notice that there are aspects of the project you will need the drill machine.

    The cost estimate helps plan the tools and design the processes.

  5. Make Resource Management Efficient

    This is one of the most considerable efficiencies you will notice with cost estimation. It allows you to manage the hiring, contractual management, and resource planning efficiently.

    You have denoted the number of days and an approximation of the tasks that need to get done. With these details, you will know how many people you need for the particular project.

    It would help if you had people who would till the land, carry the bricks, and so on. For every activity carried simultaneously, you will need unique laborers. At the same time, if you need some specialists for the activities involved in managing the project, you will need to appoint them accordingly.

    The estimates are an excellent way to identify the same.

  6. Analyze the Cost-benefit Ratio

    cost benefit ratio analyze

    This is important if you want to know whether or not the project is profitable. Let’s see why?

    Imagine a project where the cost is x. Your efforts were higher as you had to finish the project within a specific timeline. When you are done with the project, you realize it is not earning the big money you had projected.

    Either the idea failed or you had not analyzed the benefit against the costs involved. That’s why cost-benefit ratio analysis is essential.

    For the cost, resource investment, and other aspects of the project management, you need to study the benefits you will gain. For example, in the case of a construction project, if more people are buying the flat/commercial project, then it is a hit with the people. That means the investment was beneficial to your business. However, if no one is buying the plot or residential flat, you might incur losses. In that case, the cost was not beneficial.

    Instead of analyzing this fact after the project is executed, you can do that in the pre-planning phase. When estimating the direct costs and the overheads, you can also analyze if the project will benefit your business.

  7. Make the Costing Efficient

    When you work on cost estimates, you also ensure that the costs aren’t too high. For example, you will work on the variables and the fixed factors. You will try to identify where you can reduce the outflow to reduce the overall budget needed.

    Cost controlling needs a defining and all-inclusive estimate that caters to all aspects of the project.

What is the Cost Estimation Process?

what is the cost estimation process

It is essential to take the proper steps to craft a high-quality cost estimate to ensure you have met the budget requirements. Here we will take you through the entire process for estimate creation.

  1. Define the Purpose

    Start by knowing why estimating project costs is important. Do you want to attract investors to fund your project? Are you looking to identify the overall budget for your project?

    When you are clear with the purpose, you should know the overall vision of the estimate. What are the different things you want to see in an accurate cost estimate? Similarly, you should also determine the details you need in the forecast.

  2. Know the Requirements

    When you plan to create the cost estimate for the project, you should know everything there is about the project. It should include the type of project, what the business aims to achieve, some of the initial requirements, and other details.

    It will help build the scope for the project, which will eventually translate into the estimate. For instance, to estimate cost for a construction project, surveying the land is an essential requirement. You will need to add the resources, cost, and timeline for this phase. If you aren’t aware of the project requirement or scope, you won’t determine this estimate.

  3. Estimate Plan and Approach

    The bottom-up analysis method and a parametric model can help you arrive at the correct estimate for your future costs. You must choose the right plan and approach to arrive at the cost estimate.

    What kind of process will best suit your estimate? For example, if the requirements are already available, you might want to ditch this step in the approach. If your assessment depends on the past project cost estimation, you will need to check that.

  4. Finalize the Segments

    What will all headings be covered as part of your estimate? For example, if you plan a remodeling project, you will need to include a demolition phase. You should know the costs involved in demolition, which consists of the labor, equipment, efforts, and material cost.

What are the Three Types of Cost Estimates?

tree type of cost estimation

It is important to know the three types of cost estimating approaches that can help you define a successful quote for a future contract.

  1. Analogous Cost Estimating

    The analogous estimating method depends on past projects and their budget to estimate current costs and resources. It will also consider the project manager’s experience in handling similar projects.

    This estimating approach is majorly used to identify the scope and duration of the project. It also involves knowing if there are other similar projects and how much they cost. Lastly, you will be basing the estimation on the past budget and timelines.

  2. Top-down Cost Estimating

    In this project, the project managers budget the whole project. After that, they break the costs into individual categories and sub-categories. Lastly, they break it down to the minutest detail, such as materials.

    It involves step-by-step estimating, starting from the top of the project scope.

  3. Three-point Cost Estimating

    There are three approaches to this project cost management- the positive, the pessimistic approach, and the likely approach. After coming through all three assessments, the final estimate is created for the project.

Conclusion

Cost estimate for businesses acts as the first step to planning your project. It not only estimates the project costs but also helps with indirect costs that impact your success.

When you approach cost estimates, you should consider suitable cost estimating techniques. Not all approaches will help achieve the budget and improve your quotes.

It is also the stepping stone to project planning and enhancing the project goals. You will be able to plan and execute your project with the help of accurate project cost estimates.

Author Bio
Jeel Patel
Jeel Patel
Founder

Jeel Patel is the Founder of InvoiceOwl and is the main curator & writer of the content found on this site. With ideals of quality, commitment, and perseverance, he believes in creating lasting business relationships with the clients.

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