An understanding of project costs is a key part of project planning and building the supporting business case. The project costs create the project budget against which the project manager is expected to deliver. The scale of the project is immaterial, two people for a few days or a large team for a year, knowledge and management of the project costs are one of the key attributes for measuring success.
When project costs are being estimated for a new piece of work it can often be hit and miss when required early in the process.
If a similar piece of work has been done in the past, estimating the project cost can be an easier process and is more likely to be correct from the off-set.
For completely new project types though project costing can be a little like a black art and can, if incorrectly managed, create serious problems both for the project and the business.
The project costs estimation is used to give a client a price for their project in many cases. Often smaller businesses particularly are challenged by their clients to give an estimate straightaway for a piece of work. What’s worse is that these estimates are given with no contingent built in by the vendor to validate the scope or what’s required and to revise the estimate if required to do so before the work starts.
The requirement to protect the project and the business is paramount and the client needs to be made aware of the proviso’s around the project cost estimates and to understand that they may change after scope completion.
Project Cost Estimating
Project costs are essentially divided into man-hour costs and non-labour costs.
Man-hour project costs
This is calculated by taking the total amount of hours required to deliver the project broken down by skill-type. E.g. for a house build you might have architect, general builder, electrician and plumber. Multiply the number of hours required for each by the hourly cost associated each.
Non-labour project costs
These costs cover all other aspects of a project implementation outside of salary costs and contractor day costs. Typical items that are included in this cost estimation are;
- Materials and supplies.
- Travel expenses.
- Equipment.
- Building and facilities costs.
Once you have considered each relevant item to your project, this is essentially your initial project cost estimate. As the planning and design gets underway, you will be able to fine-tune your estimation and provide the client with a more robust price for their project delivery. This also gives you or your project manager a project budget to work against and measure the projects success.
So build a robust project costing process, one that works for your business. Ensure that you capture each of the relevant cost items and estimate for each type. Lastly, work a process of initial and then substantive estimation into your client offering i.e. get them to agree to the fact that the initial estimate is just ball-park and to allow you to do some further analysis to provide them with a more accurate project cost estimate.
How do you estimate project costs? Let us know.
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