To keep a project within or under budget, being able to accurately estimate cost is a vital part of the process. There are many different costs which can emerge during the delivery of a project. Hence, an accurate estimation method can make all the difference between a successful plan and ones that fail. For seasoned campaigners, it is understood that projects bring their own risks, and risks add unexpected costs.

The estimation of cost, is a process that takes into account many different factors. Project cost estimation applies to everything from constructing a building to developing software. As with most things in life, money is required. The more clarity on how much money is require to complete a project and where it is coming from, then the more likely your objective will be achieved.

There are 12 steps involved in the cost estimation process, which are outlined below;

1. Defining the purpose of the estimate: Determine the purpose of the estimate, the level of detail which is required, who receives the estimate and the overall scope of the estimate.

2. Develop Estimating Plan: Assemble a cost-estimating team, and outline their approach. Develop a timeline, and determine who will do the independent cost estimate and then create the schedule.

3. Define Characteristics: Create a baseline description of the purpose, system and performance characteristics. This includes any technology implications, system configurations, schedules, strategies and relations to existing systems. Support, security, risk items, testing and production should also be included. Deployment, maintenance, and any similar legacy systems should be considered.

4. Determine Estimating Approach: Define a work breakdown structure (WBS), and choose an estimating method that is best suited for each element in the WBS. Cross-check for cost and schedule drivers; then create a checklist.

5. Identify Rule and Assumptions: Clearly define what is included and excluded from the estimate, and identify specific assumptions.

6. Obtain Data: Create a data collection plan, and analyse data to find cost drivers.

7. Develop Point Estimate: Develop a cost model by estimating each WBS element.

8. Conduct Sensitivity Analysis: Test sensitivity of costs to changes in estimating input values and key assumptions, and determine key cost drivers.

9. Conduct Risk and Uncertainty Analysis: Determine the cost, schedule and technical risks inherent with each item on the WBS and how to manage them.

10. Document the Estimate: Have documentation for each step in the process to keep everyone on the same page with the cost estimate.

11. Present Estimate to Management: Brief decision-makers on cost estimates to get approval.

12. Update Estimate: Any changes must be updated and reported on. Also, perform a post mortem where you can document lessons learned.

There are however challenges to cost estimation, as there are many factors that remain uncertain when estimating their cost. This could be due lack of experience on what to expect in a project if it is not similar to ones you have done previously. The longer the project’s duration, the less in focus cost estimations are, and the level of skill and experience available within the team is also going to have a big factor on overall costs of the project.

The techniques required for project cost estimation are impacted by different factors. This can be alleviated by techniques to provide a more accurate cost estimation.

It is best to seek the assistance of experts in their field, a Subject Matter Expert (SME) or historical data. If historical data is available this is known as analogous estimating, which show precedents that help can define what future costs will be in the early stages of the project.

Statistical modelling, or parametric estimating, also uses historical data of key cost drivers and then calculates what those costs would be if the duration or if an aspect of the project is changed.

A granular approach would be bottom-up estimating, which uses estimates of individual tasks and then adds those up to determine the overall cost of the project.

The three-point estimate, comes up with three scenarios, they are most likely, optimistic and pessimistic ranges. These are then put into an equation to develop an estimation.

Reserve analysis determines how much contingency reserve must be allocated. This approach tries to wrangle uncertainty. There is also cost of quality, which uses money spent during the project to avoid failures. That is the money applied after the project to address failures. This can help fine-tune overall project cost estimation. And comparing bids from vendors also help figure out costs.

The use of dynamic tools to estimate costs, it helps to use an online software to collect all of your project information. Project management software can be used in unison with many of these techniques to help facilitate the process. Online software can be used to define project teams, tasks and goals.

When estimating individual tasks, costs can also be collected and tracked on an online Gantt chart. This can be refined by using the online tool of your choice. This is also the case when estimating resource cost. When planning a project with a source management tool, an account for employee schedules, equipment rentals, holidays, office space and other factors that have an impact on budget can be considered. The distribution of project resources is one way to balance a budget.

Create a resource plan by scheduling the dates for planned resources, how long they will be needed, and who will be involved. That includes any equipment or site rentals. Also, break that down into the amount of resources needed for each activity on a daily basis. Then create a schedule with detailed resources, including duration and estimated costs.

These components and factors should be considered when estimating a project budget. Ensure to use the available resources and tools available to refine the budget estimate as best as possible. If there are components which you use and not mentioned here it would be great to hear from you.