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The Top 5 Variables of Project Cost Estimation

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Understanding how important cost estimation from the early stages of a project is essential. Those in project management need to know how poor project cost estimation can impact the end result of a project. So, what does happen when project managers fail to estimate the cost of a project accurately? 

Project managers need to be fully aware that each and every process in the project is linked closely to project budgets. To be more specific, how much money is available for the project determines how long the project will take to complete, what kind of procedures and activities the project will need to have, and what type of resources will be needed.

Plenty of potential scenarios can occur with poor project estimation, and all of those scenarios can lead to negative consequences. For example, the expectations of the customer can be greatly affected due to poor project cost estimation. If a project takes too long to complete and the deliverables are not up-to-par with the standards and expectations of the client, and could also negatively affect the reputation of your organization and your whole team. 

The Importance of Budget in Project Cost Estimation

As the saying goes, “Time is money,”, and a poorly-architected budget can be very damaging to the development of a project. Which is why budgeting is extremely significant in project management. Being able to avoid unnecessary expenditure and distributing the sufficient amount to each need of the project is detrimental to the overall development of the project.

As a project manager, you need to invest your time and effort in creating an effective project quote template which will be followed by everyone in your team to successfully finish the project. Another upside to this is that it saves time for, not only you, but your team as well. Not only that, but you and your team can avoid feeling anxious and uneasy. By creating an effective project quote, you can guarantee the success of the project.

To successfully create and plan effecting project cost estimations, a project manager needs to be understand and familiarize themselves the 5 important variables that impacts a project. The 5 variables are as follows:

In order to create and plan effective project estimations, you need to familiarize and understand the important variables that can impact your project. The 5 variables are as follows:

  • The Time expected to manufacture the product.
  • The Effort required creating the product.
  • The Cost your client expects to spend.
  • The Resources required completing the project.
  • The Specifications of the product.

These 5 variables are keys to accurately and effectively create cost estimation in project management. Read on below to understand each variable in detail.

Variable #1: Time value in the project cost estimation

An accurate estimation of time is a skill that all project managers must have. Here are two reasons why:

  • Accurately estimating time means that project planning can be successfully laid out and project deadlines are met. Your dependability and competence can be greatly affected either positively or negatively depending on how you accurate estimate time.
  • Accurately estimating time can often dictate your contract pricing. This means that the potential commercial profit from the project can be affected.

As a project manager, you shouldn’t underestimate the time needed to finish a project, as well as each task in the project itself. This scenario happens when a project manager has little or no knowledge of the complex task needed to be performed. If you’re unfamiliar with a task, it’s best to ask someone from your team who has knowledge of the specific time task for their input. A lot of project managers who have no idea of the tasks often don’t allow for any potential mistakes and mishaps in their estimation. This can be utterly disastrous.

If a project manager underestimates the time required to finish a project, they can potentially lose credibility and profit. By not underestimating time, you not only can’t miss deadlines and potential profit, you also save you and your team from unnecessary stress. 

Variable #2: Resources

Your resources are composed of people, knowledge, time, materials, and equipment. Usually, companies have a limited number of resources which is why trade-offs on resources are spent when needed in an organization on a daily basis. A resource allocation plan is an important tool that project managers need to have in order to effectively manage a limited amount of resources.

For an effective project cost estimation, a project manager needs to create a project schedule which indicates which resources are needed and when. A resource allocation plan helps project managers stay organized and effective by having an effective resource management. The plan mostly describes the type of resource needed for a specific task and the exact timing it’s needed. It should so be versatile enough for changes or adjustments as the project schedule changes with time.

Most of the time, a project manager won’t already have all of the resources needed for the project at the very start of the project development phase. The truth is, the details of the entire project is normally unknown at the beginning which is why it’s not always possible for a project manager to know what resources are needed of each task and when they are required.

Most projects are fairly unique and temporary, that’s why project managers will almost always work in a land that’s dark or unknown. Resource planning and management should be continuous as the project progresses, and so does project estimation techniques in project management. Doing so can ensure you a higher success rate.

Variable #3: Effort in the project cost estimation

Accurately estimating effort required in a project is a key factor in successfully laying out the cost of the project and its estimated time of completion. As a project manager, you need to understand that the level of effort required to complete a functionality of an applications is always different from the estimates. Take note that when it comes to effort estimations, the more detailed or comprehensive an estimate is, the farther it is from the truth. Because of this, previous experiences and assumptions of the estimated effort required in a project averages at the end result. Of course, this goes both ways. Averages in estimates can’t always address the possible risks involved in each project. Even though averages are the practical approach to effort estimation, they are unable to provide an estimate of the project without any risk to a specific part of the project.

Additionally, the required time to complete a project isn’t directly related to the number of resources available simultaneously. Determining the level of effort in the project depends on the project manager’s professional evaluation of the people handling the project and the processes used to complete it. When you increase the number of resources and tasks, you also increase coordination and communication exponentially. Having a group increase in size can also lead to more errors, surveillance, and cycles without cost-effective overall output increase.

A project manager’s estimate of the effort required in a project is usually evaluated from a simple analysis of the specifications. The real effort needed during projects often increases well beyond estimates due to the “fixes” needed to fill the gap between specifications and the product as they’re developed.

Variable #4: Specifications

Specifications are usually assumed to be a known, definite factor in fixed-cost projects. Specs are used when estimating the required effort needed in a project which ultimately determines the project cost estimation. Customers usually expect that their specifications don’t need to be significantly different in order to create the desired product at the defined cost. Customers often spend a lot of time producing design specifications to make sure that they are complete and fixed. But the truth is, a project manager should have the non-assumption of specifications will need to be varied in order to achieve fixed cost results in a constant tension between the required effort, the remaining scope, and the remaining time on the project clock. 

Almost all fixed cost projects deliberately have limited scope-changing options. So instead, limiting the change in scope by not providing viable options raises the risk that the project will not achieve the desired objectives if the end users evaluate the actual product. 

Specification requirements for software development can never really be sufficiently complete or sufficiently well-communicated to ensure understanding and success. Interpretation errors due to having super broad and complex specifications can lead to several “fixes “for the development team which do not associate with actual code errors. These fixes are simply clarifications or “elaborations “of project specifications, but are assumed to be “bug fixes “in the development, testing, and QA process in most projects. 

The specification requirements of software development projects are naturally improved by the discovery during evaluation and development by both the development team and the customer team.

Variable #5: Cost

From a customer’s point of view, software development projects almost never end up at their expected costs. A few customers’ projects end at the target cost of the customer, but usually only at the expense of other project variables. This is unavoidable yet it can be controlled. 

As a result, the product is often a failure from an end-user point of view when projects cost what was originally expected. For customers, the target cost of the project generally depends on: 

  • Anticipated product cost and preferred ROI (return on investment), which could be accomplished within a reasonable amount of time by an estimated number of paying customers. So, a series of dependencies in the final analysis may have little basis. 
  • Funds available and restrictions on cash flow. 
  • Experience with “similar projects “- Though, estimates based on this approach are rarely found to be comparable in the required effort. 

To Recap

The key of successful project estimations techniques is a consultative framework for effective communication and decision- making that is assured by real-time reporting during the project as well as collaborative problem-solving in order to achieve the customer’s objectives. It’s easy to say, but to achieve effective project quotes requires understanding, planning, and agreement.

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