How to Do Project Estimation: The Complete Cost Estimation Guide
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Service companies must face dozens of new ideas and projects every day. It is their bread and water and each, at first glance, should help one’s business grow and prosper on the market. In reality, however, with lots of success potential, come lots of risks and pitfalls that require careful evaluation and thorough consideration. It is important to have a hand of efficient project estimation techniques so that the company doesn’t waste resources on the implementation of dubious initiatives.
What Is a Project Estimate & Why Is It Important?
Project estimation is when one determines the significance and total value of a project, calculates potential direct profits and analyzes benefits from its implementation, and compares everything with alternative options. If, however, the project has no alternative, then the so-called “zero alternative” is used for comparison, i.e., the “leave everything as it is” method.
The estimation is most commonly employed in the following cases:
- Before client negotiations in terms of a new project or a new stage of the ongoing project;
- For making responses to individual submissions;
- In order to analyze in-house financial resources (in particular, budget) & plan expenses;
- To make a final decision about taking up certain projects as a whole.
Particular goals of estimation define how to estimate a project in a certain case. The ultimate common objectives are to settle with the budget and overall volume of work, with some additional points, including:
- Definition of project boundaries & description of all underlying workflow conditions;
- Definition of the project cost & self-cost based on the labor costs;
- Grounding of the project budget for external & internal investors;
- Extraction of data for a number of follow-up processes, such as sales methods, workflow planning, employee hiring, further budget planning, etc.
Project Estimate Stages
The whole process in the discussion is better subdivided into the essential segments. It is important to understand how the estimation is done at each of the following stages.
One of the crucial factors in the estimation is the calculation of the work volume required by the project. If the concept proves to be too labor-consuming, then it may be more reasonable to reject it in favor of directing labor resources into more relevant aspects. It is a global implicit standard to evaluate the labor intensity in man-hours for the following reasons:
- Different companies based in different countries may use various types of calendars where a work week may consist of a various amount of hours;
- The responsible team may not yet be fully formed at the moment of estimation and some team members may be replaced further on;
- The team may need to handle several tasks or projects at once;
- It is simpler to get a clear work estimation if you divide the labor intensity by the required resources.
For the successful implementation of the project, it is necessary to calculate the project self-cost to determine what related expenses to expect in the long run. The self-cost of the project consists of the total expenses for the month (this includes workspace rent, payments for servers, licensing, etc.) and salaries of experts working on the project. When it comes to software development, basic workflow methods, such as Agile or Waterfall, also dictate how to estimate the cost of a project.
Once total expenses and employee payments are calculated, the final costs can be settled. For that, the following aspects should also be considered:
- The size of total profits is very important for estimating a project. You need to add the desired percentage from the labor self-cost the cost or add a separate point to the “total cost” list;
- Tax payments are calculated differently, as taxation systems may differ from location to location. In some cases, taxes can be calculated as an average percentage of the project cost.
- Payments for sales managers will depend on the terms of collaboration. It can be either a percentage of the closed deal or the total profit.
Yet another crucial stage in one’s regular estimation plan. In particular, at this point, one should:
- Clarify the required contributions from all parties involved with the project;
- Assure that the required resources will be available as needed;
- Compose a precise workflow schedule;
- Track all the expenses in order to avoid budget overruns.
In general, the common project implementation requires two types of resources: material and human. In order to calculate the total amount of required manpower, it is necessary to take into account the staff qualification. Experts recommend that you create a qualification sheet, which will be divided into several blocks:
- Basic qualification – the correspondence of the employee qualification with the skills necessary to solve the task.
- Additional qualification – a level of skills sufficient for handling particular tasks that are initially out of the project’s range.
- Engagement – an employee’s sole desire to take part in the project;
The qualification sheet ultimately helps to define which specialists you may lack to implement the project most successfully.
As for the project budget estimation, the essential stages include:
- Definition of the initial budget concept. Evaluation of the expenses in descending order should take place to define how reasonable the implementation of this or other project is as a whole;
- Detailed analysis of the budget based on the initially composed set of work tasks;
- Revision of the budget after the dedicated project staff is assigned and provided with the required work resources;
- Additional budget revisions should take place if any workflow changes appear.
Common IT Agency Pricing Models
There are two basic types of pricing models that help service providers claim payments from clients in an orderly fashion. Depending on the situation, they can be combined. Understanding these models helps thoroughly prepare an estimate.
Time and Materials
If the company works based on the “Time and materials” model, the client pays at an hourly rate under the contract, and also reimburses the costs associated with any additional support. The main advantage of such a model is that a minimum of preparatory work is required.
The only thing that has to be agreed on before initiating project workflow is the hourly payment of certain IT specialists. In this aspect, the question of how to estimate hours for a project based on individual qualifications often arises, which should be settled separately and beforehand.
This model has several disadvantages as well:
- It is quite difficult to predict the final costs and to guarantee the timely completion of work due to the flexible work schedule.
- Projects that are based on a contract of this type must be constantly monitored so that working time is distributed reasonably. Many clients ask for regular reports and clarifications of workflow nuances.
- The client has to pay for downtime, which, in certain situations, can mean paying for no factual work done.
These particular difficulties make the Time and Materials model in its pure form quite neglected. But it can always be enhanced with additional deal points.
Fixed Price Estimate
The supplier calculates the volume of work and defines the bill for the whole project at once. This model motivates to deliver the finished project on time while clients can settle with the budget and deadlines fairly quickly. In order to work as successfully as possible, both suppliers and clients must clearly understand the requirements of the project and its purpose.
To reduce misunderstandings, differences of opinion and conflicts that arise due to differences in expectations, clear terms of reference should be drawn up. It should contain:
- Quality requirements that are defined with the help of special metrics;
- Methods & criteria of employing specialists;
- Requirements for making further corrections, regulating communication, & taking up correction requests;
Working at a fixed rate implies considerable preparatory work and a large number of approvals. In addition, sometimes, you have to hire a separate company specifically for composing the terms of reference.
Project Estimation Techniques
There are several major techniques to help you provide estimates more precisely based on various nuances.
Poker estimate is a peculiar technique that is based on reaching supplier-client agreements that’s used to evaluate future work and the scope of the tasks to be accomplished.
You need to things to implement this one in your practice: a list of features that are needed to be discussed and a few decks of cards with numbers. Special cards may also be included in the deck, which will indicate uncertainty, infinity (the idea cannot be realized), a break (usually a cup of coffee is drawn on the card).
Here’s how this technique looks in action:
- A presenter is determined to lead the meeting;
- The product manager should provide a brief overview of each item to be discussed. The team can ask different questions, discuss suggestions, and risks;
- Each participant must select one card and put it on the table shirt up. This shows that the choice was made. The numbers drawn on the cards can be used quite differently: they may indicate certain participants evaluation of idea, the number of project stages or the units of difficulty;
- Everybody must name their card and turn it over;
- Participants that show the highest and the lowest numbers speak up and explain their evaluation;
- The brainstorm takes place until all participants reach a consensus.
Use a timer to structure such discussions.
This method is implemented using a hierarchical structure of workflow. The whole project or a single task is broken down into smaller stages to be evaluated individually. Thus, knowing how much time, resources, and effort it takes to accomplish a particular task or a piece of task, the manager compiles the data and receives a general evaluation of the project. In this case, the smaller the details that are estimated, the more reasonable the final data will be.
This method of estimation is used to estimate costs during the initial stages of the project when there is not much information available. All in all, in terms of the top-down estimate, a project is evaluated gradually, element by element.
Which Estimation Techniques Should You Employ?
In order to settle with how to estimate project cost and time efficiently in your particular case, you should settle with a method that will help you avoid or timely handle potential estimation issues, such as:
- “Overcolored” estimation, which can be utterly pessimistic or extremely optimistic;
- Lack of required data on certain project stages;
- Lack of a risk-reduction plan;
- Unexpected project changes, etc.;
Estimate Projects With MPS
When estimating projects, it is important to make organizational and planning decisions based on complex calculations. Special software and computing techniques may be used for this, for instance, the Master Project Schedule (MPS).
It provides the following features:
- The main element of the project is the types of work and connections between them, as well as the amount of involved resources. All this is formed individually for each specific project;
- The schedule is formed in such a way that all the project workflow reflects the technological sequence of their implementation and fit into the hierarchical structure;
- Specially designed hierarchical structures that help organize information are actively used to compose project data on work or resources. The most important of these is the hierarchical structure of work execution, which can be used to generate work packages for project implementation, as well as to distribute responsibility among managers;
- The most important types of resources that are given maximum attention in terms of management include time, financial, and manpower assets.
The MPS also has a built-in database with a stable structure. Readings to specify in it are extracted from automated calculations or a set of acceptable values. The major data groups include:
- Description of project workflow processes;
- Description of associations between types of work;
- Resource distribution;
- General scheduled project planning.
In addition to predefined fields, you can also apply custom fields. They may contain data to describe both the graphics as a whole and the works or resources.
How to Estimate Project Cost & Time Step by Step
To recapitulate our work estimation insight, here’s how your subsequent process of estimation should look like:
- Definition of the Project & Product Scope;
- Forming of a team;
- Estimation of the design for the future solution;
- Estimation of deadlines & scope of time required for the implementation;
- Creation of the product architecture with essential descriptions;
- Analysis of the ongoing solution development & readymade architecture.
Project Estimate Plan Examples
The most common way to plan out project estimation in essence may include the following subsequent stages:
- Analysis of the subject field;
- Basic project characteristics;
- Limitations & allowances;
- Project structure analysis;
- Project time estimation;
- Labor resources estimation;
- Project self-cost estimation;
- Estimation of risks at each stage of the project.
Estimate should be a necessary stage in any project. It is thanks to thorough evaluation of all underlying aspects that you can determine whether to take up a project, what risks it may cause and how to optimize its implementation workflow.
The analysis can be carried out at any stage of the project, and, more often than not, each stage of work on the project involves a separate set of estimates. Make sure to employ the fitting special techniques and don’t neglect the specialized software like MPS.