Project Cost Estimation: Templates, Tools, and More!
So you’re starting a new project. Great! Business is booming! But how do you estimate how long this project will take to complete? Five hours? Five days? How much will it cost your business to perform this work? Are there any opportunity costs associated with taking on this new project or client?
It can be difficult to answer these types of questions while you are busy running a business. But unrealistic project estimation frustrates employees and clients alike, as it can make deadlines, costs, and results unpredictable at best and impossible at worst.
Despite having "estimation" in its name, guessing or estimating is not the best way to predict project costs. If you are going to guess how much a project will cost — and not rely on data — you might find yourself over-servicing your clients or even losing money on a project that should have been profitable.
So, how do you make sure your organization accurately estimates project costs?
Define Your Product or Project
First, clearly identify your product (e.g., logo design, app update, etc.) and then isolate the deliverables associated with it. This may seem obvious, but naming the specifics helps to clarify the work and guide your priorities. It can also bring to light any critical components of the final product that might have otherwise been forgotten until later. With project cost estimation, you want no surprises (excluding this fantastic song.)
Project Cost Management
How are you billing for your project? Hourly? Is there a retainer? Is it a fixed fee or a lump sum amount? Your billing method will dictate how to assess project costs. Hourly projects have less risk than a retainer or fixed fee, provided your team is not working considerably more hours than your client expects. Granted, retainers offer stable and predictable income that makes hiring and planning employee time much simpler. Unfortunately, there's no easy answer to how your organization should bill for its time. We recommend reviewing your model at least once a year, as clients, laws, and the market can change quickly.
Project Costs and Overtime
Regardless of your billing model, you'll want to review your local, state, and federal overtime laws to make sure you are properly paying your employees for any overtime hours worked — and including these added costs in your project estimates. When a client says "this is not what I asked for," you may be confronted with the need to pay your non-exempt employees 1.5x their standard rate. It can be a costly and emotional lesson, especially if you a running a small business.
Project Timeline Generator
How long do you think your project will take? Got your number? Good. Now double it. At least, that's the method we recommend if you don't have good historical data. It's far too easy to underestimate the amount of time a project might take, particularly for creative work.
For those of you who track employee time, we suggest running a simple report that breaks down employee hours by task, project, and cost, so you can determine basic guidelines for your team — and generate a quick estimate of how long a new project might take. The data hidden within your time tracking software will help you create benchmarks and build more accurate estimates for your clients. It's also not a bad way to ensure your team is working at a proper pace.
Project Estimation Methods
There are a number of strategies that formally trained project managers use to estimate how long a particular project might take. We'll cover them briefly here:
For bottom-up estimation, you'll need to break down your project into every possible small task and group them together. From there, you can estimate the amount of time each task or group of tasks will require. Because of the specificity of this process, it may provide an accurate final estimate. However, it can be extremely time consuming, particularly with a task list broken down to very small incremental steps.
Conversely, a top-down estimate starts by developing an overview of the expected timeline first, using past experience as a guide. For example, if this year you need to write a 100-page annual report, and last year, you wrote a 50-page annual report, you can estimate that this project will take twice as long as last year's. You'll then segment the work into smaller tasks and assign projects to your team. This method takes less time than bottom-up estimation but may miss smaller tasks or omit important variables. Also, it's not ideal for new types of projects.
Parametric estimation is most useful for projects that require multiple instances of a similar deliverable. It involves estimating the time required to create one element and then multiplying that by the total number needed. For example, website production may be estimated by assessing the time needed to build a webpage, and then multiplying by the total number of pages. The risk with parametric estimation is when a set of tasks are similar in theory but different in practice.
With this method, each "point" represents a possible outcome. Project time is estimated based on the best case, worst case, and most likely scenarios. You take an average of these three numbers, in which the most likely scenario receives extra weight, as it has a greater chance of being accurate than the best or worse case scenarios.
Here's the three-point estimation formula: Project time = (Best Case + (4 x Most Likely) + Worst Case) ÷ 6.
Of course, the accuracy of even this method is subject to how well you and your team are able to estimate the various outcomes.
Tracking Project Time
Alright, the estimations and calculations are finally over! You now (hopefully) have an accurate understanding of how long your project will take. It’s time to create your project plan and get to work on hitting your deadlines. With fewer unknowns and a clear picture of what to do, managing, budgeting, and scheduling employee time should be much simpler.
But how are you planning to track your work? Can you automatically record the time you spend in meetings or easily capture project time in Google Chrome? Are you able to maximize profitability and manage opportunity costs by planning employee resources against a budget or retainer? Hopefully, the answers to these questions are a resounding "yes, yes, yes!" (Or, at least two ardent yeses. That would be good.)
Project Cost Estimation in a Nutshell
How to estimate project costs:
- Define the project
- Assess your billing structure
- Estimate how long the project will take
- Track your hours
- Learn from the process and improve over time
That last part is arguably the most important. Things happen. Issues arise. Keeping a project on track is more than management — it's an art. And quite often, it's an exercise in sheer willpower. No matter how good your estimations might be, no one can predict the future. Not even you. That's why it is so important to have the right systems in place. To understand the nature of the work itself. To know how long a certain activity should take, and in what context. To be able to answer the most frightful of questions: What happened?
And to say, "I know. I can tell you. I can help."