How to estimate project costs
There is no doubt that estimating project costs, regardless of type or size, requires a fundamental step that cannot be bypassed. Based on these estimates, the project owner can grasp many aspects, especially financial ones, and gain an overall perspective of the project. Therefore, our following article will clarify many steps and methods that must be implemented to accurately and clearly estimate project costs.
How to estimate project costs:
Project cost estimation or forecasting future costs for any project to be established and worked on is done by defining the project budget and not exceeding the expenses for the project's establishment within the estimated budget.
The cost estimation process involves several accurate project data points and detailed project management plans.
When calculating estimated costs, which are done during the planning phase of any project, it must be taken into consideration Numerous factors such as:
- Project timeline.
- The geographical area where the project will be implemented.
- Contingent costs or factors that may surprise workers or project managers.
- The number of individuals working on the project, along with their experience and qualifications.
Numerous actions or steps are taken to determine the expected cost of implementing the project using various means and methods. Which we will summarize as follows:
Steps for Project Cost Estimation:
Preliminary project cost estimate
The preliminary project cost report plays an important role, as most proposed construction projects depend on the project's preliminary cost, which determines whether the new project is approved or not.
This crystallizes the project with appropriate initial estimates, for example, reducing the project scope if the cost is too high or narrowing the timeline to fit the allocated budget.
Bottom-up estimation
Through this method, the lowest expenses are estimated first, then the next highest, and so on, until expenses at all levels are estimated. After that, all the expenses are summed up to arrive at the project's total estimated cost.
Countdown
In this method, the top level of the project is estimated, which is estimated through historical data of a similar project from old or implemented projects. This method is also called the analogous method.
This method is characterized by its speed and low cost, but it is criticized for its inaccuracy in cost estimation.
Expert opinion
In this method, experts' opinions are taken on the quality of the specified project, who estimate the cost through their experience in their previous work on similar projects.
Where each expert provides an approximate specific value, and then the estimated value for the project is chosen, taking into account any differences between the two projects.
With our qualified team of experts, you can communicate with our technical support team who will always be ready to assist you in estimating project costs and answering all your inquiries, and will guide you through everything you need to know about your project.
Parametric Estimation
This method is used to estimate the cost of similar projects by using the cost per unit. The cost of a single unit is multiplied by the total number of units to obtain the total project cost.
This method is often used in engineering (construction) projects.
Three-point estimates
The three-point estimation method relies on statistical methods (program analysis and review technique).
This method analyzes the activity the project will undertake, the estimated project costs, and the project timeline through optimistic, pessimistic, and most likely estimates.
These estimates are calculated using the weighted average method as follows: (optimistic + pessimistic + most likely / 3).
How is project cost estimation performed?
After the project is selected and its cost is determined using any of the cost determination methods, the project costs are analyzed to evaluate the project's cost by comparing it to the project's expected returns. This process is done as follows:
- A list of project expenses is prepared, and against each item, the expected returns or revenues to be achieved during the project's duration are placed. Accordingly, costs are subtracted from revenues.
- Based on this data, return on investment, internal rate of return, net present value, and payback period can be calculated.
- Based on the foregoing, and after completing the cost-benefit analysis, realistic results will be reached, on the basis of which a decision can be made to start and implement the project or to withdraw from it.
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