Learn a four-step process to create an accurate project cost estimate, enabling you to maintain customer satisfaction, improve profits, improve your forecasting capabilities, and improve stakeholder confidence.
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Inaccurate project cost estimates can cause a number of problems for the Project Manager to deal with, including:
- Impacted customer satisfaction
- Impacted profits due to absorbing project cost overages
- Inaccurate budget, profit, and cash flow forecasting
- Lost management, stakeholder, and stockholder confidence
There are several reasons why a project may have cost variances, including:
- Lost control of project scope
- Unforeseen issues adding cost to the project
- No structured project estimating process
There is a four-step process that you can follow to generate an accurate cost estimate for a project:
- Identify the project scope
- Create a project work breakdown structure (WBS)
- Create a simple project schedule
- Assign resources and calculate costs using the project schedule
This is a structured and detailed process, and there are several things to consider when using any or all of these techniques. However, you should be able to follow these steps to create an accurate project cost estimate (+/- 10%), enabling you to:
- Maintain customer satisfaction
- Improve profits
- Improve forecasting
- Improve stakeholder confidence
Related Quotes To Consider:
(The following is the full transcript of this episode of ‘The Project Guide with Tony Zink’, where Project Management author and trainer Tony Zink shares his insights on how to use tools and techniques to get better results on projects.)
Hi, folks. Tony Zink here, project management author and trainer and creator of the Project Manifesto. I show people how to use tools and techniques to get better results faster on their projects, whether that means saving time, saving money, reducing risks, or providing a more stress-free and pleasant experience for everyone involved in the project. If you’re new here, please consider subscribing or following me on this channel. If you’re not tuning in directly on my website, TonyZink.com, then you can go there to get the video for this episode and others like it, the audio podcast for this episode, the entire written transcript, and other goodies, too.
Have you ever had to charge your project customer more than you originally told them? Have you ever had to absorb a loss on a project? Have inaccurate project cost estimates ever had an impact on your budgeting, profit, or cashflow forecasting? Maybe you’ve lost management, stakeholder, or stockholder confidence because your project costs don’t line up with your estimates.
Unfortunately, this happens all too often. It can happen for a number of reasons, such as losing control of project scope creep or unforeseen issues that add cost to your project. It can also happen because you don’t follow a methodical, detailed process for generating project cost estimates. This might be fine for initial discussions and back of an envelope type of estimates with a customer, but it’s not acceptable for formal or contractual agreements with your customer.
With the right combination of tools and techniques, though, you can create accurate and reliable cost estimates for your projects. Variances of plus or minus of 10% are possible with some practice, assuming that there aren’t any other issues or events that add costs over the course of your projects. I’m going to share with you a four-step process that you can use to create an accurate project cost estimate. There are other tools and techniques that people use, but today we’re going to focus on this four-step process built on basic project management principles.
The first step of this process is to identify the scope of the project. In other words, what exactly does your customer want to accomplish? You can discover this by asking who, what, when, where, and why types of questions. You can capture the answers to these questions in a charter or a scope or a statement of work document.
For example, maybe a customer of yours who owns a hotel wants to install electric vehicle charging equipment in their parking lot for their guests to use while they stay there. They want to provide their customers who drive electric cars—so, there’s the who—they want to provide them with the ability to charge their cars. There’s the what. While they stay overnight in the hotel. There’s the when and the where.
A few points to remember while you’re going through this step. First of all, don’t fall into the trap of designing the solution with your customer. Capture only their high-level requirements. If you allow them to design what they want, then your success will be limited to your customers’ knowledge and experience. They should be hiring you because of your expertise, experience, and perspective.
Another thing to remember, this is only for cost estimating purposes. Detailed requirements should be discussed at a later time.
Once you’ve completed the first step of defining the scope of the project, step two is to create a work breakdown structure or WBS for your project. This involves decomposing the scope or the end product into smaller pieces that are easier to plan and manage. It’s easier to estimate the time required and the cost required when the project is broken down into smaller chunks. It’s all easier to plan, assign, and schedule the resources that you’ll need if it’s broken down. It’s also, once the project is underway, easier to track the progress of the project if it’s broken down into smaller pieces that are easier to manage.
For example, the project for our hotel customer can be decomposed into the following components: permits, contractor bids and selection, equipment selection and purchase, installation, testing of the equipment, creating procedures for hotel employees and guests to follow, and then training for the hotel employees.
A few things to remember during this step. Don’t get too detailed. This is only for cost estimating purposes. It’s really easy to get drug down into the details, but remember, later on when the project actually starts and we get into the more detailed planning stage of the project, this is where we can really dig into the details, but now’s not the time for that.
Decompose to a sufficient level of granularity, but avoid components that sound like do the work or purchase and set up the equipment. That’s a little bit too high level, and you need to go a little bit deeper than that in order to get a good estimate at the end of the process.
Create rules for the sufficient level of granularity, such as breaking the project into somewhere between three and 10 stages.
This is typically represented with a visual hierarchical or tree-style diagram, or a written outline.
After you’ve identified the scope of the project and created a work breakdown structure, the next step is to create a simple project schedule. During this step, you should outline the activities and the timing for each item or deliverable that you identified in your work breakdown structure. In other words, for each deliverable, what are the tasks that are required to produce that deliverable? Once you’ve identified all the tasks, estimate the work effort required to complete each one of those tasks for each one of the items in your work breakdown structure. Then, sequence the activities or determine the order in which those activities should be performed. That then should make it relatively easy, as long as your project schedule is simple and not overly detailed to generate an activity timeline.
Now, this is really important for managing deadlines in your project once you’ve started the project, and for predicting scheduling conflicts, which can add costs to your project.
For example, unless activities are defined and scheduled out on a timeline, you may not realize that there are risks of missing your customers’ installation deadline of October 31st because of city zoning delays. You may also find that the electrical contract that you’ve selected is not available during the timeframe when you need them to perform your installation. You’ll then want to evaluate your options, such as maybe paying overtime to get predecessors done sooner, paying the contractor that you’ve selected a premium to rearrange their schedule, or maybe you’ll just select someone else to do the work.
A couple things to remember here. Don’t get too detailed. Again, this is only for cost estimating purposes. You don’t need to create a large, very detailed project schedule here. Create rules for a sufficient level of granularity, such as maybe tasks should be between eight hours and 40 hours in scope or scale.
When you’re done, all the work should be represented. If you can think of anything that isn’t represented in your schedule, then you’re missing tasks. Or, you may even be missing a deliverable in your work breakdown structure, which would of course have tasks that would go along with it.
You can do this in a worksheet, but I recommend that you use project scheduling software. It’ll make it easier for calculating the costs. Then, you’ll be ready to execute the project once it’s underway.
After you’ve developed your simple project schedule, a final step in the process is to assign resources and calculate the costs for your project. Most project costs are typically attributed to the resources that you’re utilizing on your project. Those resources consist of materials, equipment, personnel, permits, other types of purchases and so forth. Identify and assign the resources to the tasks in your project schedule, and then calculate their costs. For example, for personnel, you could calculate their costs by simply multiplying the work hours that that person is going to be performing on that task by the hourly rate for that person.
For example, our hotel owner wants to have this electric vehicle charging equipment installed on their property. The types of costs that we would probably incur in that type of a project that we can see in our project schedule would be permit fees, equipment and material purchases, labor costs for the people who are actually doing the work, procedure generation, and time spent creating and delivering training to hotel employees.
A few points to remember here. All project costs should be represented by resources in your project schedule, again, such as people, equipment, materials, and other payments and purchases that are assigned to tasks. Conversely to that, all tasks should have costs associated with them. Therefore, all tasks should have resources assigned to them, which carry costs.
Then, you should check for scheduling conflicts, as I mentioned in the last step, because any type of scheduling conflicts that you might find now, you can take care of those oftentimes by rescheduling things or finding other ways to mitigate those risks, such as replacing resources or contractors with other contractors that have more availability during the timeframe when you need them.
You can do this layout in a worksheet, but I recommend that you use project scheduling software once again. It’ll make this job easier because of the automatic calculating capabilities of project scheduling software. Again, once the project is underway, you’ll have a good foundation for running this project.
To wrap up, if you take the time to complete these four steps, identify the scope, create a work breakdown structure, create a simple project schedule, and assign resources with costs, then you will create a more accurate project cost estimate that allows you to maintain customer satisfaction by sticking to those estimates, improve profits by not needing to absorb unplanned costs, improve your budget, profit, and cashflow forecasts, and improve management, shareholder, and stakeholder confidence.
Thanks again for tuning in and spending this time with me. I hope that you enjoyed these tips and that you find them useful. I’d like to take a quick moment and remind you of two things.
If you’re not tuning in directly on my website, then you can visit my site at Tonyzink.com. Watch the video and others like it. You can listen to the audio podcast. You can read the entire written transcript and find other goodies there, too.
Number two, please post your thoughts in the comments section. Do you have any questions, tips, or recommendations that you’d like to share? How do you handle situations like this? Some of the best questions and tips come from the folks like you, the project management community. The people who are out there in the trenches every day, working on projects. So, definitely connect with everybody in the comments sections.
Until I see you next time, go back out there and keep building great things.