Does this situation sound familiar?
You’ve billed a client for 50 hours of work, but the project is slowly creeping towards 75 hours. Research, meetings, and revision requests have taken longer than you bargained for.
The project is spiraling out of control, scope creep is closing in, and you’re losing sleep because of all the stress.
Unfortunately, this scenario is all too common for project managers.
Project cost estimation can be challenging, especially when the project is complicated and has many moving parts.
But if you accidentally underestimate the time and resources you’ll need, things can quickly spiral out of control and lead to the project tumbling into the red.
If this sounds like you, then you’re in the right place.
In this guide, you’ll learn:
- What a project cost estimate is
- Why most project cost estimates are terrible
- How to create an accurate project estimate
- What to do after creating your project cost estimate
Let’s first clarify what we mean by a ‘project cost estimate’.
What is a project cost estimate?
A project cost estimate is the total amount you think a project will cost, based on the scope of work and the time and resources needed to complete it.
Project costs often include money spent on:
- Employee hours
- Contractor payments
- Tools and software
- Workspaces and utilities
Costs can be direct (related to one specific project), or indirect (ongoing costs related to multiple projects). The larger and more complicated your project is, the harder it will be to estimate costs.
You’ll need to account for all those people’s labor hours and management time, as well as the different tools they need to do their jobs.
But for the sake of this guide, we will primarily focus on direct project costs.
Estimating the cost of your projects isn’t the most exciting part of your work. But getting it right can mean the difference between your project falling into the red or the black.
So let’s jump straight into it.
How to create an accurate project estimate
To avoid scope creep and nail your project cost estimates, you’ll need to create an organized process.
Here’s a five-step process to follow:
- Collect the information needed for the project
- Outline project phases and tasks
- Calculate cost and length of time for each task
- Calculate the total cost of the project
- Identify if you have enough resources to complete the project
1. Collect the information needed for the project
The first step is to find out exactly what’s needed for the project.
You’ll first need to gather information on the project requirements to create a cost estimate your client or internal stakeholders are happy with. This is typically part of the project discovery phase.
As part of the discovery phase, you should have a discovery meeting to talk about:
- Goals and expectations:
- What does the client want to achieve in the short term and long term?
- What does the client expect the final product to look like (with specific examples)?
- Who are the clients’ customers/target audience? What do they want to see?
- Stakeholders: Who will be involved in the project? How will they be involved?
- Scope: What’s included, and what’s not included?
- Deadlines: When should you deliver each section of the project?
- Budget: How much will the project cost? How will you structure the payments?
This is the most crucial step in creating accurate project cost estimates.
You will run into problems when the project starts, as your project plan will be riddled with holes as the information collected from the client was too vague.
2. Outline project phases and tasks
Once you’ve collected the project requirements, the next step is outlining the phases and tasks you need to complete for the project.
This is where creating a Work Breakdown Structure (WBS) will come in handy.
As an example, here are the typical phases and examples of tasks that are involved in a website build:
|Discovery||– Client meetings|
– Client communication
|Planning||– Research into what elements are needed for the website|
– Developing a sitemap to create a navigational system
– Collecting content from the client
|Design||– Creating wireframes|
– Creating mockups
– Creating brand guidelines
|Development||– Building a WordPress theme|
– Building a desktop and mobile version of all pages
|Testing||– Test functionality of the website on desktop and mobile|
– Updating plugins
|Launch||– Migrating files to client-server|
– Launching website
– Post-launch testing
Further reading: Coming Up With a Killer Work Breakdown Structure
The information above is not a true reflection of what goes into a website build. But taking the time to fill out a WBS document will help you better understand what is involved in each project. Drastically improving your project cost estimates.
Note: A WBS can also be the foundation for creating a solid project plan.
3. Calculate the cost and length of time for each task
Now that you know which tasks you need to complete, you need to figure out how long each task will take and how much that task will cost.
Using your WBS, you can apply an hourly time estimate to each task inside each phase.
Let’s take our website development example further and assign estimated hours to a few phases.
|Design||– Creating wireframes (4hrs)|
– Creating mockups (4hrs)
– Creating brand guidelines 8hrs
|Development||– Building a WordPress theme (10 hours)|
– Building a desktop and mobile version of all pages (20 hours)
|Testing||– Test functionality of the website on desktop and mobile (8 hours)|
– Updating/testing plugins (2 hours)
Once you know how long each task and phase takes, you should be able to quickly calculate how much each phase will cost.
Just remember, the amount of time a task could change once you dig into the actual work. So it’s wise to have a change management process when completing projects.
There are several time estimation techniques you can use. But one based on experience, past projects, and data will provide you with the most accurate estimates.
You can view historical data on previously tracked tasks by looking at the projects tab inside of Toggl Track. You can look at the total time for a project as a whole or the total time for individual tasks within a project.
Note: Checkout our Knowledge Base for articles on how best to create and manage projects and tasks inside of Toggl Track.
100% accuracy is not worth the time you’ll waste trying to “be accurate”. Getting a general number for your tasks and projects is critical.
The best practice is taking the average time of your last three similar projects or tasks. The more you do this, the more “accurate” your estimates will become.
Completing a project for the first time? You will have to rely on your knowledge and experience of similar work. You can start to use historical averages once you’ve completed enough of a particular type of project.
4. Calculate the total cost of the project
Now it’s time to calculate the total project cost.
You should be able to use your WBS to see the total number of hours it will take to complete the project. So this next step is pretty straightforward.
(Total number of hours) X (hourly rate) = total cost of the project.
Adding a project buffer or contingency fund to the base cost estimate is wise to cover estimated uncertainty and risk exposure if you charge per project.
How many contingency hours do you need to add?
This will mainly come down to your own expert judgment and experience.
But suppose you’re tracking your project hours in Toggl Track. You could review historical data inside the projects tab to see how much you charged for similar past projects. You can then use this as a basis to calculate estimates for any future projects.
Estimates for project flat fees are often based on hourly tracking, so if you have “lousy estimates” you’ll have low billability or utilization.
Further reading: Project Estimation Techniques: A PM’s Handbook
Charge hourly? Treat this cost estimate for what it is. An estimate.
Educate the client that the cost could change as the project progresses. This typically happens when there are any last-minute requests, or you uncover more work as the project progresses.
Having a change management process in place will help with any changes in the project.
Further reading: How To Track Billable Hours & Increase Profits by 20%
5. Identify if you have enough resources to complete the project
After estimating how many hours you’ll need for each task, consider internal resources. Your team probably has multiple projects on the go already, so you’ll need to ensure they have time to accommodate the potential incoming work.
To estimate team capacity, consider:
- How many hours each team member works per day
- Remember to factor in breaks and non-billable hours!
- How many billable hours per day each team member is racking up (staff utilization)
- Planned vacations and holidays
- Unexpected circumstances, like sick leave
Further reading: Project Resource Management: A Simple Guide For New Managers
What to do after creating your project cost estimate
Project cost estimation doesn’t have to be super complicated. If you follow the steps we went through above, you should be on the right path to creating more accurate estimates.
This will help you create a solid project proposal you can present to your client!
Want to step up your project estimation game? Check out our guide: Project Estimation Techniques: A PM’s Handbook