Estimating Project Costs 1/3
A key skill which project manager's are required to have nowadays is the ability to quickly and accurately estimate project
costs. Now this can be at the
initiation of a project
where a estimating project costs are required to detail a budget.
However this skill is also required throughout the entire
project lifecyle to quickly
manage scope creep
and change requests which will be raised.
Not long ago this skill was one which wasn't in demand. Organisations were purely interested in project manager's with the
ability to deliver to ridiculously tight timeframes. Of course these project manager's are still very much in demand;
the difference is that Organisations now want this skill together with tight budgetary control.
So how should you go about estimating project costs?
Well as with all things, there is the
textbook approach to estimating project costs,
and then there is the
subjective way to estimating project costs which
places a great
deal of emphasis on the gut instinct and guile of the project manager. Unsurprisingly the latter approach tends to be much
more effective because few Organisations whilst willing to follow the textbook approach are unable to make it work in practice.
Now before I detail each approach there are a few things you need to remember for both. These are:
- Contingency is key. If you have no contingency then your project is virtually doomed to failure.
- Your Project Sponsor will always want you to come in under the budget allocated for the project. If you don't then you will need to have a good reason why.
- Money does help a project get delivered so the bigger a budget you can get during project initiation, the easier time you're going to have getting it delivered.
- It is best to have the arguments over budget at this stage rather than during development, when you'll just appear incompetent and not in control of the project.
Further you also need to remember that your Project Sponsors and Finance will have their own idea regarding what the
project budget should be. This is often based
upon what was stated within the Project Justification Document no matter how
ridiculously low the figure was. However, I should emphasise that at this stage any budget figure in people's minds is
usually not based on anything other than their
gut instinct. However you should never discount their views because of it.
After all in one instance I had gone through the process of estimating project costs using I should say the subjective
approach and had determined that it would cost a minimum of $8.6 million. I should mention that using the Textbook approach
had led to a project cost of $11.2 million! Not surprisingly the Project Sponsor’s agreed. Sadly the Finance Director didn’t
and decided that he would only allocate $3.5 million to do the work. Then when he didn’t get his way he decided to put the
project on hold by demanding that all timesheets put in by the project resources would be refused until he got his way.
This led to contract resources being sent home and an almighty bunfight ensuing between Finance and Marketing. Finally we
came up with some completely unrealistic ways to reduce the $8.6 million figure down to $3.5 million which was enough for
the Finance Director to agree to continue the project. Of course none of those completely ludicrous cost savings were ever
implemented and the project ended up costing the $8.6 million predicted, but the Finance Director had made his point!
I should mention that this project was at the time the most high profile within the Organisation and in fact one which it’s
very future depended upon. Further it was one which research predicted would bring in sales of $52 million a year. So if
this kind of thing can happen on such an important project it always pays to remember that whatever project cost you come
up with, needs to fit in with the expectations of Finance, Project Sponsors and your Project Justification Document.
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