How to Estimate Project Costs
In a world of limited funds, as a project manage you're constantly deciding how to get the most return for your investment. The more accurate your estimate of project cost is, the better able you will be to manage your project’s budget. Therefore, estimating a project’s costs is important for several reasons:
It enables you to weigh anticipated benefits against anticipated costs to see whether the project makes sense.
It allows you to see whether the necessary funds are available to support the project.
It serves as a guideline to help ensure that you have sufficient funds to complete the project.
Although you may not develop and monitor detailed budgets for all your projects, knowing how to work with project costs can make you a better project manager and increase your chances of project success.
A project budget is a detailed, time-phased estimate of all resource costs for your project. You typically develop a budget in stages — from an initial rough estimate to a detailed estimate to a completed, approved project budget. On occasion, you may even revise your approved budget while your project is in progress.
Your project’s budget includes both direct and indirect costs.
Direct costs include the following:
Salaries for team members on your project
Specific materials, supplies, and equipment for your project
Travel to perform work on your project
Subcontracts that provide support exclusively to your project
Indirect costs fall into the following two categories:
Overhead costs: Costs for products and services for your project that are difficult to subdivide and allocate directly. Examples include employee benefits, office space rent, general supplies, and the costs of furniture, fixtures, and equipment.
You need an office to work on your project activities, and office space costs money. However, your organization has an annual lease for office space, the space has many individual offices and work areas, and people work on numerous projects throughout the year. Because you have no clear records that specify the dollar amount of the total rent that’s just for the time you spend in your office working on just this project’s activities, your office space is treated as an indirect project cost.
General and administrative costs: Expenditures that keep your organization operational (if your organization doesn’t exist, you can’t perform your project). Examples include salaries of your contracts department, finance department, and top management as well as fees for general accounting and legal services.
Suppose you’re planning to design, develop, and produce a company brochure. Direct costs for this project may include the following:
Labor: Salaries for you and other team members for the hours you work on the brochure
Materials: The special paper stock for the brochure
Travel: The costs for driving to investigate firms that may design your brochure cover
Subcontract: The services of an outside company to design the cover art
Indirect costs for this project may include the following:
Employee benefits: Benefits (such as annual, sick, and holiday leave; health and life insurance; and retirement plan contributions) in addition to salary while you and the other team members are working on the brochure
Rent: The cost of the office space you use when you’re developing the copy for the brochure
Equipment: The computer you use to compose the copy for the brochure
Management and administrative salaries: A portion of the salaries of upper managers and staff who perform the administrative duties necessary to keep your organization functioning