Project estimation for cost and time is essential to increase profitability, strengthen client relationships, and improve resource allocation for your next IT project. Creating a project cost or time estimate can be challenging because you may need more information than you have available. Resource dependencies between projects can make the cost estimation process difficult, too. Remaining consistent with each subsequent project is also a common challenge. However, learning how to estimate a project is essential to help it succeed.
In this guide, you’ll learn how to estimate a project’s time and cost using multiple methods. At the end, you’ll have a fully defined project estimate that you can put into a statement of work, and your team will know how much budget and time they should expect to spend on your upcoming IT project.
What is project estimation?
Project estimation or cost forecasting is the process of predicting a project’s cost and duration. This is an essential part of project planning that occurs during a project’s initiation or planning stage. Project estimation can involve:
- Dividing the project into tasks
- Analyzing dependencies between them
- Factoring in resource availability or potential risks
Cost and time are two of the most critical project factors to predict. By forecasting these elements, you’ll better understand how much money, resources, and time the project will require. This allows you to be sufficiently prepared to complete the project on time and under budget.
As you create an estimate, calculate quantitative amounts as accurately as possible using the information currently at your disposal. You might draw on information from similar projects to give you a baseline at which to start. Or you might have requirements already in place for an upcoming project.
Why accurate cost estimation is important
Project estimation matters because it gives you an idea of approximately how much time, money, and other resources a particular project will take. When you have this information in advance, it’s easier to scope the project in a way that helps you stay within budget and complete the project on schedule. Cost estimation allows you to correctly allocate resources, manage risk, and see higher profitability.
Here are a few areas that good project estimation improves:
By coming up with accurate cost estimates for an upcoming project, you can charge a fair price that covers all the costs needed to finish the project or develop the product, leaving room for profit. Accurate project estimates prevent underbidding, which can cause financial losses, employee burnout, and strain on client relationships.
Project time estimation sets clear expectations on timeframes and deadlines. Providing deliverables by the date promised builds customer trust and increases satisfaction. For example, consider a client who expects a project in four weeks but receives it eight weeks later due to inaccurate estimations. This can create a negative perception of your company and damage that client relationship.
Improve your resource allocation with project estimation by knowing whom to assign specific tasks. This maximizes efficiency and productivity. If you assign a senior developer a task that could be done by a junior developer, for instance, this is an inefficient utilization of resources and could lead to higher costs. Project estimation helps you avoid a scenario like this.
Project estimation also includes risk management. Identify potential risks early on and develop mitigation strategies to put into play if needed, preventing these risks from derailing your project. This proactive approach prevents project delays and cost overruns.
5 project estimation methods
There are multiple methods of project estimation you can use. While some are time estimation methods and others are cost estimation methods, there is some overlap between the two categories — some time estimation methods can also be used to estimate costs, and vice versa.
Time estimation methods
The most common time estimation methods include expert judgment, analogous estimation, and parametric estimation. Here’s how to use each method and examples of what it might look like in practice:
1. Expert judgment
Also called expertise-based estimation, expert judgment draws on the knowledge and experience of your team members and project managers to create a project estimation. People are your greatest resource. Because team members know the requirements of each task, they can help estimate task durations more accurately.
For instance, you might have a project requiring large-scale data migration. You could set up an estimated timeline for this project by discussing with each person or team involved how long they predict the tasks they’re responsible for will take:
- 1 month of migration planning and data mapping
- 1 month of source data preparation
- 1 month of migration development
- 1 month of trialing and UAT testing
This would equal a total of four months to project completion.
2. Analogous estimation
Analogous estimation leverages historical data for better accuracy, creating estimates based on similar projects you have personally completed. It combines expert judgment and historical data and can be helpful if you have limited project data.
You may need to complete a hardware refresh that involves auditing your current hardware, installing updates, and properly disposing of old hardware. If you’ve completed a similar project before, look back at how long that project took overall and how long each stage took. You can also use analogous estimation for cost estimation.
3. Parametric estimation
Parametric estimation relies on statistical formulas to estimate the time needed for a project. It uses unit cost or duration and the number of units required for a project. The difference between analogous estimation and parametric estimation is that parametric estimation looks at the relationship between variables and is more accurate, whereas analogous estimation is based on an analogy (a past project). You can also use analogous and parametric estimation simultaneously.
Parametric estimation suits projects with well-defined parameters, repetitive tasks, and established industry benchmarks. For example, say you must upgrade network switches in a company with 100 employees. You might work out a time estimation by using the following data and formula:
- Industry average switch installation time: 1 hour per switch
- Number of switches to install: 100
- Estimated installation time for all switches: 100 switches x 1 hour per switch = 100 hours / 12.5 workdays
Cost estimation methods
Other project estimation methods are specifically used for project costs. Forecasting the approximate cost of a project helps you avoid waste and stay within the project scope. Two of the most popular project estimation methods are top-down estimation and bottom-up.
4. Top-down estimation
Top-down estimation starts with the overall project cost estimate and breaks that larger number into costs and percentages representing individual tasks.
Here’s a project cost estimation example. Perhaps you’re completing a cloud migration from on-premise to Microsoft Azure. Your initial high-level estimate might be $45,000 for an overall project budget.
Based on that high-level estimate, you would then break down your budget into smaller sections representing the costs required for each stage of the project:
- Workload assessment and migration: $20,000
- Azure configuration and support: $15,000
- Governance: $10,000
Top-down estimation is best for projects with a high-level overview but limited detailed information about specific tasks. It can also fit well with recurring or repeatable projects.
5. Bottom-up estimation
With bottom-up estimation, you estimate the cost of each task. Then, aggregate those numbers to get the final overall cost of the project.
An example of bottom-up estimating is a project to upgrade network infrastructure to improve server performance and handle increased traffic. You would begin by estimating the cost for each task involved:
- Hardware upgrade: $5,000
- Software licenses: $2,000
- Configuration and deployment: $1,000
- Testing and validation: $500
The total estimated cost adds up to $8,500.
A bottom-up approach is accurate and detailed. It provides a comprehensive breakdown of project costs and tasks.
How to estimate a project
Several steps go into good project estimation. Doing each one correctly is essential since they build on each other. From gathering project requirements to validating your final estimations, the more time and thought you put into the estimation phase, the fewer headaches or delays you’ll likely run into later. Follow these steps and tips to learn how to cost estimate a project.
1. Gather project requirements
Before estimating, you must know the project scope, deliverables, and timeline. Many of the most common project estimation methods use this information. You can’t come up with cost estimates for tasks, for instance, if you don’t know the deliverables. Gain clarity on what is needed and what kind of deadline you’re looking at.
2. Create a Work Breakdown Structure
It’s helpful to create a Work Breakdown Structure (WBS) — a visual representation of a project that breaks down the project into individual tasks. A WBS provides all stakeholders with a comprehensive understanding of the project’s complexity. It also shows time and cost estimations for each task. This document organizes the project and helps it seem more manageable.
3. Estimate time needed per task
You can estimate project duration using the methods discussed above:
- Expert judgment
- Analogous estimation
- Parametric estimation
While developing project duration estimates, you’ll need to consider factors like the complexity of the tasks, resource availability, and any potential dependencies between specific tasks.
4. Identify resources and cost
The next step involves determining the resources you’ll need for each task. These might include personnel, equipment, and materials. Study the project requirements to understand the deliverables and timeline, helping you determine which resources you’ll need to complete the project on schedule.
Next, estimate the approximate cost associated with each resource. You can do this using a method such as top-down or bottom-up estimation. Top-down estimation is best for repeatable projects. Bottom-up estimation is a good fit for something that is not similar to other projects you’ve done before.
5. Establish contingency buffers
Contingency buffers are an important part of project planning and estimation. Think of them as Plan B’s that help you account for unforeseen circumstances and delays. They give you a safety net and ensure realistic timelines.
You can use contingency funds to help manage risk in cost estimation. Your contingency reserve fund should be around 10–20% of the project cost. Or put time buffers in place by adding extra time to the project schedule in case anything goes wrong or gets off track.
6. Validate and review your estimations
The final step in project estimation is to validate and review your estimations. Seek feedback from team members and stakeholders to refine your estimates or use historical data to ensure your predictions are aligned. This input from diverse perspectives helps improve overall accuracy.
Example project time and cost estimation
Here is what an example project estimation for a network infrastructure upgrade might look like:
- Project scope: Upgrade the network infrastructure of a small office with 20 employees, including replacing switches, routers, and cabling.
- Time estimation: 3 weeks and 4 days
- Planning and design: 2 weeks
- Procurement: 1 week
- Installation: 3 days
- Testing and configuration: 1 day
- Cost estimation: $18,500
- Switches: $5,000
- Routers: $3,000
- Cabling: $1,000
- Engineer: $2,500
- Purchasing manager: $1,000
- Technician team: $4,000
- Software licenses:
- Network management software: $2,000
How to move from estimation to SOW
Based on feedback and further analysis, finalize your time and cost estimates and get approval from all relevant stakeholders. Next, you’ll be ready to move from an estimation to a statement of work (SOW).
Your SOW document should include everything you figured out in your project estimate, as well as additional information that will help the project succeed:
- Project summary
- Purpose and objectives
- Tasks, deliverables, and timelines (including your time estimate)
- Costs (including cost estimate) and budget allocation
- Payment schedule and invoicing procedures
- Standards for project deliverables
- Change procedures
- Conditions for termination
As you develop the SOW document, use highly specific language to state your expectations clearly. Once signed, a SOW is a legally binding document. This is why ensuring your project cost estimation is accurate is crucial.
Finally, secure client approval and signatures on the SOW before starting the project. This ensures everyone is on the same page, avoiding potential disagreements later.
Solutions to make project estimation easy
You don’t have to estimate your next project on your own. We recommend that you don’t — especially for repeatable projects. Instead, use a software or template that helps the process flow more quickly and easily, coming up with an accurate estimation for your next project.
A platform such as project management software or a presales automation tool can help estimate cost. Project management software helps project managers:
- Estimate project timelines more accurately (60%)
- Make better use of project resources (55%)
- Improve budget estimation (48%)
With ScopeStack, you can create a project that includes all the information you need for time or cost estimation — like deliverables, services, what’s out of scope, and more. ScopeStack is tailor-designed for the IT industry and helps you develop accurate, consistent quotes.
Pre-built templates for IT projects are a valuable tool to provide a starting point for your estimations. Using a template is beneficial because it saves time, ensures consistency, and helps you stay organized, ensuring you don’t forget any detail of the project estimation process. ScopeStack has a free library of over 55 SOW templates that can help you find, document, and share an estimated cost in project management.
Industry benchmarks are another helpful tool for project estimates. Leverage industry standards and reports to gauge typical costs and timelines for similar projects. This helps refine your estimations as you match them up with industry norms. You can use industry data in the validation stage to ensure your estimate is realistic. Or pull these benchmarks into the picture earlier in the process, using a combination of analogous and parametric estimation to find an average.
Simplify the cost estimation process for IT with ScopeStack
ScopeStack’s presales automation platform is specifically designed for IT service providers. With an intuitive scoping editor, software integrations, and dozens of SOW templates, you can turn your project estimates into comprehensive statements of work that pave the way for a smooth project ahead.
To learn more, contact our team and see how we can make your next project estimation accurate and easy — leading to project profitability and success.
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