Estimating Project Costs

Estimating, monitoring, and controlling project costs is a core project management function. This post explores the key categories of project costs, but there are a few caveats.

For labor costs, the big question is how to allocate costs on in-house resources. I suggest that there can be two sets of books: one that feeds the accounting system, where the cost would be 0, and the other where this is a project cost related to the cost/value being provided that is internal to the project environment.

For non-labor costs, there can also be what about in-house, or internal, costs, such as the use of facilities like desks, rooms, labs, computers, that are already paid for. Similar to the internal labor costs, there can be two sets of books: one to feed the accounting system, and the other to give a complete picture of the cost of the project, with some allocated cost figures, for internal project team use.

The key is to make sure it all makes sense, and especially that costing is done consistently, and in a way that can easily be explained and understood.

Here's the TenStep guest post entitled, "Estimate Project Costs Across Three Main Categories".

Once you understand the work of the project you can estimate the resources that will be required to complete the work. Knowing the resources allows you to estimate the costs of the resources to the project. There are three main areas where costs come into play.

Labor costs

The cost of labor is derived by looking at the effort hours of each resource and multiplying by the hourly (or daily) cost of each resource. In many companies, estimated labor costs for internal employees are assumed to be zero, since their costs are already accounted for in a departmental budget. This does not imply there is no cost. Rather, it assumes there are no incremental costs over and above what the company is already paying for.

If you are using external contract or consulting resources, their costs always need to be estimated and budgeted. You have to determine the type of external resources you need and the hourly rate of the resources and how many hours you need. If you are not sure of the actual resource cost, you need to make some assumptions based on the general type of resource. For instance, there may be a standard hourly cost for accounting contractors or programming contractors.

Non-labor costs

Non-labor expenses include all resource costs not directly related to salary and human contractor costs. Some of these costs, like training and team-building expenses, are related to people. However, they are still considered non-labor since they are not related to employee salary or contractor hours. Non-labor costs include:

  • Hardware and software
  • Travel expenses
  • Training
  • Facilities
  • Equipment
  • Material and supplies
  • Depreciation
  • ... more

Each project manager must be aware of the accounting rules in his own company to make sure the labor and non-labor costs are allocated correctly.

Outsourced costs

This is a third category of costs. For practical purposes this is considered non-labor costs. However, it is a cost that is provided to you by a vendor to complete some pre-specified piece of work. As a project manager, you don't need to determine resources and the costs of resources. This is the vendor's responsibility. You just need to understand the scope of work to be completed and the cost of that work. In some projects, especially construction and engineering, the vast majority of the work may be outsourced to vendors. On those projects it is important to provide clear scope of work feedback to the vendors and then aggregate that costs of all vendors to come up with final project cost estimates.

Document all assumptions

Don't forget. You will never have all the information you need with 100% certainty. Therefore, it is important to document all the assumptions you are making along with the estimate. If you change your assumptions, it is likely to change your estimates.

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