When working within the professional services industry, the most important part of successful project work is not only delivering it on time and to scope, but also within budget.
Studies show that 28% of all projects fail because businesses were unable to accurately estimate project costs. This is particularly true for small-to-medium businesses, which often lack the resources, previous experience, or understanding of how they can successfully carry out project costing.
Effective project costing allows your business to increase its profits, maximize efficiency, and accurately reflect the true cost of the work you’re doing, yet knowing where to start is often the hardest part.
What is Project Costing?
Project costing is an important process for forecasting how long a certain job or project will take. It also assists you in tracking your associated costs, such as labor, overhead, and expenses. By analyzing past data, you can establish an accurate estimate of the time and money necessary to perform a specific type of project.
Team leaders must be thorough in the planning and forecasting stages to ensure they’re correctly predicting project costs and only taking on work that offers a sufficient ROI. Ultimately, getting the cost right can mean the difference between a successful project and one that fails.
There are a number of common approaches to project costing. Some businesses punch the numbers manually, however as with all manual business tasks, this leaves plenty of room for human error. Others prefer to use small business job costing software, which allows them to cut down on manual processes. Additionally, putting project costs and estimates into one interface streamlines operations and reduces unnecessary admin hours. The best job costing software will also integrate with accounting, time tracking, or inventory management systems to give businesses a comprehensive view of every job, at every moment.
Keys to Accurate Project Costing
The following 5 tips will help you to perfect your project cost estimating for greater business success.
Tip #1 – Compile a List of Tasks Required
The first stage in project cost estimating is determining which tasks are required. The simplest method to do this is to divide the project into its many smaller, individual tasks. Start by thinking about the various stages involved in the project, then write a list of every single task involved in that stage—no matter how small.
This also helps you to ensure that you and your client are on the same page and that your scope of work accurately reflects what they expect from the project.
Tip #2 – Thoroughly Understand the Scope of Work
While it’s one thing to list the many jobs that need to be accomplished within a project, it’s another to thoroughly understand the scope of this work. This next step involves knowing what equipment and materials are required to complete the work, who will be undertaking each task, as well as how long each job should take.
When assigning each of these individual tasks to team members with hourly rates, it’ll then be easier to calculate how much each stage of the project will cost.
In addition to the project’s required labor and resources, there are some other factors you must consider when mapping out the scope of the entire project. These include:
- Professional services required, such as legal or accounting fees
- Software
- Hardware
- Facility rental
- Employee training, onboarding, or recruitment
Tip #3 – Estimate the Cost of the Work
With a complete list and understanding of what’s involved in a project, you can then estimate the project cost as accurately as possible.
There are a number of different estimating techniques, including:
- Parametric estimating is useful for work that has repeatable parts that may be costed per unit.
- Analogous estimating is helpful when you have previously completed similar projects and can use their exact budgets as a foundation for your estimate.
- Bottom-up estimating, which can be used when you have a comprehensive view of all the work and can cost each individual part at a detailed level.
- Expert judgment is effective when you have confidence in your subject matter specialists’ ability to estimate accurately based on their past experience and expertise.
- Three-point estimating, is useful when you need to account for the best, worst, and most likely situations, or when you have many subject matter experts telling you various things.
You are not required to apply the same estimating method for each project component. Depending on what you’re estimating, choose the strategy that makes the most sense.
When you’ve completed these estimations, add up your figures. You will then arrive at an overall cost for the work that needs to be completed.
Tip #4 – Add a Buffer
It’s important to set aside money in the budget for unanticipated events such as last-minute change requests or currency and pricing fluctuations. It’s also critical to provide a buffer to a project’s predicted duration to allow for unforeseen delays or unavoidable scenarios such as sick leave.
The amount of contingency your project requires is determined by the work’s complexity and certainty, as well as prior experience with similar projects.
Contingency funds can always be released back if they aren’t needed by the project’s end.
Tip #5 – Track Time
To produce accurate project time and budget estimations, project managers must depend on the right data. This is where time tracking is highly beneficial. Instead of under-pricing clients or underestimating the time it would require for your team to finish the work, you can analyze how much time has been dedicated to relevant past projects and budget accordingly.
Time tracking software, such as Time Tracker by eBillity, enables you to identify how much time is being spent on profit-adding activities and how much time is being wasted on laborious administrative tasks that can be automated or outsourced.
It can also assist you in determining whether projects are viable to begin with. You can analyze trends in which clients, projects, and services have a high or low return-on-time by segmenting time tracking data by project, client, and category.
The ability to utilize time-tracking software in real-time also allows you to see where time is being spent day-to-day and which areas may need improvement as the project unfolds. You can then reallocate your project team accordingly to ensure the project remains on the right track.
Need Help With Your Project Cost Estimating?
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