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Project Cost Estimation: How to Estimate Project Cost

Good cost estimation is essential for project management success. Many costs can appear over the project management life cycle, and an accurate project cost estimation method can be the difference between a successful plan and a failed one. Project cost estimating, however, is easier said than done. Projects bring risks, and risks bring unexpected costs and cost management issues.

What Is Project Cost Estimation?

Project cost estimation is the process that takes direct costs, indirect costs and other types of project costs into account and calculates a budget that meets the financial commitment necessary for a successful project. To do this, project managers and project estimators use a cost breakdown structure to determine all the costs in a project.

Project cost estimation is critical for any type of project , from building a bridge to developing that new killer app. Everything costs money, so the clearer you are on the amount required, the more likely you and your project team will achieve your objective.

Project cost estimating is a critical step during the project planning phase because it helps project managers create a project budget that covers the project costs that are needed to achieve the goals and objectives of the project set forth by executives and project stakeholders.

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Project Estimate Template

Use this free Project Estimate Template for Excel to manage your projects better.

What Is a Project Estimate?

A project estimate is the process of accurately forecasting the time, cost and resources required for a project. This is done by looking at historical data, getting information from the client and itemizing each resource and its duration of use in the project.

To create a project estimate, you should first define your project scope and then create a project cost breakdown structure, which allows you to pinpoint all of your different project costs for each stage of the project life cycle.

Project cost estimation is simplified with the help of project management software like ProjectManager . Add project budgets and planned costs for specific tasks and include labor rates for your team. When you build your plan on our Gantt chart, your estimated project costs will calculate automatically. Plus, as the project unfolds, you can track your costs in real time on our automated dashboard. Try it for free today.

What Is a Project Cost Breakdown Structure?

A cost breakdown structure (CBS) is a very important project costing tool that details the individual costs of a project on a document. Similar to a work breakdown structure (WBS) , it’s a hierarchical chart where each row represents a type of cost or item. This is done at the task level, which is called a bottom-up analysis.

Creating a cost breakdown structure might be time-consuming, but one that’s worth the effort in that the result is a more accurate estimate of costs than you’d get with a top-down approach, such as basing all your estimates on the costs of previous, similar projects.

Using a cost breakdown structure is an essential part of project cost management and resource management . By zeroing in on costs at the task level early during the project planning phase, you’re less likely to miss hidden costs that could come up later during the project execution stage and throw your project budget off.

Types of Project Costs

There are five main types of costs that make up your total project cost. Here’s a quick overview of these types of project costs and how to measure them.

• Direct costs: Direct costs are those that occur in a project and are attached to specific activities. These are generally costs that are easier to accurately estimate. They include raw materials, labor, supplies, etc.
• Indirect costs: Indirect costs in a project are those that are in support of the project, such as administrative fees. These can include everything from rent to salaries of the administrative staff to utilities, etc.
• Fixed costs: Fixed costs, as the name suggests, are those that don’t change throughout the life cycle of a project . Some examples of fixed costs include setup costs, rental costs, insurance premiums, property taxes, etc.
• Variable costs: Variable costs are costs that change due to the amount of work that’s done in the project and are variable in nature. These costs can include hourly labor wages, materials, fuel costs and so on.
• Sunk costs: In project cost estimating, when an investment has already been incurred and can’t be recovered it’s called a sunk cost or retrospective cost. Some examples of sunk costs include marketing, research, installation of new software, etc.

Free Project Cost Estimation Template

ProjectManager has free templates for every aspect of managing a project, including a free cost estimate template for Excel. It can be used for any project by simply replacing the items in the description column with those items that are relevant to your project.

This free cost estimate template has all the fields you’d need to fill in when estimating project costs. For example, there’s the description column followed by the vendor or subcontractor column and then there are columns to capture the labor and raw materials costs. These can be added together by line and then a total project cost can be calculated by the template.

Naturally, a cost estimate template is a static document. It’s handy in terms of collecting all your project costs and tracking them over the life cycle of the project. However, all that data must be manually added, which takes time and effort—two things that you don’t have in abundance when managing a project. Once you’re ready to streamline the cost estimate process you’ll find that there are many project management software solutions that can build budgets and track them in real time to keep you from overspending.

What Does a Project Estimator Do?

The project estimator or cost estimator, is tasked with figuring out the duration of the project in order to deliver it successfully. This includes determining the resources needed, including labor, materials, etc., which informs the project budget .

In order to do this, a project estimator must understand the project and its phases and be able to research the historical data of projects that were similar and executed in the past. Cost estimators also need to have a firm grasp of mathematical concepts.

Unlike a project manager , who’s responsible for the delivery and oversight of the project, a project estimator is focused on the direct and indirect costs associated with the project. Project estimators work closely with contractual professionals to develop accurate estimates, which are presented to project leaders.

Project Cost Estimation Techniques

All of these factors impact project cost estimation, making it difficult to come up with precise estimates. Luckily, there are cost estimating techniques that can help with developing a more accurate cost estimation.

Analogous Estimating

Seek the help of experts who have experience in similar projects, or use your own historical data. If you have access to relevant historical data, try analogous estimating, which can show precedents that help define what your future costs will be in the early stages of the project.

Parametric Estimating

There’s statistical modeling or parametric estimating , another cost estimation method that also uses historical data of key cost drivers and then calculates what those costs would be if the duration or another of the project is changed.

Bottom-Up Estimating

A more granular approach is bottom-up estimating, which uses estimates of individual tasks and then adds those up to determine the overall cost of the project. This cost-estimating method is even more detailed than parametric estimating and is used in complex projects with many variables such as software development or construction projects.

Three-Point Estimate

Another approach is the three-point estimate, which comes up with three scenarios: most likely, optimistic and pessimistic ranges. These are then put into an equation to develop an estimation.

Reserve Analysis

Reserve analysis determines how much contingency reserve must be allocated. This cost estimation method tries to wrangle uncertainty.

Cost of Quality

Cost of quality uses money spent during the project to avoid failures and money applied after the project to address failures. This can help fine-tune your overall project cost estimation. Plus, comparing bids from vendors can also help figure out costs.

Dynamic Project Costing Tools

Whenever you’re estimating costs, it helps to use online software to collect all of your project information. Project management software can be used in Congress with many of these techniques to help facilitate the process. Use online software to define your project teams, tasks and goals. Even manage your vendors and track costs as the project unfolds. We’ll show you how.

How to Estimate Project Costs in 10 Steps

The U.S. government has identified a 10-step process that results in reliable and valid cost estimates for project management . Those steps are outlined below.

• Define the cost estimate’s purpose: Determine the purpose of the cost estimate, the level of detail that is required, who receives the estimate and the overall scope of the estimate.
• Develop an estimating plan: Assemble a cost-estimating team and outline their estimation techniques. Develop a timeline , and determine who will do the independent cost estimate. Finally, create the team’s schedule.
• Define characteristics: Create a baseline description of the purpose, system and performance characteristics. This includes any technology implications, system configurations, schedules, strategies and relations to existing systems. Don’t forget support, security, risk items, testing and production, deployment and maintenance and any similar legacy systems.
• Determine cost estimating techniques: Define a work breakdown structure (WBS) and choose an estimating method that’s best suited for each element in the WBS. Cross-check for cost and schedule drivers; then create a checklist.
• Identify rules, assumptions and obtain data: Clearly define what’s included and excluded from the estimate and identify specific assumptions.
• Develop a point estimate: Develop a cost model by estimating each WBS element.
• Conduct a sensitivity analysis: Test the sensitivity of costs to changes in estimating input values and key assumptions, and determine key cost drivers.
• Conduct risk and uncertainty analysis: Determine the cost, schedule and technical risks inherent with each item on the WBS and how to manage them.
• Document the estimate and present it to management: Having documentation for each step in the cost estimate process keeps everyone on the same page with the cost estimate. Then you can brief the project stakeholders on cost estimates to get their approval.
• Update the cost estimate: Any changes to the cost estimate must be updated and reported . Also, perform a postmortem where you can document lessons learned.

Project Cost Estimation Example

Let’s take a moment to create a hypothetical project and run through a general cost estimate example to see how this process works. Construction cost estimation is straightforward so we’ll use a construction estimate example. This construction project will focus on the general requirements for cost estimation in project management.

Related:  Construction Estimate Template

First, you’ll want to have a list describing the various elements needed to build your construction project. Gather all your construction project management documents such as plans, designs and specifications, blueprints and permits to find out cost data. In your documents, you’ll find administrative costs, financing costs, legal fees, engineering fees, insurance and other cost items.

Now it’s time to use a work breakdown structure (WBS) to identify all your construction project activities. Identify the labor costs, direct costs and indirect costs associated with every activity in your project schedule. There are various cost estimating techniques such as bottom-up estimating which allow contractors to estimate costs for each construction activity to create accurate proposals for the construction bidding process.

These costs are then added together for a line total, and those line totals are added together to determine your total project cost. Having a cost estimation template is a good tool to collect and track this information.

ProjectManager Helps With Project Cost Estimation

ProjectManager is a project management software that has features to help create a more accurate project cost estimate. Our Gantt chart can be used to help you track costs and expenditures for projects and tasks.

Estimate Costs of Specific Tasks

When estimating individual tasks, costs can also be collected and tracked on our online Gantt chart. Here you can add a column for the estimated costs, baseline cost and the actual costs to help you keep the project on budget once it’s been executed.

Our online Gantt chart can not only track tasks, but you can set it up to track materials and fixed costs associated with each project task and monitor the difference between budget and actual costs. All of this data is collected on one page.

Start by creating a project and then go to the Gantt view on ProjectManager. If you already have data, you can import it by clicking on the import button on the top right-hand side of the page. Or you can use this online Gantt chart to collect the data. It can be easily shared with team members and stakeholders when you’re ready to get input or approval.

Estimate Costs of Resources

The resource management feature on ProjectManager is another tool that can help you achieve a more accurate project cost estimate. It offers a way to look at your costs through the workload across tasks and projects.

When planning a project with our resource management tool , you can account for employee schedules, equipment rentals, holidays and office space, among other factors that’ll impact your budget. Distributing project resources is one way to balance a budget.

Create a resource plan by scheduling the dates for planned resources, how long you’ll need them and the people who will be involved. That includes any equipment or site rentals. Break that down into the number of resources needed for each activity on a daily basis and you’ll be able to create a schedule with detailed resources, including duration and estimated costs.

FAQs About Project Cost Estimation

Here are some of the most frequently asked questions about project cost estimation online.

What Is Project Cost Analysis?

A project cost analysis is used to determine the costs and benefits associated with a project. It’s a process used to determine if the project is feasible.

What Is a Project Cost Breakdown?

A project cost breakdown is the process by which a project manager estimates what will need to be spent in order to deliver a project. A cost breakdown structure is used during the project cost estimating process to ensure all costs are accounted for.

Why Is Project Cost Estimation Important?

Cost estimation and cost management are an essential part of project management. The project manager is responsible for making the most accurate project budget possible by using a cost breakdown structure and project estimating techniques.

The project budget collects indirect costs and direct costs as it estimates the overall cost of delivering the project on time and meeting quality expectations. That means, whatever you’re going to need to make the project a success will be thought through during the cost estimation process.

Related Content

• Project Estimation Techniques: A Quick Guide
• Time Estimation in Project Management: Tips & Techniques
• Calculating Estimate at Completion (EAC)
• Parametric Estimating In Project Management
• What Is Job Costing? When to Use a Costing Sheet (Example Included)

When estimating costs on a project, you want to have the best tools to help you calculate a more accurate budget. ProjectManager is online project management software with online Gantt charts and resource management features that give you control over your project costs. See how ProjectManager can assist with your project cost estimation by taking this free 30-day trial today.

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How Much Does it Cost to Start a Business?

8 min. read

Updated April 25, 2024

What will it cost to start your business? This is a key question for anyone thinking about starting out on their own. You’ll want to spend some time figuring this out so you know how much money you need to raise and whether you can afford to get your business off the ground.

Most importantly, you’ll want to figure out how much cash you’re going to need in the bank to keep your business afloat as you grow your sales during the early days of your business. 

Typical startup costs can vary depending on whether you’re operating a  brick-and-mortar store, online store, or service operation . However, a common theme is that launching a successful business requires preparation.

And while you may not know exactly what those expenses will be, you can and should begin researching and estimating what it will cost to start your business.

• How to determine your startup costs

Like when developing your  business plan , or  forecasting  your initial sales, it’s a mixture of  market research ,  testing , and informed guessing. Looking at your competitors is a good starting point. Once you feel your initial estimates are in the ballpark, you can start to get more specific by making these three simple lists.

1. Startup expenses

These are expenses that happen before you launch and start bringing in any revenue. Here are some examples:

• Permits and Licenses: Every business needs a license to operate, just like a driver needs one to drive. Costs vary depending on industry and location.
• Legal Fees: Getting your business structure set up (sole proprietorship, LLC, etc.) might involve consulting a lawyer and at least will involve the basic business formation fees.
• Insurance: Accidents happen, and insurance protects your business from unforeseen bumps.
• Marketing and Branding: The ways to spread the word about your product or service. They could involve creating a website, creating business cards, or promoting social media.
• Office Supplies : Pens, paperclips, that all-important stapler – the essentials to keep your business humming.
• Rent/Lease: If you need to rent space for your business before you start selling, include those expenses in your list as well.

2. Startup assets

Next, calculate the total you need to spend on assets to get your business off the ground. Assets are larger purchases that have long-term value. They’re typically significant items that you could resell later if you needed or wanted to.

Here are a few examples:

• Equipment:  Think ovens for a bakery, cameras for a photography business, or computers for a tech startup.
• Inventory:  If you’re selling products, you’ll need to stock up before opening your doors (or your online store).
• Furniture and Decorations:  Desks, chairs, that comfy couch in the waiting room – creating a functional and inviting workspace might involve some upfront investment.
• Vehicles: If your business requires a vehicle to deliver your product or service, be sure to account for that purchase here.

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Why separate assets and expenses?

There’s a reason that you should separate costs into assets and expenses. Expenses are deductible against income, so they reduce taxable income. Assets, on the other hand, are not deductible against income.

By initially separating the two, you potentially save yourself money on taxes. Additionally, by accurately accounting for expenses, you can avoid overstating your assets on the balance sheet. While typically having more assets is a better look, having assets that are useless or unfounded only bloats your books and potentially makes them inaccurate. 

Listing these out separately is good practice when  starting a business  and leads into the final piece to consider when determining startup costs. 

3. Operating Expenses

Finally, figure out what it’s going to cost to keep your doors open until sales can cover expenses. Create a list that estimates monthly expenses, such as:

• Payroll (including your own salary)
• Marketing and advertising
• Loan payments
• Insurance premiums
• Office supplies
• Professional services
• Travel costs
• Shipping and distribution

Then, based on your revenue forecasts , calculate how many months it will take before your sales can cover all those monthly expenses. Multiply that number of months by your monthly operating expenses to determine how much you’re going to need to cover operating expenses as your business starts.

This number is often called “ cash runway ” and is a critical number – you need enough cash to fund those early red ink months. This number is how much cash you need to have in your checking account when you open your doors for business.

Calculating how much startup cash you need

To figure out how much money you need to start your business, add the asset purchases, startup expenses, and operating expenses over your cash runway period. This is your total startup costs, and it’s better to overestimate than underestimate these costs.

It often makes sense to invest the time to build a slightly more detailed starting costs calculation. Assuming you start making some sales and those sales grow over time, your revenue will be able to help pay for some of your operating expenses. Ideally, your sales contribute more and more over time until you become profitable.

To do a more detailed calculation, you’ll want to invest the time in a detailed financial forecast where you can experiment with different scenarios. If you do this, you’ll be able to see how much it will cost to start your business with different revenue growth rates. You’ll also be able to experiment with different funding scenarios and what your business would look like with different types of loans.

• Funding Starting Costs

You can cover starting costs on your own, or through a combination of loans and investments.

Many entrepreneurs decide they want to raise more cash than they need so they’ll have money left over for contingencies. While that makes good sense when you can do it, it is difficult to explain that to investors. Outside investors don’t want to give you more money than you need, because it’s their money.

You may see experts who recommend having anywhere from six months to a year’s worth of expenses covered, with your starting cash. That’s nice in concept and would be great for peace of mind, but it’s rarely practical. And it interferes with your estimates and dilutes their value.

Of course, startup financing isn’t technically part of the starting costs estimate. But in the real world, to get started, you need to estimate the starting costs and determine what startup financing will be necessary to cover them. The type of financing you pursue may alter your startup or ongoing costs in a given period, so it’s important to consider this upfront.

Here are common financing options to consider:

• Investment : What you or someone else puts into the company. It ends up as paid-in capital in the  balance sheet . This is the classic concept of business investment, taking ownership in a company, risking money in the hope of gaining money later.
• Accounts payable : Debts that are outstanding or need to be paid after a certain time according to your balance sheet. Generally, this means credit-card debt. This number becomes the starting balance of your balance sheet.
• Current borrowing : Standard debt, borrowing from banks,  Small Business Administration , or other current borrowing.
• Other current liabilities : Additional liabilities that don’t have interest charges. This is where you put loans from founders, family members, or friends. We aren’t recommending interest-free loans for financing, by the way, but when they happen, this is where they go.
• Long-term liabilities : Long-term debt or long-term loans.
• Other considerations for estimating startup costs

Pre-launch versus normal operations

With our definition of starting costs, the launch date is the defining point. Rent and payroll expenses before launch are considered startup expenses. The same expenses after launch are considered operating or ongoing expenses.

Many companies also incur some payroll expenses before launch because they need to hire people to train before launch, develop their website, stock shelves, and so forth.

Further Reading: How to calculate the hourly cost of an employee

The same defining point affects assets as well. For example, amounts in inventory purchased before launch and available at launch are included in starting assets. Inventory purchased after launch will affect  cash flow , and the balance sheet; but isn’t considered part of the starting costs.

So, be sure to accurately define the cutoff for startup costs and operating expenses. Again, by outlining everything within specific categories, this transition should be simple and easy to keep track of.

Your launch month will likely be the start of your business’s fiscal year

The establishment of a standard fiscal year plays a role in your analysis. U.S. tax code allows most businesses to manage taxes based on a fiscal year, which can be any series of 12 months, not necessarily January through December.

It can be convenient to establish the fiscal year as starting the same month that the business launches. In this case, the startup costs and startup funding match the fiscal year—and they happen in the time before the launch and beginning of the first operational fiscal year. The pre-launch transactions are reported as a separate tax year, even if they occur in just a few months, or even one month. So the last month of the pre-launch period is also the last month of the fiscal year.

• Aim for long-term success by estimating startup costs

Make sure you’ve considered every aspect of your business and included related costs. You’ll have a better chance at securing loans, attracting investors, estimating profits, and understanding the cash runway of your business.

The more accurately you layout startup costs and make adjustments as you incur them, the more accurate vision you’ll have for the immediate future of your business. 

Clarify your ideas and understand how to start your business with LivePlan

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

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Project cost estimation: types and techniques for project success in 2024

Plus a 4-step process to calculate project costs as accurately as possible.

Stella Inabo,   Content Marketer

• project planning

Project cost estimating is the process of predicting the total cost of the tasks, time, and resources required to deliver a project’s scope of work.

Unfortunately for project and resource managers, humans can’t see into the future 🔮 and that’s what makes cost estimation for projects a daunting task.

But even if you’re not a clairvoyant, there are several methods and tools to help you create cost estimates that will be close to the project’s actual cost. We’ll cover them below, including:

• What a project cost estimate is
• How to create one
• Methods and tools for cost estimation

Plus, we’ll also give you an example of how one of our customers figured out how to estimate costs for a new project.

What is cost estimation in project management?

Project cost estimation is the process of forecasting the financial resources required to complete a project successfully. It involves analyzing various factors such as labor, materials, equipment, overhead, and other expenses associated with the project to come up with an estimate of the total cost.

Cost estimation is a critical aspect of strategic project management as it provides stakeholders with valuable information for decision-making, budgeting, and resource allocation .

It helps ensure that projects are completed within budget constraints and enables project managers to identify potential cost overruns or risks early in the project lifecycle.

Imagine you’re a digital agency owner about to send a proposal to a client to revamp their website. Your main question is probably: How much is this going to cost us? Well, one way to figure that out is by looking back at a similar project you’ve tackled before: how long it took, who was involved, and what they charged per hour.

If you’ve been storing all this project info in a dedicated resource management tool , accessing these details should be a breeze.

You can easily store and track all your projects in Float

Get your project cost estimates right with resource management software

Rated #1 on G2 for resource management , Float helps your team accurately forecast project costs with a detailed view of your capacity, availability, and budget spend.

5 project cost estimation methods & techniques

You can estimate how much a given project might cost in different ways. Here are five cost estimation techniques and who they might work best for—but remember, this list is not exhaustive. 

1. Analogous estimate

Analogous estimation is a top-down approach that uses historical data from similar past projects to estimate the cost of a new one.

Let’s say you want to estimate the cost of an advertising campaign for a new Netflix film: you’d look at the cost analysis of a past project that is similar in size and scope and make some adjustments based on changes in equipment, inflation rates, and resource costs.

This cost estimation technique is best for you if you have a reliable record of the cost and duration of past projects.  

2. Bottom-up estimate 

Bottom-up estimating is where you estimate the cost for individual tasks or components of a project and then sum them up to get to the total project cost. 

It involves creating a work breakdown structure and including overheads for contingencies . 

This cost estimation technique is best for projects with a well-defined scope and list of tasks. 

3. Parameter estimate 

Parameter estimation is a method that makes predictions or estimates based on specific characteristics or data points. It’s like making an educated guess using known factors or measurements.

For instance, a paid ad agency estimates that reaching the target audience on a specific platform might cost $4,000 based on past campaigns and the client’s objectives. So they project that creating multiple ad variations could cost $10,000, and they sum up these estimated costs to provide the client with an overall estimate for the advertising campaign. 

Parametric estimation works best when you have a lot of information from similar projects in the past. 

4. Three-point estimate

A three-point estimation is a way to calculate a project’s cost based on likely, optimistic, and pessimistic cost projections.

The benefit of a three-point estimation is that it ties a project’s costs to uncertainties and risks, which allows you to plan for "worst-case" scenarios.

Let’s say you’re to find the cost of building a new website. Your estimate could look like this:

💰 Likely cost: $10k 😃 Optimistic costs: $7.5k 😟 Pessimistic costs: $15k

These three figures become a basis for building an average estimate. Simply add them together and divide by three:

10,000 + 7,500 + 15,000 = 32,500

32,500 ÷ 3 = 10,833

As a result, the average project estimate is $10,833.

Three-point estimates are best for where there’s a lot of uncertainty or variability in the tasks or projects.

5. Ballpark estimate

A ballpark estimate will give you the approximate value of a project based on the combination of similar projects you’ve done in the past and expenses unique to the particular project.

Let’s say your client needs a website built and your team has done similar projects in the past for $10k. Using the ballpark estimate, the cost might range from -25% to +50% ($7.5k - $15k).

Ballpark estimates are best used when there’s limited information available like at the start of a project. 

How to create accurate cost estimates using a dedicated tool 

The cost estimation process we will outline below is best suited for you if 

1. You are running a professional service business, not an internal project 

2. You have some idea of how much things cost based on historical data

If you don’t have any historical cost data, you can skip to the section below this one to see how to estimate costs for new projects. Note that we will be using our tool, Float, throughout this example; if you are using a different tool (or none at all) some parts of this may not be applicable, but the overall approach remains the same. Here is how you can create accurate estimates:

1. Gather data from past projects

Start by collecting data from past projects that are similar in scope, size, and complexity to your current project. This data should include total costs, duration, resources used, and any other relevant information.

To find similar projects in Float, here’s what you would do:

• Head over to the Project tab in Float 
• Toggle the project view options to “Archive” and voila, all your old projects will apply

You can access records of past projects in Float

If you don’t have any projects in Float, you can sign up for a free 14 day trial , import your project details in, and get started. You can learn how to get set up with this guide .

2. Identify variables and adjust costs

A few things (or a lot) might have changed since you worked on other similar projects. Before estimating costs for new projects, look for any changes from previous work like higher billing rates or pricier software like VFX instead of CGI. 

Aside from cost, consider how durations might have to change. Check if certain phases in past projects took longer than expected and adjust for new projects accordingly.

You can easily check for variations in duration by heading to the Report page in Float and comparing the actual and scheduled time spent on tasks.

You can see your team’s scheduled vs logged time in Float

3.  Create a tentative project to calculate the estimated costs

By now, you should have a good idea of the people, duration, and billing rates you need for the new project. 

To get a good idea of how much will cost, create a tentative project in Float. You can do this by simply selecting Tentative on the project menu.

You can plan unconfirmed projects in Float by creating tentative projects

Then, allocate your team’s time to the project and set your budget type and billing rates. You can use placeholders if you plan to hire freelancers.

Because the project has been marked tentative, the new allocations will not affect your team’s time schedule . 

Once you are done setting up the project, head over to the project report to check for the total estimated cost.

4. Review the estimate with your team

Verify the estimate with stakeholders, experts, or team members to ensure its accuracy. Different team members might notice things that were initially overlooked. This process helps uncover any missed details or factors in the initial estimate.

A real-life cost estimate example for new projects (without past data)

One of our customers , a marketing and communications company, took on a project they had never worked on before (we’re not going to share their name to protect their privacy 😉)

Since they had not done similar projects in the past, they anticipated a learning curve and expected to spend more time than initially scoped due to several potential client revisions. 

To accommodate this uncertainty, they added buffers—increasing the estimated cost by 50% and extending the project duration from 30 to 45 or 50 working days.

You can set your project budget based on estimates in Float

These measures allowed them to manage additional costs caused by a slower pace and multiple rounds of client feedback.

Use resource management software to track and control costs in real-time

When your project budget gets a thumbs up, there lies a new challenge of cost management and control. The things to pay attention to never end!

This is where a dedicated resource management tool can help you not just make estimates, but also track spending as it happens, ensuring that you always know how much money is available and when you’re running out of funds. 

And, yes: you can also do this in a spreadsheet. But if you track your projects in Float, you can just click on a project and see the entire budget. Ta-da!

Project budget report in Float

Depending on the budget type you choose, you can either see the budget displayed in hours or currency.

You can choose between 5 budget types in Float

You can see how much was spent per project phase and the remaining budget. 

You can also keep tabs on your team’s hours and individual rates. And if there are cost overruns , Float alerts you by showing how much over budget your project is. 

If you’re ready to take control of your project costs, sign up for a free trial today .

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Some FAQs about project cost estimation

What factors influence cost estimates.

Several elements can influence cost estimates. These cost elements include:

• Scope of work
• Material costs
• Equipment costs
• Project duration
• Market conditions
• Location factors
• Inflation rates
• Contingency allowances

Who performs project cost estimation?

Cost estimating can be performed by various individuals or teams depending on the nature and size of the project. This may include project managers, cost estimators, engineers, financial analysts, and other relevant stakeholders.

How can businesses choose tools and software for estimating costs?

Choosing the right estimating software depends on several factors, including the specific needs of your organization, the complexity of your projects, your budget, and the features you require.

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How to calculate fte for better resource (and budget) management, what is resource utilization formula + examples, how to create & manage timesheets effectively.

The Ultimate Guide to Project Cost Estimating

By Kate Eby | March 27, 2017

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Whether designing a building or developing software, successful projects require accurate cost estimates. Cost estimations forecast the resources and associated costs needed to execute a project, which helps ensure you achieve project objectives within the approved timeline and budget.

Cost estimating is a well-developed discipline. By understanding the nuances of cost estimating and using standard estimation techniques, you can improve your forecasts. This complete guide to project cost estimating will walk you through the key concepts and major estimating techniques. Additionally, find how-tos, templates, and tips for key industries to help you get started with your estimates.

Overview of Cost Estimating

Cost estimating is the practice of forecasting the cost of completing a project with a defined scope. It is the primary element of project cost management, a knowledge area that involves planning, monitoring, and controlling a project’s monetary costs. (Project cost management has been practiced since the 1950s.) The approximate total project cost, called the cost estimate, is used to authorize a project’s budget and manage its costs.

Professional estimators use defined techniques to create cost estimates that are used to assess the financial feasibility of projects, to budget for project costs , and to monitor project spending. An accurate cost estimate is critical for deciding whether to take on a project, for determining a project’s eventual scope, and for ensuring that projects remain financially feasible and avoid cost overruns.

Cost estimates are typically revised and updated as the project’s scope becomes more precise and as project risks are realized — as the Project Management Body of Knowledge (PMBOK) notes, cost estimating is an iterative process. A cost estimate may also be used to prepare a project cost baseline, which is the milestone-based point of comparison for assessing a project’s actual cost performance.

Key Components of a Cost Estimate

A cost estimate is a summation of all the costs involved in successfully finishing a project, from inception to completion (project duration). These project costs can be categorized in a number of ways and levels of detail, but the simplest classification divides costs into two main categories: direct costs and indirect costs.

• Direct costs are broadly classified as those directly associated with a single area (such as a department or a project). In project management, direct costs are expenses billed exclusively to a specific project. They can include project team wages, the costs of resources to produce physical products, fuel for equipment, and money spent to address any project-specific risks.
• Indirect costs , on the other hand, cannot be associated with a specific cost center and are instead incurred by a number of projects simultaneously, sometimes in varying amounts. In project management, quality control, security costs, and utilities are usually classified as indirect costs since they are shared across a number of projects and are not directly billable to any one project.

A cost estimate is more than a simple list of costs, however: it also outlines the assumptions underlying each cost. These assumptions (along with estimates of cost accuracy) are compiled into a report called the basis of estimate, which also details cost exclusions and inclusions. The basis of estimate report allows project stakeholders to interpret project costs and to understand how and where actual costs might differ from approximated costs.

Beyond the broad classifications of direct and indirect costs, project expenses fall into more specific categories. Common types of expenses include:

• Labor: The cost of human effort expended towards project objectives.
• Materials: The cost of resources needed to create products.
• Equipment: The cost of buying and maintaining equipment used in project work.
• Services: The cost of external work that a company seeks for any given project (vendors, contractors, etc.).
• Software: Non-physical computer resources.
• Hardware: Physical computer resources.
• Facilities: The cost of renting or using specialized equipment, services, or locations.
• Contingency costs: Costs added to the project budget to address specific risks.

Create Project Cost Estimates at Critical Points in the Timeline

Cost estimates are critical to successful project management, so teams are expected to produce a reasonably accurate and reliable estimate during the conception and definition phase of a project. Estimates are adjusted for accuracy during the planning phase, as project stakeholders and sponsors may ask for revisions before they are willing to authorize a budget. After this early stage, the accuracy of estimates is systematically increased.

Cost estimating is an ongoing process, and estimate revisions are normal in order to ensure accuracy throughout project execution. Typically, work scheduled in the near future will have the most accurate estimates, while work scheduled farther away in time have less accurate estimates. This approach is known as rolling wave planning.

Detailed cost estimates are usually broken down into greater levels of detail and supplementary information. These outputs typically include:

• Activity cost estimates for the activities that make up a project.
• Supporting details, which include assumptions underlying estimates, cost data sources, and cost element sensitivity.
• Requested changes, which a newer, more accurate cost estimate may prompt.
• Updates to the cost management plan, such as those necessitated by changes to the project scope.
• Inputs for subsequent planning processes that use cost estimates.

The Continuum of Accuracy in Project Cost Estimations

Project cost estimates are classified into categories based on how well the scope is defined at the time of estimation, on the types of estimation techniques used, and on the general accuracy of estimates. These categories are not standardized, but they are all based on the recognition that a cost estimate can only be as accurate as the project scope is detailed. In its estimating manual , the American Society of Professional Estimators (ASPE) classifies cost estimates in order of increasing accuracy on a five-level scale. Level 1 is an order of magnitude estimate and Level 5 is a final bid. The U.S. Department of Energy uses a similar five-class scale , but in the reverse accuracy order (Class 5 as an order of magnitude estimate and Class 1 as a definitive estimate).

AACE International (formerly the Association for the Advancement of Cost Engineering) offers a helpful chart summarizing key points. Here’s an overview of the cost estimate categories:

Order of magnitude estimates: An order of magnitude estimate, or ASPE Class 5, is an extremely rough cost estimate created before a project has been defined. It is based only on expert judgment and the costs of similar past projects. An order of magnitude estimate is typically presented as a range of costs spanning -25% to +75% of the actual project cost. It is only used in high-level decision making to screen projects and determine which ones are financially feasible.

Intermediate estimates: An intermediate estimate can be created using stochastic or parametric techniques when a project is defined to some limited extent. Like an order of magnitude estimate, its main purpose is determining project feasibility based on the general project concept.

Preliminary estimates: Created when a project’s deliverables are about halfway defined, a preliminary estimate uses somewhat detailed scope information to incorporate unit costs. Preliminary estimates are accurate enough to be used as a basis for project financing. Some project budgets are authorized based on the preliminary estimate.

Substantive estimates: A substantive estimate uses a reasonably finalized project design to create a fairly accurate cost estimate based mainly on unit costs. At this point, the project’s objectives and deliverables are established, so a substantive estimate is accurate enough to create a bid or tender to complete a project. Substantive estimates may also be used to control project expenditure.

Definitive estimates: Drafted when a project’s scope and constituent tasks are almost fully defined, a definitive estimate makes full use of deterministic estimating techniques, such as bottom-up estimating. Definitive estimates are the most accurate and reliable and are used to create bids, tenders, and cost baselines.

Of course, even definitive estimates do not remain static through project execution. Since all estimates are based on numerous assumptions and are contingent upon risks of all magnitudes, cost estimates are often updated if these base assumptions change significantly or additional risks are realized. When this happens, the project cost baseline is revised accordingly so that you can continue to assess project performance accurately.

Estimates of all types are created using a combination of estimation techniques (with varying levels of accuracy). As we have seen, the most accurate estimates rely more on deterministic methods than on conceptual methods.

Major Cost Estimating Techniques: Best Uses for Each

To create accurate estimates, cost estimators use a combination of estimating techniques that allow for varying levels of accuracy. While the cost estimator always aims to create the most accurate estimate possible, they may have to start with less accurate estimates and revise once project scope and deliverables are fleshed out. The most widely used cost estimating techniques are:

Analogous estimating: Like expert judgment, analogous estimating — also called top-down estimating or historical costing — relies on historical project data to form estimates for new projects. Analogous estimating draws from a purpose-built archive of historical project data, often specific to an organization. If an organization repeatedly performs similar projects, it becomes easier to draw parallels between project deliverables and their associated costs, and to adjust these according to the scale and complexity of a project.

Analogous estimating can be quite accurate if used to form estimates for similar projects and if experts can precisely assess the factors affecting costs. For example, a similar project conducted three years ago might be used as the basis for a new project cost estimate. Adjust the estimate upward for inflation, downward for the amount of resources required, and upward again for the project’s level of difficulty. These adjustments are typically stated as percentage changes — a new project might require 10 percent more preparation time and 15 percent more on resources. However, project management professional Rupen Sharma stresses the need to make sure that projects really are comparable since projects that appear similar, such as road construction, can actually cost vastly different amounts depending on other factors — say, local landscapes and climates.

Bottom-up estimating: Also called analytical estimating, this is the most accurate estimating technique - if a complete work breakdown structure is available. A work breakdown structure divides project deliverables into a series of work packages (each work package comprised of a series of tasks). The project team estimates the cost of completing each task, and eventually creates a cost estimate for the entire project by totaling the costs of all its constituent tasks and work packages — hence the name bottom-up. Bottom-up estimates can draw from the knowledge of experienced project teams, who are better equipped to provide task cost estimates.

While deterministic estimating techniques such as bottom-up estimating are undoubtedly the most accurate, they can also be time-consuming, especially in large and complex projects with numerous work breakdown structure components. It is not unusual for definitive estimates to also use techniques such as stochastic, parametric, and expert-judgment-based estimating (if these have proved suitably accurate in early estimates). That said, bottom-up estimating is also the most versatile estimating technique and you can use it for many types of projects.

Parametric estimating: For projects that involve similar tasks with high degrees of repeatability, use a parametric estimating technique to create highly accurate estimates using unit costs. To use parametric estimating, first divide a project into units of work. Then, you must determine the cost per unit, and then multiply the number of units by the cost per unit to estimate the total cost. These units might be the length in feet of pipeline to be laid, or the area in square yards of ceiling to be painted. As long as the cost per unit is accurate, estimators determine quite precise and accurate estimates.

However, as project management professional Dick Billows , Chief Executive Officer of 4PM.com, cautions, parametric estimating does not work well with creative projects or those with little repeatability. It is difficult, for example, to come up with an accurate cost per chapter for editing a book written by 12 different authors, since each chapter is likely to require a different amount of work. Similarly, a writer penning a fantasy novel on commission may find herself struggling to advance the story at some points and fully immersed in its flow at others. Therefore, parametric estimating is a good choice only for skill-based projects with uniform, repeatable tasks.

Download Parametric Cost Estimating Template Below

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Compare the Strengths and Weaknesses of Analogous, Bottom-Up and Parametric Cost Estimating  

Cost of quality: The cost of quality is a concept used in project management - and more broadly in product manufacturing - to measure the financial cost of ensuring that products meet agreed-upon specifications. It usually includes the costs of preventing, identifying, and addressing defects. As an aspect of quality management, the cost of quality is usually an indirect project cost.

Delphi cost estimation : An empirical estimation technique based on expert consensus, Delphi estimation can help resolve discrepancies among expert estimates. A coordinator has experts prepare anonymous cost estimates with rationales; once these anonymous estimates are submitted, the coordinator prepares and distributes a summary of the responses and experts create a new set of anonymous estimates. This exercise is repeated for several rounds. The coordinator may or may not allow the experts to discuss estimates after each round. As the exercise progresses, the estimates should converge (indicating growing consensus between the estimators). When an estimate consensus has been reached, the coordinator ends the exercise and prepares a final consensus-based estimate.

Empirical costing methods: Empirical costing methods draw from previous project experiences using software- or paper-based systems. These methods work well for projects that are similar and frequently conducted in certain industries. A project manager wanting to obtain an empirical cost estimate completes a form detailing the project’s characteristics and parameters, and the system estimates a cost based on the kind of project. Since empirical costing methods draw from existing data and are increasingly automated, they are accurate, time-effective choices for less complicated projects. The Royal Institution of Chartered Surveyors’ Building Cost Information Service (BCIS), which computes rebuilding costs for houses, is an example of an empirical costing method.

Expert judgment: Most commonly used in order of magnitude and intermediate estimates, expert judgment estimating is conducted by specialists who know how much similar projects have cost in the past. As such, it relies mainly on drawing parallels between past and future projects to create and adjust estimates. Since any two projects are unlikely to be identical and project work is typically complex, expert judgment estimates are presented as a range. While a wide range typically means these estimates have limited use, project management professional Billows points out that such broad estimates are only meant to indicate project feasibility and provide a ballpark figure to hold project managers accountable. In this regard, they “are better than commitments you can’t keep,” Billows says.

Reserve analysis: Reserve analysis is an umbrella term for a number of methods used to determine the size of contingency reserves, which are budgetary allocations for the incidence of known risks. One outcome of reserve analysis is a technique called padding, which involves increasing the budgeted cost for each scheduled activity beyond the actual expected cost by a fixed percentage. Critical path activities may have larger percentages assigned as padding . The Project Management Institute (PMI) also suggests other methods for managing contingency reserves, including the use of zero-duration activities that run in tandem with scheduled activities and the use of buffer activities that contain both time and cost contingency reserves.

Resource costing: Resource costing is a simple mathematical method to compute the costs of hiring resources for a project. It is easily done by multiplying the hourly cost of hiring a resource by the number of projected employment hours.

Three-point estimating: Three-point estimating has roots in a statistical method called the Program Analysis and Review Technique (PERT) , which is used to analyze activity, project costs, or durations by determining optimistic, pessimistic, and most likely estimates for each activity. Three-point estimating uses a variety of weighted formula methods to compute expected costs/durations from optimistic, pessimistic, and most likely costs/durations. One commonly used formula for creating estimates is:

Expected value = [Optimistic estimate + Pessimistic estimate + (4 x Most likely estimate)] ÷  6

The standard deviation is also calculated to create confidence intervals for estimates:

Standard deviation = (Pessimistic estimate – Optimistic estimate) ÷ 6

Three-point estimating can construct probability distributions of estimates in a number of fields. In project cost estimating, estimators may create a three-point estimate of cost using optimistic, pessimistic, and most likely costs. Alternatively, for projects that measure deliverables in units of time with fixed costs, estimators may use expected durations as the number of units and determine costs via parametric estimates. However, remember that three-point estimates are only as good as their initial optimistic, pessimistic, and most likely estimates - if these are not accurate, the expected values are useless.

‌ Download Three-Point Cost Estimating Template - Excel

U.S. Government Accountability Office (GAO) 12-step process: The GAO recommends a 12-step process for creating high-quality cost estimates. Essentially a deterministic estimating technique, the 12-step process is a systematic approach where estimators select an appropriate estimating technique for each component of a work breakdown structure, fully identify the assumptions underlying estimates, and conduct risk and uncertainty analyses for estimates.

Using cost estimating software: Project management software can simplify, speed up, and enhance cost estimating. You can use a variety of project management software to create cost estimates or to determine the levels of uncertainty involved in cost estimates via probabilistic modeling.

The Monte Carlo method is one example of this modeling approach. It refers to the risk analysis simulations performed by researchers working on the atomic bomb and named after the gambling resort in Monaco. The Monte Carlo method produces a range of potential outcomes and offers probabilities for their occurrence based on different variables.

Vendor bid analysis: This estimating technique is used to supplement internally constructed estimates. It allows estimators to compare their own estimates with those stated in bids submitted by vendors, and can provide a useful point of comparison and external perspectives on what a project should cost.

What Makes a Good Cost Estimate?

The usefulness of a cost estimate depends on how well it performs in areas like reliability and precision. There are several characteristics for judging cost estimate quality. These include:  

Accuracy: A cost estimate is only as useful as it is accurate. Aside from selecting the most accurate estimating techniques available, accuracy can be improved by revising estimates as the project is detailed and by building allowances into the estimate for resource downtime, project assessment and course correction, and contingencies.

Confidence level: Since even the best estimates contain some degree of uncertainty, it is important to communicate the amount of potential variability in any estimate to stakeholders. Confidence levels can communicate estimates as ranges, such as those produced by three-point estimating techniques or Monte Carlo simulations.

Credibility: Stakeholders or sponsors preparing to authorize budgets want to know that estimates are founded in established fact or in practical experience. Increase the credibility of an estimate by incorporating expert judgment and by using set values for variables, such as unit costs and work rates.

Documentation: Since project managers are eventually held accountable to cost estimates, it is important that the assumptions underlying estimates are identified and recorded in writing, and that regular budget statements are provided. Thorough documentation precludes misunderstandings and helps stakeholders understand the reasons behind estimate revisions.

Precision: To reduce the variation in cost estimates due to techniques used, estimators should compare and corroborate estimates. Cost estimating software makes this fairly easy.

Reliability : Reliability is a concept based on the extent to which historical cost estimates for a certain type of project have been accurate. For new projects that are similar to successfully-completed past projects, analogous estimating techniques will allow reliable estimates.

Risk detailing: All projects can be affected by negative risks, so it is important to build allowances into cost estimates. Thorough risk identification and allocation of contingency reserves is the most common approach. Estimates should be overestimated rather than underestimated, and estimators should establish tolerance levels for cost deviation.

Uniformity: For performing organizations that conduct many projects of the same type, expect unit costs to be reasonably consistent across projects and only adjusted for inflation. This type of unit cost uniformity is possible for organizations that have undertaken several similar projects, which enables them to create reference lists for recommended unit costs.

Validity: Confirming the validity of a cost estimate involves checking the underlying data for accuracy. Improve validity by relying on established cost literature, and on cost indices when up-to-date literature is unavailable.

Verification: Cost verification is the act of checking that mathematical operations used in an estimate were performed correctly. Cost verification is much easier if estimates are properly documented.

In their book Project Management for Business, Engineering, and Technology , project management experts John M. Nicholas of Loyola University and Herman Steyn of University of Pretoria, South Africa, say the best estimates are made by teams that include designers, builders, suppliers (this is opposed to estimates from more homogenous teams). They describe these diverse estimating teams as concurrent engineering teams.

The Most Likely Causes of Inaccurate Project Cost Estimates

Alternatively, factors that undermine cost estimations include poor raw data or assuming that resources are 100 percent utilized. Some of the most common pitfalls for cost estimators are:   

Lack of experience with similar projects: Accuracy in cost estimating tends to increase as estimators, project teams, and organizations gain experience working with similar projects. Inexperienced estimators and project teams may not be familiar with the scope of a project, which may lead to inaccuracies with - even with deterministic estimating techniques. At an organizational level, the use of analogous estimating techniques is typically not reliable if the organization has not conducted similar projects before.

Length of the planning horizon and of the project: Professional estimators stress the importance of not making premature estimates. As we have discussed, accurate estimating depends on the degree to which a project is defined. For large, complex projects, approaches such as rolling wave planning mean that future work is less well defined. It is important that cost estimating practices reflect this and that cost estimates are revised as more up-to-date information becomes available. For mega projects that take several years to complete, it’s important to take currency value fluctuation and political climates into account.

Human resources: Creating accurate estimates becomes more difficult as the number of human resources involved in a project increases. While it is standard practice to assume that any resource will only be productive 80% of the time and to create estimates accordingly, it becomes harder to account for costs in managing and organizing people. This is especially noticeable in project activities that involve building consensus or coordinating tasks across many people.

Difficulty also arises when estimating costs of human resources via resource costing or parametric estimating. Both estimating techniques revolve around the concept of unit-based costing, but the complexities of managing people make it difficult both to obtain accurate unit costs and to forecast the task completion time accurately. Further, it’s unlikely that workers’ skill levels will be identical (even if they are classified as such), so some time deviation is inevitable. This shows the value of systematically overestimating instead of underestimating, especially when dealing with human workers.

Several other common mistakes can affect the accuracy of estimates:

Not fully understanding the work involved in completing work packages: This is sometimes a problem for inexperienced project teams who have not worked on similar projects before.

Expecting that resources will work at maximum productivity: A more appropriate rule of thumb is to assume 80% productivity.

Dividing tasks between multiple resources: Having more than one resource working on a task typically necessitates additional planning and management time, but this extra time is sometimes not taken into account.

Failing to identify risks and to prepare adequate contingency plans and reserves: Negative risks can both raise costs and extend durations.

Not updating cost estimates after project scope changes: Updated cost estimates are an integral part of scope change management procedures, as project scope changes render prior estimates useless.

Creating hasty, inaccurate estimates because of stakeholder pressure: Since project managers are held accountable for estimates, order of magnitude estimates are a much better choice than numbers pulled out of thin air.

Stating estimates as fixed sums, rather than ranges: Point estimates are misleading. All estimates have inherent degrees of uncertainty, and it is important to adequately communicate numbers like cash flow via estimate ranges.

Making a project fit a fixed budget amount: The scope of a project should determine its budget, not the other way around. As Trevor L. Young explains in his book How to be a Better Project Manager , estimating is a “decision about how much time and resource are required to carry out a piece of work to acceptable standards of performance.” The reverse approach — planning projects to fit budgets — is likely to result in projects that fail to meet requirements and to deliver results.

Other Project Management Fields Tie to Cost Estimating

The job of estimating project costs and ongoing budget control is not done in a vacuum. Several other project management specialties influence it, and the cost estimation, in turn, has impact on those other project aspects. Some of these are:

Communications management: Routinely update project team members and stakeholders with project activities. Project team members who do not understand their roles cost the project time and money. Likewise, stakeholders who do not receive regular project progress updates may request costly management changes at non-optimal times.

Human resource management: Inadequately trained or unprepared project staff can be a liability in terms of both time and money.

Procurement management: Ineffective procurement management can increase project costs, especially for projects performed over extended lengths of time. For example, fluctuating resource prices and changing economic and political conditions may make it more expensive to procure necessary goods or services.

Quality management: Establish quality requirements for project deliverables before execution begins, and communicate these requirements to all project team members. A lack of clarity on quality requirements can prove costly during the quality control process, when defects or noncompliance must be addressed (often at substantial cost).

Risk management: All projects face risks. Adequate risk identification and preparation of contingency plans and reserves are vital to prevent risks from causing cost overruns.

Time management: Project costs are directly related to the time taken to complete a project, and so a failure to construct an accurate and viable project schedule will likely cause cost overruns.

How Cost Estimation Is Applied in Key Industries

Regardless of the size and scope of your project, standardized cost estimating will help produce accurate estimates. That said, the industry, sector, and type of project can have a bearing on how you develop your estimates. Therefore, it’s worth examining how cost estimating is done in some key industries and more complex use cases.

Construction

Construction costs span two major cost categories: those incurred in the actual construction and development of a facility and those incurred in the operations and maintenance of the facility throughout its life cycle.

The first category includes things like the cost of land, labor, equipment, and materials needed to build a facility, the cost of architectural design and engineering, and the cost of facility inspection. The second category includes maintenance and repair costs, land rent and utilities costs, and the cost of operations and employing operations staff.

One factor that looms large in cost estimation for construction projects is the need for contingencies. Since construction projects are typically large-scale and performed over extended periods of time, adequate contingency planning is vital. Contingencies in construction projects include:

• Schedule adjustments, which are not unusual for such large-scale projects. Given the large costs of equipment and labor in construction projects , delays and schedule extensions can increase costs considerably.
• Changes in equipment and labor costs, which are also not uncommon in lengthy projects.
• Environmental changes, such as changes in climate — again not uncommon in lengthy projects.
• Changes in design development, which, though rare, are not unheard of. These depend on the quality of pre-execution project planning and uncontrollable circumstances such as natural events.

Cost estimates for construction projects fall into three classes:

• Design estimates: Created during project planning and design, these include a number of estimates ranging in accuracy from screening through conceptual to definitive.
• Bid estimates: This is a finalized definitive estimate used to conduct competitive bidding.
• Control estimates: Use these to measure cost performance during project execution; they are susceptible to revisions during a project.

An important aspect of cost estimation in construction projects is determining the relationship between project scale and average cost per unit. Typically, estimators using empirical data to establish these relationships will find that there are economies or diseconomies of scale. That is, the average cost per unit changes as the scale of the project increases. Estimators seek to take advantages of economies of scale to minimize unit costs.

Information Technology

In producing cost estimates for information technology projects, many of the conventional cost estimation practices do not adapt well to Agile project development , given this approach’s emphasis on changing project scopes.

However, since the primary input in Agile processes is labor - not resources - and that Agile development supports fixed-time iterations, use parametric estimating techniques to create accurate cost estimates. Agile development teams divide work into manageable portions for each iteration and can thus charge fixed costs depending on the number of developers needed to complete the work scheduled for each iteration.

Even here, however, there may be difficulties. Fixed price cost estimating works well for adaptation work, which focuses mainly on amending already designed IT products. Developmental work, on the other hand, is more difficult to estimate, given that it involves product design. Because Agile methods encourage scope changes, it is difficult to pre-plan the amount of time to spend on design. Therefore, cost overruns for developmental work are quite common.

On the whole, therefore, cost estimation for IT development projects (involving both developmental and adaptation work) is best conducted as a combination of top-down and bottom-up estimating. Adaptation, which is generally well defined, can be estimated using bottom-up estimating techniques since its scope is fixed. Developmental work, which does not have a fixed scope, is better estimated using top-down techniques such as expert judgment and analogous estimating.

Engineering

Civil engineering projects (such as for highways and bridges) sometimes have added pressure from increased public interest in their progress and especially their cost performance. This can be problematic when critics fail to appreciate the iterative nature of cost estimating and draw misleading comparisons between inaccurate preliminary estimates and control estimates. This problem is compounded by the fact that civil engineering projects typically feature large degrees of uncertainty in estimates — usually due to a combination of project length, natural conditions, and, in some instances, political conditions in the region. As such, organizations such as The Institution of Engineers of Ireland suggest that preliminary estimates for civil engineering projects not be made public and that more definitive estimates clearly state project scopes and underlying assumptions.

Civil engineering projects that run over extended periods of time may also have to contend with scope changes requested by changing political administrations. In some developing countries, these projects might struggle to retain political support as governments change, and it is not uncommon for there to be problems with administrative corruption. As such, civil engineering projects place special importance on adequate risk identification, and contingency reserves for these projects tend to be generous. It is also important to undertake project planning in a way that minimizes the likelihood of future scope changes, since these can easily cause cost overruns.

Service Industries

Project costing in service industries can present a unique set of challenges. Since the emphasis is on knowledge-based work (for which expected durations and rates of work can be difficult to forecast), simple, unit-based estimating techniques are unsuitable. Instead, service industry projects typically compute labor and resource costs separately, and add overhead costs to these when creating estimates.

Costs for service industry projects are broadly divided into three categories: labor costs, resources, and overheads. In most cases, labor and resource costs are simply billed as they are incurred on a per-job basis. Billing for overheads, however, is more complicated, especially since increased automation has in recent years increased the size of overhead costs for many service industries. Service industries adopt a variety of costing techniques to manage billing for overhead costs, including:

• Job order costing: Applies a fixed overhead fee to each job.
• Activity-based costing: Assigns overheads in proportion to service activities via cost drivers.
• Actual costs plus: Assigns a percentage of a company’s actual costs as overheads to each job.
• Set costs: Charges each job a predetermined fixed fee.

Set costs jobs are, of course, the easiest to estimate. For the other costing techniques, the separation of resource costs from labor costs can improve the accuracy of estimates as long as service providers can accurately assess the extent of labor involved in each project — which can be imprecise.

Commonly Used Tools for Cost Estimating

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How to Estimate Project Cost in 8 Steps (Accurately)

Estimating the cost of a project and creating a budget that works for you and your client is practically an art. Clients want more for less, and you want more significant margins.

No matter what industry you’re in — one of the most critical parts of successful project management for any project manager is delivering on time, to scope, and within budget.

In this guide, you’ll learn about different cost estimation techniques and how to apply them to create accurate project cost estimates for your next client.

Let’s go!

What is cost estimating in project management?

Project cost estimating is the process of identifying the tasks, duration, and resources needed to complete the project. By accurately estimating the cost of a project, a business can better ensure that spending stays within budget once the project begins.

Note: your first cost estimate shouldn’t be the final price you hand over to a client — it should act as more of a ballpark on how much it might cost to deliver the project (more on this below).

Project estimate vs. budget

But what’s the difference between an estimate and a project budget? An estimate is what the cost of a project will be. Once the client approves this, it becomes a project’s budget. You will track expenses against this fee to generate a profit.

Types of estimates

Avoid selling a project at a fixed fee during the initial stages of the project.

You should follow a simple process of defining the overall project budget and creating different types of estimates before you sign off on a Statement of Work (SoW) .

Consider creating the following estimates for your next client project:

Ballpark estimate 

• Budget estimate 
• Statement of Work (SoW) estimate

The client needs to know if the project is possible, but you need more information to give a proper estimate. So you can do this by giving them a ballpark estimate of how much the project will cost ($80k-$140k).

Budget estimate

Suppose the client is happy with the ballpark estimate. In that case, you may ask for more information about the project to put together a more accurate estimate and a project plan with an estimated timeline. Your revised estimate may change to $90k-$130k.

SoW estimate

Assuming the client is still good to go, the final step in the estimate refinement is pulling together the SoW, which will include the estimate and total project budget. You may adjust your estimate to $100k + a 20% contingency fund.

Techniques for estimating project costs

Below are a few cost estimating techniques you can use.

Analogous estimation

Analogous estimating involves looking at similar projects you’ve completed to create your estimate.

For example, a client may want a simple five-page website. You can look at the budget for similar website projects you’ve completed to create your estimate.

The issue with analogous estimates is that they tend to be slightly inaccurate. 

They assume that:

• You have (accurate) historical data to reference
• There are no differences between projects,

But they are quick and easy and can be used with limited information to create a ballpark estimate — especially if you have historical data to hand (more on this later).

Top-down estimating

Top-down estimating looks at a high-level project budget and scope to create a ballpark estimate. 

The initial project budget should come from the client, and it is your job to take their budget, slice it up, and allocate time/costs to phases or tasks in the project.

You then decide whether or not the client’s budget is enough to deliver the project. If not, you can ask the client to adjust the project scope to fit their budget better. 

It is a form of analogous estimating, where existing knowledge of similar projects is used in the estimation process to produce a ballpark figure for the total cost.

Three-point estimating

Three-point estimating combines the best-case, worst-case, and most likely outcome scenarios to create an accurate, flexible estimate. This technique is particularly useful when the client has asked for a more detailed cost estimate. 

How do you use this technique?

The best way is to break the project down into tasks and calculate an hourly estimate for each.

For example, you and your team may estimate the time to create a wireframe as follows:

• Best-case: 4 hours
• Worst-cate: 8 hours
• Most likely: 5 hours

Which gives you an estimated time of 5.6 hours.

The main advantage of three-point estimating is that it reduces risk — as you’re considering three different scenarios. But the downside is that it takes a bit of time!

Bottom-up estimation 

Bottom-up estimating considers the time, cost, and effort for each task within the project. It then adds it up to create an estimation for the entire project.

This means it can be a super accurate technique if you’re at the point of creating a Statement of Work estimate.

The best way to use this technique is a tool called a Work Breakdown Structure (WBS). 

This helps you break down a project into its tasks, which are then estimated separately and added to calculate the total project cost.

The advantage of the bottom-up estimating technique is that it’s the most accurate and, by being granular, enables precise tracking of a project’s progress against the estimate.

Note: we’ll explore how to use a WBS for estimating below!

Project costs to consider

A typical project estimate will be made up of the following components

• Tasks – what’s going to be done
• Resources – Who’s going to be doing it
• Duration – how long it will take
• Rate – how much will it cost to deliver the project
• Tools and software – what tools and software will be needed for the project

Note : remember to consider all direct costs (related to one specific project) and indirect costs (ongoing costs related to multiple projects). 

How do you go about estimating the components above? 

Let’s get into it!

How to estimate project costs in 8 steps

A typical cost estimation process can look like this:

• Rework their idea
• Consider conducting a project discovery
• Break down the project into phases and tasks 
• Calculate the cost for each task
• Identify if you have enough resources to complete the project
• Calculate the total cost of the project
• Add a project buffer to protect profits
• Account for hidden costs

Note: The steps below will focus on creating an SoW estimate while touching on the steps you need to complete to create ballpark and budget estimates.

1. Rework their idea

Most clients won’t fully understand what they want from a project initially. It may be a basic concept, an end deliverable, or a simple idea. 

It’s your job to rework their idea and turn it into a viable solution you can deliver within their budget.

But say the client wants to know how much it will cost before committing to working with you.

What do you do?

Get clarity on what you’re doing, why, and how. Rework their idea into a viable solution that matches their budget and timeline and delivers on their goals and objectives so that it delivers results.

The basics you need to go over are:

• Client needs – what problems are they facing? How do they expect the project to solve them
• Client expectations – What does success look like to the client? What do the deliverables look like?
• Client budget – What’s their budget, and what do they want/need to get done for that budget?

Your goal here is to shape their idea into a clear list of deliverables — so that you can articulate what the project is, how it works and how you will deliver it.

Unless you have a solid understanding of what needs to be delivered, you should use the top-down or analogous estimate technique to provide a rough ballpark estimate here. You don’t want to do too much leg work if the client doesn’t have the budget.

You can either use your experience here or use data from past similar projects to give a rough estimate. 

If you’re using Toggl Track , you can access the financial data of past projects within the Project Dashboard .

This will show you earnings for flat rate and hourly billed projects.

2. Consider conducting a project discovery

Gathering all project requirements (or as much as possible) during a project discovery isn’t just essential — it’s one of the most crucial elements in your project lifecycle.

What is a project discovery? 

A project discovery is a process that takes place before kicking off a project. It is focused on collecting detailed project requirements to identify goals, stakeholders, deliverables, costs, and budgets.

It will help you to create a far more accurate cost estimate. 

But when do you carry out a project discovery?

This will depend on the project’s complexity and how much information you collected during your project intake process. A project discovery could be an initial 30-minute phone call, and that’s all you need to estimate the project’s cost. If that’s the case, you’ll probably not charge for that.

But the best-case scenario would be to

• Sell your project with a variable price range
• Carry out a project discovery
• Re-estimate and refine project scope post-discovery
• Sell each project phase/sprint at a flat rate

If not, you can 

• Sell a discovery at a flat rate before you commit to the project
• Sell the rest of the project based on your findings

Try to avoid selling an entire project for one fixed price. You should do this only if you’ve done the project a thousand times before and know exactly what kind of effort is involved.

3. Break down the project into phases and tasks

Once you have a solid understanding of what work is required to deliver the project, and the client is happy to move forward with your ballpark estimate, it’s time to create a more accurate estimate. 

You can use either the three-point estimation or the bottom-up technique here. But your goal is to break down the project so you can isolate parts of the deliverables and estimate their costs separately. 

The best way to do this is to use a Work Breakdown Structure . 

The purpose of creating a WBS is to help organize, visualize, and manage projects more efficiently. It serves as a framework for detailed cost estimation and control and can help you build an estimated project timeline. Adding a project buffer is smart, too! (more on this later).

Feel free to use our WBS template below. The template contains fields to enter each task’s estimated hours and costs. Once filled out, this will create an estimated cost estimate for the entire project.

4. Calculate the cost for each task

Now that you know which tasks you need to complete, you can begin assigning time estimates to each.

Use the WBS template to fill out the estimates here. Hand the file to your team to use their knowledge and experience to add more accurate time estimates for each task.

Once a time estimate has been added for each task, a cost estimate will be generated based on your hourly rate.

We’ve added a formula to the template to speed up this part. 😊

By splitting the project into individual phases and tasks, you’ll better understand how the project fits together to form the whole. And when divided into smaller parts, it also makes it much easier for your team to estimate how much effort will be required to produce it. 

When it comes to tracking p roject costs , you will be able to track expenditures against specific project phases rather than lump them all together.

But this process can take time, so don’t do this for a ballpark estimate. It makes more sense to do this when you know the client has the budget and needs more detail from you.

You can provide budget estimates faster if you’re experienced with the type of work or have access to past project estimates.

Using Toggl Track, you can view past project task data within the Reports Dashboard to better understand what time and costs went into each task.

This is useful for quickly coming up with a budget estimate for a project when the client wants a little more detail.

It’s worth noting that project cost estimates often need to be adjusted during the discovery phase — especially on long and complicated projects. 

But using a WBS and past historical project data should help you to create far more accurate cost estimates.

5. Identify if you have enough resources to complete the project

After estimating how many hours you’ll need for each task, consider internal team capacity . Your team probably has multiple projects on the go already, so you’ll need to ensure they have time to accommodate the incoming work.

To estimate team capacity, consider

• How many hours each team member works per day
• How many billable hours per day each team member is racking up (billable utilization) 
• Planned vacations and holidays
• Unexpected circumstances — such as sick leave

From speaking with many agencies, we know capacity planning is a big issue. So don’t skim over this step. 

Not knowing if you can manage projects can lead to many issues. Such as scope creep , profits taking a hit , and project timelines being pushed back constantly.

There are plenty of capacity planning tools out there. But if you’re using Toggl Plan , you quickly view your team’s capacity using Team Timelines .

Team timelines give you the best visual overview of who’s working on what and when. 

That way, you can see at a glance what everyone is working on, make sure that no one is overloaded, and notice when there’s room for new projects.

Check out this page to learn more 👉 Resource Planning with Toggl Plan .

6. Calculate the total cost of the project

Finally, it’s time to calculate the project’s total estimated cost.

If you’ve used the WBS template mentioned above, you may have something like the example below.

You can use the project’s total estimated cost as part of your budget or SoW estimate and send it straight off to the client for feedback. 

But first, you may want to consider adding a project buffer…

7. Add a project buffer to protect profits

Agreeing on the cost of a project is the easiest part — but trying to keep that project within budget?

It’s almost impossible to avoid hiccups throughout the lifecycle of a project. 

Prevention is key here. 

The easiest solution to avoid project profitability tanking is to mitigate project risks is to add a bit of a buffer to your project cost estimates — at the task, phase, or project level.

Adding this will help account for anything that could go wrong within the project. It will be a much-appreciated cushion for minor issues and sudden changes.

Projects tend to go over budget for several reasons.

• Additional client requests 
• Sudden changes from the client
• Poor project planning
• Goals and objectives are constantly changing

Note: check out our guide ‘ How to Create and Manage a Project Budget ’ to learn more about how to address each issue above.

How much of a project buffer should you add?

Experts recommend adding about 10% – 30% to your project estimate. Check out the video below for more tips on this.

The better solution to adding buffers to your project cost estimates is to mitigate the impact of risk by estimating for it upfront. This can be done by adding a 20% contingency fund to your estimate to account for change and risk.

Don’t build this into your estimate, but add it as a separate line item. This helps set a precedent and educates your client that changes to scope equate to additional costs from the contingency fund. 

This means you can say yes to your clients a lot more, with a small caveat that you’ll be using the additional budget for it.

8. Account for hidden costs

Before you wrap up your estimate, ensure you include a project’s hidden costs. With any project, there’s the cost of delivering the main project. But expenses associated with providing the project must be accounted for, or your profitability gets obliterated. 

Here are some of the things to think about.

Project and account management time 

The most significant drain on project costs is the time you spend managing the project and the account.

Try adding at most 25% to the project estimate for this. The amount of time you spend on project and account management will vary from project to project. So be realistic and remember that clients want to pay for the work being done.

Do you want to understand better how much time you spend managing projects? 

Tracking time is your best option here. This can be done for billable and non-billable tasks. That way, you will better understand what resources go into each project.

For example, you may spend a lot of time in meetings with a client discussing the project. If so, you should be tracking this as your project management time!

Using Toggl Track, you can start tracking your time in just a few clicks.

This will help you better determine how much time you spend on project and account management, allowing you to estimate the cost of future projects more accurately.

Scoping time

Remember the time it takes to initiate a project. Think about how and where you will include costs for the effort at the start of the project, pulling together timelines, gathering and compiling project requirements, and putting together the scope of work documentation. 

Don’t bury this in with your estimate — get the client to pay for this as part of an initial discovery phase, or include it in your total estimate as a separate item.

3rd party costs

Finally, don’t forget the 3rd party costs. What other stuff will you need to pay to deliver the project? 

This may include equipment rental, hosting, subscriptions, translations, photography, fonts, licensing, and more. 

And if you’re working with clients in a different city, don’t forget about travel and subsistence and your travel time; who’s paying for the team’s time when they can’t work on other projects? 

Making sure you account for these costs is critical to ensuring you don’t ruin your profitability.

Project cost estimate example

Let’s use a marketing campaign project as an example for a more simple explanation of how to estimate project costs. 

Using a phase-based approach , your high-level WBS may look like the image below.

Next, you would use the bottom-up estimation technique and calculate how long these tasks will take and determine how much they’ll cost.

Note: by adding time estimates, the WBS can also act as the foundation for your project timeline —perfect for your detailed project proposal. If you can gather historical data and automate parts of the process for consistency, this will make project costing easier and more accurate.

Step up your project cost estimation game 

Hopefully, this guide has helped you understand when and how to create different project cost estimates.

Accurate project estimation is the make or break of your entire project’s outcome. 

Yet, for many businesses, proper project estimating is often overlooked.

Start fine-tuning your project estimation process to help you avoid missed deadlines and improve your margins while drinking up pure, unfiltered success.

More resources

• How to Create and Manage a Project Budget
• Work Breakdown Structure: A Guide For Agencies
• Project Estimation Techniques: A PM’s Handbook

Bonus resources

• When Client Says “Your Price Is Too High”– How To Respond Role Play By The Futur
• How do you Estimate the Cost of a Project? By The Futur

Sean is a Content Marketer at Toggl. He's been involved in SEO and Content Marketing since 2017. Before working for Toggl, Sean ran SEO at a digital marketing agency—so he's all too familiar with time tracking and project management.

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Project Cost Management: The Basics, Steps, and the Main Goals

Table of Contents

When your business takes on a new project, the success or failure of your work depends on the efficiency of your project management efforts — and the most important element of your project management efforts is handling project management costs .

What’s more, inaccurate project cost estimation can be one of the main reasons why projects go over budget or totally fail.

To be able to complete your project successfully, you need to be able to control, analyze, and forecast the costs more precisely, assess risks, and prevent bad outcomes.

To help you stay within your project budget, we’ll explain the following:

• The definition of project cost management,
• The main goals of project cost management,
• The way to calculate project management costs, and
• The 4 steps in project cost management.

We’ll also cover some frequently asked questions about project cost management, so stay with us.

What is project cost management?

Project cost management is a process that involves the estimation and allocation of the project budget and subsequent costs, as well as project cost control.  

Project cost management allows you to have a clear picture of the financial status of your project. It helps project managers predict future expenses and act accordingly.

Some of the benefits of project cost management are:

• Decreased expenses,
• Increased efficiency, and
• Progress and performance tracking. 

Important project cost management terms

To make it easier for you to understand some important terms related to project cost management, we’ll explain them in more detail.

In this section, we’ll explain the following terms:

• Project costs, and
• The project budget.

What are project costs?

Overall, project costs are the total funds needed to monetarily cover and complete a business transaction or work project.

Project costs involve:

• Direct costs — Direct costs are those directly involved with the project and necessary in order to complete said project.
• Indirect costs — Indirect costs for a project are costs that do not directly lead to project completion but are still vital for the company or individual working on said project. As such, they are a part of individual project costs.

Direct costs include the cost of:

• Professionals working on the project — i.e. company employees or outsourced contractors and freelancers.
• Equipment — i.e. the tools and machines the employees, contractors, or freelancers use to finish the project.
• Materials — i.e. physical materials (that are not tools or machines) needed to finish the project.
• Project management tasks — i.e. all tasks meant to facilitate project completion before a given time, and according to specific requirements.
• Engineering tasks (if needed) — i.e. all research, design work, and installation of equipment made in order to finish the project.
• Transportation (if any) — i.e. custom rates, bringing the finished product to retailers, etc.

Indirect costs include the cost of:

• Operating overhead expenses — i.e. office rent, utilities, insurance, general office equipment, and materials.
• Target annual salary — i.e. the clean profit the company or individual wants to make, in addition to the money needed to cover overhead and other expenses.

💡 Clockify Pro Tip

Want to know more about how to calculate your ideal target annual salary and your average operating overhead-expenses? You can do it with our handy calculator:

• Hourly Rate Calculator

Handling direct and indirect costs and keeping them within the budget is essential for smooth project cost management. 

What is the project budget?

The project budget is the total amount of money planned and allocated for the execution of a project within a specific time period (deadline). 

The project budget is based on the initial cost estimate of the project and usually depends on the efficacy of the project cost control. There are 4 main project budget management techniques:

• Incremental — You track time on your tasks within a project and gain an understanding of the actual time you’ll need to finish said tasks in the future.
• Activity-based — You calculate your ideal revenue , consider how many projects you need to work on during the year and their prices to reach said revenue, and determine each individual project budget by calculating the costs for that project.
• Value proposition — You add items to your budget based on the value they bring to your project. If an item/task/professional is important for the project, they get added to your planned budget.
• Zero-based — This budget management technique is similar to the value proposition. The difference (and the condition for the item to be included in the budget) is that the item must be justified and proven useful for each new business period and not just one project. All items that are important for a new business time period are approved for the budget.

To learn more about the best ways to manage all costs related to a project budget, take a look at these budget cost management techniques. 

Budget cost management techniques

In order to make sure you stick to the budget (and cut the costs where you can), you should:

• Train employees to be efficient with their time — Following the right time management tips and increasing the right time management skills will improve your team’s performance, and reduce the risk of a project falling through, which will, in turn, help you save costs.
• Make use of the latest technology — Apart from a project management tool, try introducing other business tools to help automate employees’ work in a cost-effective manner.
• Outsource tasks — Hiring a reputable professional from outside the company to handle a portion of your work (business-related or project-specific work) will help you cut costs.
• Cut down your overhead expenses — Insurance is a non-negotiable overhead expense, but there are some overhead expenses you could work (and live) without. Examples include a stylish office in the city center for your freelance work or fashionable but otherwise less than useful utilities. Cut what you can to make the most of your budget.

The importance of cost management in projects and the listed cost management techniques is almost self-explanatory — when you aim to manage your costs to adhere to the set project budget, you’re essentially letting the set budget guide your decisions. 

If you don’t aim to manage your project costs, they’ll likely spiral out of control, and your entire project might fall apart due to faulty management.

What are the main goals of project cost management?

The benefits of proper project cost management stem from the main goals of project cost management , which include:

• Focusing on the project delivery based on the value criteria established at the start of the project,
• Monitoring and documenting all transactions, payments, and project-related changes, and
• Making efforts to reduce business costs overall.

In general, the main purpose of proper project cost management is to help project managers successfully complete the project, but also reduce unnecessary project expenses. A project can only be truly successful if you track costs and stay within the project budget. 

How to calculate project management costs

When determining project management fees for its major facilities projects, Northwestern University adhered to the following principle — the larger the project, the lower the cost of managing the project compared to the total cost of the project itself.

To see how they calculated their project management expenses according to the size of their projects, take a look at the table below.

As projects get more expensive and larger, the costs of project management are gradually decreasing — according to a graduated project management fee system they use.

Their fee is based on the project budget that was determined at the beginning of the project itself, and it should also remain the same throughout the duration of the said project.

In essence, your project management costs will depend on your project size, but they will also depend on the price of the project management software you choose to use, which also has to be included in the budget.

What are the 4 steps in project cost management?

To manage your project costs in the best possible way, follow these 4 simple steps:

• Plan the resources,
• Estimate the cost,
• Determine the cost budget, and
• Control the costs.

Step #1: Plan the resources

Resource planning includes reviewing the project scope and then figuring out future resources — these resources are necessary to complete the project. Project scope is a project outline that determines all aspects of the work that needs to be done in order to complete the project.

Resources for the project can include:

• People that are needed to execute the project,
• Certification,
• Equipment and tools, and
• The time needed for each task.

Everything that enables you to complete the project successfully is considered a resource.

To create a comprehensive resource plan, you have to define: 

• How many people will be needed for a project,
• What type of experience they need to possess, 
• What type of equipment will be needed, and 
• What the exact timelines for each of the activities are.

However, regardless of the effort you put into resource planning, there’s always the possibility of some unavoidable obstacles arising. In case this happens, you need to take into account the possibility of certain resources becoming unavailable.

It’s also important to track resource allocation . Tracking resource allocation provides project managers with a clear overview of what needs to be done and helps them facilitate the delegation of tasks.

Once we have a complete inventory of all the resources we need, we’ll be able to estimate the costs, as we can see in the next step.

Step #2: Estimate the cost of resources

As soon as you’re done crafting your resource plan, you’ll need to estimate all the costs for the previously allocated resources. 

Determining the cost of each resource and taking variable factors into consideration is vital for every decision-making process that involves supplies, tools, and the overall project budget. 

After you’ve gathered all the necessary pricing information, you’ll get an estimated calculation of your expenses.

To make sure you’ve obtained the most accurate numbers, you can: 

• Track your project time and expenses , 
• Monitor the activities of everyone involved in the project, and 
• Get to see where the money is going in real-time.

To learn more about the cost budget, let’s get right to the third step. 

Step #3: Determine the cost budget

Determining the cost budget is the core of project cost management. 

Simply put, a cost budget is a sum of all the costs needed for all the tasks and milestones that the project aims to fulfill. Knowing your cost budget helps you manage the actual costs compared to the estimated ones. 

Determining the cost budget highly depends on the project schedule. Also, being aware of task durations and milestones makes it easier to track project deadlines. 

Having a cost budgeting strategy also allows project managers to make more accurate budget estimates for future stages or maybe even prevent overruns. 

Step #4: Control the costs

Controlling your costs means keeping an eye on all the costs as the project progresses, and recording them. 

This process allows you to take appropriate action when there are certain adjustments, such as changes in the prices of materials or services. Cost control is important because it helps you reduce costs and ensures your project remains profitable.

To take control over the costs in the best possible way, here’s what you should do:

• Ensure the project stays within scope,
• Collaborate with stakeholders,
• Follow the schedule and manage your time, and
• Use project management software.

Is it hard for you to choose the right project management app with so many project management apps available? To help you choose the most suitable tool for your needs that’ll actually boost your team’s performance, take a look at our guide:

• The definitive guide to best project management tools

Frequently asked questions about project cost management

In case you still have your doubts about project cost management, let’s go over some of the frequently asked questions and look into everything you need to know about:   

• Project management software, and
• Project cost estimation.

Do you need project management software?

One of the more important project costs in project management is project management software — and one of the more important project management questions revolves around project management software cost.

Of course, the entire purpose of using project management software is to speed up the project management process and make it more:

• Precise, 
• Accurate, and 
• Cost-effective. 

So, by using such software, you’re essentially saving money in the long run.

There are many project management tools available for project planning, but finding the right project management software that’s also easy to use can simplify the process of project tracking.

In a project management tool such as Plaky, for example, you can: 

• Collaborate with teammates, 
• Keep all tasks in one place, and 
• Track the progress of your projects.

While you should include the cost of project cost management software in your project planning, there are some other options like Plaky where you can use a large number of features, and all for free.

 💡 Clockify Pro Tip

Are you looking for some other useful techniques and tools to help you manage your projects better? Check out our blog post below:

• Project management techniques and tools

What is project cost estimation?

Project cost estimation is the process of predicting the: 

• Cost, 
• Quantity, and 
• Price of all the resources you need in order to finish the project. 

However, considering that the estimation is made before project completion (meaning it cannot account for unexpected expenses and changes), it is often uncertain and serves only as a starting point for setting a project budget and handling cost management.

When estimating your project costs, make sure to cover the following:

• Be precise — Try not to overestimate or underestimate your costs. Make the estimation in relation to what you’re looking to accomplish, your resources, and time period.
• Be accurate — While your consultants, workers, and freelancers are essential for your project’s success, the most important element in your project estimation is the time you’ll spend on it. So, it’s important that you track time on all your projects. This way you’ll get an accurate number of hours for each project type, so it’ll be easier to estimate the time needed to finish projects in the future.
• Understand the project requirements (and limitations) — Be careful not to underestimate the time, the number of team members, and the monetary resources you need overall to bring your project to an end.

Different professionals approach project estimation in various ways, so let’s see what types of cost estimates you can use to manage your project. 

Types of cost estimates in project management

There are several effective types of cost estimates in project management:

• Expert judgment — This estimation is most suitable for seasoned professionals as it is based on the previous knowledge and experience of the estimator.
• Cost of quality — This estimation is based on the money spent to manage potential failures and prevent poor project quality. It helps you minimize losses and analyze where you can save money.
• Vendor bid analysis — This estimation is mainly used at public project tenders as it requires you to analyze your competition and guess their bids before making your own.
• Using a project estimation software — This estimation relies on numbers provided by a specialized project estimation software. 
• Reserve analysis — This estimation is used to accommodate potential project risks and the reserve resources that need to be secured to accommodate said risks.
• Three-point estimates — This estimation includes the average estimation of the most likely estimation (A), an optimistic estimation (B), and a pessimistic estimation (C). For example: A = $60,000, B = $55,000, C = $80,000. According to the formula, (B + 4A + C)/6, the three-point estimate for the example estimates is $62,000.
• Analogous estimating — This estimation is based on data compiled from previous similar projects. It is usually used in the early stages of a new project.
• Parametric estimating — This technique is similar to the analogous estimating technique, the difference being that the historical data used is based on the relationship between various project variables.
• Bottom-up estimating — This estimation is calculated by comparing the current project with the work packages you’ve already established. After that, you make your estimate for the current project.

How best to estimate a project — example

We’ll show you how to estimate a project through the project cost estimation example . This example takes into account: 

• The professionals working on the project, 
• Their hourly rates, 
• The materials they use, as well as 
• The time they need to finish specific tasks.

Here’s what you need to do if you want to estimate your project:

• List all professionals,
• List their respective hourly rates,
• List all the physical resources you’ll need, including all equipment and materials,
• Make an estimation of the time you’ll need to finish the project, and
• Calculate the final price.

Now you’ve estimated that your team members will spend 300 hours in total on the project-related tasks they were assigned to — more specifically:

• Lisa Johnson (hourly rate: $45) will spend 30h on Task 1
• John Bautista (hourly rate: $45) will spend 70h on Task 2
• Katie Stark (hourly rate: $50) will spend 50h on Task 3
• Austin White (hourly rate: $40) will spend 120h on Task 4
• Thomas Clark (hourly rate: $50) will spend 30h on Task 5

Here’s the formula for the total 300 hours estimated:

Hourly rate x the time spent working (for each employee)

Here is what the equation looks like:

$45 x 30 + $45 x 70 + $50 x 50 + $40 x 120 + $50 x 30 =  $13,300

As we mentioned, apart from including your employees, you also need to take into account the clean costs of your materials and equipment. When it comes to materials, you’ll have to include the number of units but also the price per unit.

Moreover, when you compare your planned budget with your actual expenses, you’ll see the difference between those two.

Finally, if you track your progress, you’ll be able to change your schedule to allow more time for certain tasks and track when the planned budget is about to hit the limit.

Use Clockify to track budgets and set time estimates

Tracking your time and regularly monitoring budgets can significantly contribute to effective project cost management. 

But you probably knew that already.

So, what are you missing?

Well, there’s a way you can keep tabs on your budget by using project-tracking software like Clockify.

With this productivity powerhouse under your belt, you can easily set project budget by following these steps:

• Go to one of your project’s settings tab,
• Select Project budget under Estimate, and
• Insert your cost estimate into the Manual space.

So, if the project runs into the risk of exceeding its budget, you can take proactive measures to address the issue.

Equally important, you can set up alerts when you’re close to going over budget.

You just need to visit your Workspace settings, choose Alerts, and add the criteria you like for getting a notification from Clockify. It can be something like: “If Project X reaches 90% of estimate, alert Workspace admin.”

Speaking of estimates, did you know you can even set up time estimates for all your projects? 

Estimates are useful because they help you determine whether to charge more (or less) for your projects. For example, as soon as you compare estimated versus tracked time you spent on a particular project, you can get a better idea of how long a project of that sort takes to implement. As a result, you’ll be better able to:

• Create better quotes for future clients, and 
• Set more accurate budgets.

Get your team and projects up to speed by introducing a piece of project tracking software.

Marija Kojic is a productivity writer who's always researching about various productivity techniques and time management tips in order to find the best ones to write about. She can often be found testing and writing about apps meant to enhance the workflow of freelancers, remote workers, and regular employees. Appeared in G2 Crowd Learning Hub, The Good Men Project, and Pick the Brain, among other places.

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Mastering Project Cost Management: Best Practices for Every Industry

Keeping expenses under control is one of the most crucial aspects of project management. Expenses have the ability to drive up prices faster than you anticipate, particularly in complex projects. To keep their budgets on track, project managers must practice proactive cost management.

Understanding Project Cost Management

At the heart of every successful project lies a critical component: project cost management. This multifaceted discipline is more than just keeping an eye on expenses; it’s about strategically guiding a project through its financial journey from conception to completion. Project cost management encompasses a range of activities designed to ensure that a project is completed within the approved budget.

The Four Pillars of Project Cost Management

Mastering project cost management is akin to a balancing act, where the project manager must juggle various elements to keep the project within budget and on track. The four pillars of project cost management—resource planning, cost estimating, cost budgeting, and cost control—serve as the foundation for a successful project financial strategy.

• Resource Planning : This is the first step in project cost management, where you determine what resources (people, equipment, materials) are needed to complete the project. It’s about allocating the right resources at the right time to avoid bottlenecks and minimize costs. For instance, using Creately’s visual kanban project management feature can help in mapping out resource allocation and availability. For more details check out our guide on resource planning.

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Cost Estimating : After planning resources, the next step is to estimate the costs associated with them. This involves predicting the expenses for resources and other project-related costs. Accurate cost estimating is crucial for setting a realistic budget and is a skill that improves with experience and the use of the right tools.

Cost Budgeting : Once you have an estimate, you can create a cost budget. This is a financial plan for the project that outlines expected costs and revenue. It serves as a benchmark against which actual performance can be measured. Effective project budgeting ensures that the project remains financially viable from start to finish.

• Cost Control : The final pillar is cost control, which involves monitoring project expenses in real-time and making adjustments as needed to stay within budget. Real-time cost tracking, a feature of Creately, allows for immediate visibility into cost variances and enables proactive management of the project budget.

Integrating these components into a cohesive cost management plan is essential. Each component plays a vital role throughout the project lifecycle, from the initial planning stages to the final project closeout. By effectively managing project costs, you can ensure that your project is delivered on time, within scope, and on budget, ultimately contributing to the overall success of the project.

The Importance of Real-Time Cost Management

In the dynamic landscape of project management, maintaining budget adherence is a critical challenge. Real-time cost tracking is not just a feature; it’s a strategic advantage that can make or break the success of a project. Here’s how it plays a pivotal role:

Immediate Visibility : With real-time cost tracking, project managers gain immediate visibility into where every dollar is going. This transparency allows for proactive adjustments before costs spiral out of control.

Data-Driven Decisions : Access to up-to-the-minute financial data empowers managers to make informed decisions. Whether it’s reallocating resources or postponing non-critical tasks, these decisions are crucial for staying within budget.

Early Warning Signs : Real-time tracking acts as an early warning system, highlighting cost overruns as they happen. This enables teams to address issues promptly, rather than being surprised by them at the end of a project cycle.

Enhanced Accountability : When team members know that costs are being monitored in real time, it fosters a culture of accountability. This can lead to more mindful spending and efficient work practices.

Challenges in Project Cost Management

Project cost management is a critical aspect of project management that, when not handled properly, can lead to significant challenges. Here are some common obstacles that project managers face:

Inaccurate Cost Estimates : Without precise forecasting, projects can quickly exceed their budgets, leading to cost overruns.

Lack of Real-Time Data : Managing project costs effectively requires up-to-date information, which can be hard to obtain without the right tools.

Complex Resource Allocation : Balancing the costs of labor, materials, and equipment is a delicate task that can easily go awry.

Change Management Difficulties : Projects are dynamic, and costs can escalate if changes are not managed efficiently.

The consequences of poor project cost management practices are severe, including blown budgets, decreased profitability, and even project failure. Understanding the complexity of cost management across diverse industries is essential, as each industry has unique cost drivers and constraints. To navigate these challenges, project managers can leverage tools like Creately, which offers features such as real-time collaboration and visual Kanban project management, aiding in better resource planning and cost control. With such tools, project managers can improve their project cost estimation, budgeting, and tracking, ultimately leading to more successful project outcomes.

Strategies to Overcome Project Cost Management Challenges

Improving Project Cost Estimation Accuracy Accurate cost estimation forms the foundation of sound project budgeting and resource allocation. To enhance estimation accuracy, project managers should employ a combination of proven methodologies and data-driven approaches.

Historical Data Analysis : Reviewing past projects' cost data and performance metrics provides valuable insights into similar projects, enabling more informed estimations. Parametric Estimating: Utilizing mathematical models and algorithms to extrapolate costs based on specific project parameters and historical data points.

Expert Judgment: Consulting subject matter experts and experienced stakeholders to validate assumptions and identify potential cost drivers and risks.

Contingency Planning: Incorporating contingency reserves to account for unforeseen events and uncertainties that may impact project costs.

Maintaining Effective Cost Control Throughout the Project

Effective cost control measures are essential for monitoring project expenditures and ensuring alignment with budgetary constraints. Key techniques for maintaining cost control include: Regular Monitoring and Reporting: Implementing robust monitoring mechanisms to track actual costs against budgeted allocations and identifying variances promptly. This can be done through visual frameworks like a Work Breakdown Structure.

• Change Management Processes: Establishing clear change control procedures to evaluate and approve modifications to project scope, schedule, and budget, thereby mitigating scope creep and cost overruns.
• Stakeholder Communication: Maintaining transparent communication channels with project stakeholders to keep them informed about cost-related issues, risks, and mitigation strategies.
• Utilizing Technology to Enhance Cost Management Processes
• Advancements in technology offer powerful tools and platforms to streamline and optimize cost management processes. Leveraging technology-driven solutions can significantly improve efficiency and accuracy in cost management.
• Advanced Analytics and Reporting Tools: Utilizing data analytics and visualization tools to gain actionable insights into cost trends, performance metrics, and potential risks.
• Cloud-Based Solutions: Adopting cloud-based cost management solutions for enhanced accessibility, scalability, and collaboration across distributed project teams.

How Creately Helps in Estimating Project Costs:

Creately’s visual collaboration and diagramming software integrates seamlessly:

• Real-Time Cost Tracking : Ensuring that project managers have a clear and current picture of their project’s financial health.
• Infinite Canvas : Allows for an expansive view of project costs.
• Visual Kanbans : These project management system helps in prioritizing tasks that align with budget goals.
• Drag and drop tasks : The intuitive canvas further simplifies the process of managing project costs, making it accessible and actionable.

By leveraging these features, project managers can ensure that their projects not only meet their strategic objectives but also adhere to the financial constraints set forth at the outset. In essence, real-time cost tracking is not just about monitoring expenses; it’s about ensuring the financial integrity and success of the entire project.

Mastering project cost management requires three key elements: accurate estimation, effective control, and technology. By analyzing history, using expert judgment, and planning for surprises, estimations become more precise. Monitoring, value management, and change control help stick to budgets. Using project software, analytics, AI, and the cloud strengthens cost management. These strategies help teams overcome challenges and succeed.

Some helpful links for effective project Management

Guide to Work Breakdown Structure

Project Charter Template

RAID Log Guide

Stake Holder Mapping

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More Related Articles

Chiraag George is a communication specialist here at Creately. He is a marketing junkie that is fascinated by how brands occupy consumer mind space. A lover of all things tech, he writes a lot about the intersection of technology, branding and culture at large.

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Project cost management: Definition, steps, and benefits

Cost management is the process of planning, budgeting, and reporting project spend in order to keep teams on budget and overall costs reasonable. In this article, we'll go over the four functions of cost management and explain exactly how to use them to improve your project's bottom line.

What is cost management?

Cost management is the process of estimating, budgeting, and controlling project costs. The cost management process begins during the planning phase and continues throughout the duration of the project as managers continuously review, monitor, and adjust expenditures to ensure the project doesn't go over the approved budget.

Why is cost management important?

Have you ever wondered what happens when a project goes significantly over budget? The consequences can be severe—from strained relationships with clients to financial losses. Let's consider an example:

A small software development team was tasked with creating a custom application for a client. Midway through, they realized the project was quickly exceeding the initial budget. They faced a common dilemma: continue as planned and absorb the extra costs or re-evaluate their approach.

By implementing rigorous cost management strategies, the team was able to identify areas where expenses were ballooning. They streamlined their project management processes, prioritized essential features, and renegotiated terms with subcontractors. This approach not only brought the project back within budget but also improved their working relationship with the client, who appreciated their transparency and commitment to delivering value.

This scenario highlights how effective cost management can transform a potentially disastrous situation into a success story.

How to create a cost management plan

Cost management is a continuous, fluid process. However, there are four main elements or functions that can be found in any cost management plan:

Cost estimating

Cost budgeting, cost control.

Because new expenses can appear and project scope can be adjusted, cost managers need to be prepared to perform all four functions at any time throughout the project life cycle. Your workflow will vary according to the project’s needs.

Here, we'll break down each of the four elements in greater detail and explain what is required from the cost manager at each stage.

The very first step in any cost management process is resource planning, which is when the cost manager reviews the project's scope and specs to figure out what resources the project will require.

A resource is anything that helps you complete a project—including tools, money, time, equipment, and even team members. To create the most accurate resource plan possible, consult directly with team leads and stakeholders about what resources they will need during the project. People with hands-on experience in each project department will have a better understanding of what resources will be required. 

For this step, you'll need:

Clearly defined project objectives

A high-level project roadmap or a work breakdown structure (WBS) , depending on the complexity of the project

A tentative resource management plan

A project scope statement

Once you have a list of necessary resources, the next step is to estimate what it will cost to procure them. The key to this step is to gather as much pricing information as possible so that you can make informed cost estimates.

For tangible resources like tools, supplies, and equipment, get real price quotes from sellers to inform your cost estimate. For labor costs, get multiple price quotes from potential contractors to help give you a realistic idea of what the work you require will actually cost. Keep in mind that some time may pass between when you make your estimate and when these items will be purchased, so you should build in some room in case prices rise. 

In addition to building in a cushion for each individual cost, you'll also need to add a buffer of 5–10% to your cost total to account for unexpected expenses. If this is your first time working with this project team, find out if the previous cost manager generated budget reports at the end of past projects. 

You can take a look at how much previous projects' final costs deviated from their initial estimates and use this cost data as a benchmark to estimate how much of a margin you need to build into your estimation report.

In the estimation stage , you'll need:

Project schedule or a PERT chart , depending on the complexity of the project

A list of your project deliverables

Clearly defined success metrics

Now that you have general estimates for your project needs and resource requirements, you can begin to work on your project budget . Your project budget is a detailed plan of how much you plan to spend during the project, for what, and by when. 

Depending on the complexity of your project, the “when” may significantly influence your cost management strategy. For multi-year projects, you may want to specify cost allocations so that no more than 30% of your budget should be spent in the first year, etc. This can prevent cost overruns later down the road.

In this stage, you'll need:

A project budget document 

A project stakeholder analysis

The bulk of the cost management process is made up of cost control . This is the process of recording and accounting costs as the project progresses, making adjustments, and alerting stakeholders to problems when they occur. The goal of the cost control step is to compare actual project costs with original budgets and estimates and take steps to make sure the project stays as close to plan as possible.

The frequency with which you review this will depend on your project. Sometimes you’ll want to review costs in real time. In other cases, you may check in monthly or even quarterly. Share cost updates as necessary through project status reports so the entire project team is on the same page.

Keep in mind that any changes to the project scope will impact the project budget and costs, so keep a close eye on scope creep. If the project cost deviates too much from what you budgeted, let your stakeholders know so you can proactively come up with an action plan.

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Post-project cost accounting

Once the project is over, it’s time to calculate cost variance and evaluate how far your project deviated from your original budget and estimates. What were the project’s total costs? How did your actual costs compare to your estimated costs? 

A successful project ends close to (but under) the forecasted project budget. If you spent too much money, you either underestimated your project budget or had too many unforeseen expenses. If this happens, hold a project post-mortem meeting to evaluate why that happened and prevent it from happening in the future.

On the flip side, spending too little of your budget is also not ideal. You estimated these costs for a reason, and if you came in significantly under budget, your cost-budgeting process was inaccurate. Log this information as historical data and keep it in mind for future projects, so you can increase your accuracy during the cost estimation phase.

How to calculate project costs

To ensure that your project stays profitable and within budget, it is essential to have a solid understanding of how to calculate project costs. 

Project managers have a variety of cost management methods to choose from, and picking the best one depends on the specific needs and scope of your project. Consider factors like project complexity, the predictability of tasks, client expectations, and the level of flexibility you'll need to achieve your cost-performance goals.

Calculating project costs on an hourly basis involves paying for the amount of work done, measured in hours. This method is particularly effective for projects where the scope is flexible or uncertain because it allows for adaptability as the project progresses. 

For example, consider a software development project. The development team's cost is calculated based on the number of hours they spend on the project. If the team works 100 hours a month at a rate of $100 per hour, the project costing for that month would be $10,000. This method provides flexibility and can accommodate changes in the project's scope effectively.

A flat rate, or fixed price, approach involves agreeing on a total project cost upfront. This method is ideal for projects with a well-defined scope and deliverables. This gives both parties a clear understanding of the total cost.

Imagine a marketing campaign. The agency and the client agree on a fixed price of $20,000 for the entire campaign. This price covers all aspects of the project, from planning to execution. The advantage here is predictability in budgeting, as the client knows exactly how much the project will cost, irrespective of the time and resources utilized.

The cost-plus method involves charging the actual costs of the project plus a markup or additional fee. This approach is often used in long-term projects where the costs cannot be accurately estimated at the start. It ensures that all project costs are covered and includes a profit margin.

For instance, in a construction project, the contractor charges for the actual costs incurred (like materials and labor) plus a fixed percentage as profit. If the material and labor costs amount to $50,000 and the agreed markup is 20%, the total charge to the client would be $60,000. This cost management method aligns the interests of the client and the contractor, as both parties aim for optimal cost performance.

Value-based pricing

Value-based pricing focuses on the value or benefit the client receives rather than the cost of the project itself. This estimation method is ideal for projects where the outcome has a high perceived value, regardless of the actual cost of delivery.

Consider a scenario where a consulting firm is helping a client increase their annual revenue. If the consultant's strategies result in a $1 million revenue increase, the consultant may charge a fee based on a percentage of the revenue increase, say 10%, which would be $100,000. Value-based pricing ensures that the pricing reflects the value delivered.

Effective project cost management methods

One of the most persistent challenges faced by teams across various industries is controlling and preventing budget overruns. These overruns not only strain financial resources but can also lead to compromised project quality, delayed timelines, and even project failure. 

Effective cost management is the key to tackling this challenge because it makes certain that projects are delivered within their allocated budgets while maintaining high standards of quality and efficiency.

Choosing the best cost-management method is key to addressing these financial challenges head-on. For further cost optimization, teams can leverage automation, management software, and dashboards that offer real-time cost analysis, cash flow, and future cost visualization. This will ultimately contribute to the success of your project.

Top-down estimating

Top-down estimating is a method where the overall project cost is estimated first, and then individual costs are deduced from this total. This approach is beneficial in the early stages of project planning, when detailed information is not yet available. It gives a quick and rough idea of how much the project will cost.

For example, in a new software development project, the project manager might estimate the total project cost at $200,000 based on previous similar projects. This total cost is then broken down into smaller segments like design, coding, testing, and deployment, each allocated a portion of the total budget. This method is effective for providing a preliminary cost framework and guiding early project decision-making.

Bottom-up estimating

Bottom-up estimating is the reverse of the top-down approach. It involves estimating individual tasks or components of the project first and then adding them up to get the total project cost. This estimation method is more accurate and reliable, especially for projects with a well-defined scope, as it considers detailed cost information.

Consider a construction project where each part of the project, such as foundation laying, framing, plumbing, and electrical work, is estimated individually based on detailed analysis. After estimating all these components, the costs are summed up to determine the overall project budget. Bottom-up estimating is ideal for teams that need precise control over each aspect of the project's costs.

Earned value management

Earned value management (EVM) is a sophisticated approach to cost management that combines measurements of project performance in terms of scope, schedule, and cost. EVM provides a comprehensive view of the project's progress and its alignment with the original project planning.

For instance, in a large infrastructure project, EVM would be used to track the following: 

Budgeted cost of work scheduled (BCWS)

Actual cost of work performed (ACWP)

Budgeted cost of work performed (BCWP) 

By comparing these figures, project managers can gauge the project's cost performance and take corrective action if necessary.

Three-point estimating

Three-point estimating is used to determine a more realistic estimate by considering three scenarios: 

Most optimistic (best-case) 

Most pessimistic (worst-case) 

Most likely 

This cost management method provides a range of possible outcomes, which can increase the predictability and cost performance of a project.

Take, for example, a new product development project. The project manager might estimate that the design phase could take 30 days (optimistic), 45 days (most likely), or 60 days (pessimistic). Using these three points, they calculate an average or weighted average duration, which helps in setting realistic timelines and budgets.

FAQ about cost management

What is the first step in project cost management.

The first step in project cost management is to define the baseline for your project's budget. This involves identifying all potential costs and inputs related to the project, including labor, materials, equipment, and any other expenses. Creating a baseline is essential because it provides the framework for monitoring and controlling expenses during the lifecycle of a project.

What are the 5 functions of cost management?

The five key functions of cost management are:

Cost estimation: Determining the total cost required for completing the project.

Cost budgeting: Allocating the overall cost estimate to individual work items to establish a baseline for measuring performance.

Cost control: Monitoring project expenses and implementing measures to keep costs within the approved budget.

Cash flow management : Ensuring there is adequate cash flow to meet project needs, which is critical for maintaining project momentum.

Procurement management: Managing the procurement of goods and services, ensuring that everything is obtained at the best possible cost and meets project needs.

What is cost management in project management?

Cost management in project management is the process of planning, estimating, budgeting, and controlling costs with the aim of completing the project within the approved budget. It involves a continuous process of measuring and monitoring project activities and expenses and implementing necessary adjustments to ensure that the project's financial resources are used effectively. 

Improve your project performance with cost management

Cost management has a lot of moving parts. But as long as your team has visibility into project costs, you can prevent cost overruns and ensure you’re finishing your project under budget every time.

To keep track of all of your project’s information, use a work management platform like Asana. From project costing and kickoff to post-mortem, Asana helps you stay in sync with your project team members and stakeholders during the entire project process.

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Home > Finance > Cost Management

How to Accurately Project Cost Estimates

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Knowing how to project cost estimates is one of the most important parts of running a small business. Estimating costs involves effective management and an understanding of your budget and resources.

For example, you don't want to commit to a project or sign a lease before you know what machinery or equipment is involved. Here are four steps to take toward effective cost-estimating to help manage risk for your business.

1. Document everything and determine your purpose

According to the U.S. Government Accountability Office (GAO), keeping a detailed documentation that clearly outlines the estimate's purpose is one of the most vital parts of an accurate cost projection, "Comprehensive documentation during data collection greatly improves quality and reduces subsequent effort in developing and documenting the estimate."

You should supplement any historical data you gather with current return costs, new contracts, and updated vendor quotes. Keeping accurate documentation will help determine how expected funding will be spent on the project, save time from doing unnecessary research, and prove to be an invaluable source for future projects.

2. Make a list of your resources and the costs

This is one of the most common and intuitive techniques business owners use, and it is highly effective for projects of any size. First, take inventory of what you have, and then write down all the resources you will need, including labor or employees, equipment buying or leasing, outside services, and raw materials, and calculate the total estimated cost.

Typically, cost of labor is hourly as opposed to being based on the length or scale of the project. You can also ask for bids to perform the work, and be sure to compare prices for buying or leasing large pieces of machinery. For construction projects, you can often perform cost projection based on cost per unit, such as a cubic foot, work station, or square foot. Determine how large the building or space is for your building or renovating project, and then apply the dollar amount per unit to determine the total cost.

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3. Look at your competitors

Empirical methods are great for business owners completing projects that are typical for your type of business or industry. This method usually involves buying software that gathers data and provides statistical information about similar projects.

It will also break down the cost when you apply your parameters to the program. Although this method involves deeper investigation than others and a small cost for the necessary software, knowledge of what your competitors are spending their funds on can give you an advantage.

4. Tracking costs will be vital for the future

In the same vein as data documentation and collection, keep track of vendor prices, costs of parts and labor, materials, and all other resources used, which can assist in a type of projection called historical costing. This allows you to perform cost estimates based on previous work. Local businesses that aren't competitors, but have completed similar projects, might also be able to assist with providing historical data. This method is one of the most accurate in cost projection and can easily be done by using the right project cost management tools .

There are many project cost management tools available (Business.org's recommendation for the best is HubSpot ), but to determine what project cost management tool is right for you, you should weigh what you are looking for —whether an all-in-one solution or something to quickly layout the facts and figures.

Once you're able to accurately project cost estimates with a combination of these techniques, you'll be able to complete projects without going under or over your budget. This will help with risk assessment for your business and help you get the best value out of your project.

Do you know how much your small business computer should cost ? Find out if a new computer will fit into your cost projections.

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How to Estimate Project Time and Cost

This chapter touches on best practices for estimating projects and being prepared for inevitable change requests . Get ready to learn a whole new set of project estimation techniques because you’re about to become the best project estimator in the business.

What is project estimation?

Project estimation is the process of forecasting the time, cost, and resources needed to deliver a project. It typically happens during project initiation and/or planning and takes the project’s scope, deadlines, and potential risks into account.

Why is cost estimation important in project management?

Every business has a budget and wants to know if a project is worth the costs before they invest in it. 

A project estimate gives you and your stakeholders a general idea of how much time, effort, and money it’ll take to get the job done. That makes it easier to build a feasible project budget and plan so you can set your team and organization up for success.

Easy drag and drop features with templates for faster scheduling. Plan a project in minutes, collaborate easily as a team, and switch to calendar and list views in a single click.

How to estimate project cost and time in 7 easy steps:

• Know your team’s expertise & job responsibilities
• Understand how your company's PM process works
• Study project estimation techniques and trends
• Use historical data to create better project estimates
• Ask detailed project questions to improve cost estimation
• Use a WBS to get granular with your estimate
• Assign hourly estimates to tasks and people in TeamGantt

Step 1: Know your team's expertise & job responsibilities

Want to be better at estimating projects? Sometimes project managers focus too much on the numbers and not enough on the people. 

Good project estimation techniques are built on solid working relationships. That’s because, the more you know about someone’s work and process, the easier it is to estimate their work.

Invite your team to be part of the estimation process.

A stronger understanding of—and collaboration with—your team will help your projects come in closer to your project budgets.

Here’s the thing: To estimate projects successfully, you MUST engage in the work. Having a solid understanding of what each and every team member actually does on a daily basis can help you avoid problems down the road.

Get to know each team member's tasks and skill sets.

If you really want to know how or why someone does their job, just ask them! As a project manager, one of the best things you can do is be genuine and honest about what you don’t know. It might sound silly, but most project managers feel like they’re supposed to know everything. You don’t, and that’s okay.

Remember: It’s better to admit what you don’t know and ask questions from the get-go. This not only gives you an opportunity to connect with your team on an individual level. It also helps you understand the inner workings of different types of projects—and their appropriate budgets. After all, figuring out the steps one person takes to create a deliverable will work wonders in helping you calculate a true and accurate project estimate.

Step 2: Understand how your company's PM process works

Once you’ve got a good grasp on who does what and how, it's time to move on to the next step of project estimation: understanding how work gets done in your organization.

Figure out how all of your project’s moving parts fit together—or could fit together.

You may work for a company that abides by a singular method like Agile or Waterfall . In that case, study that process, know all your dependencies, and run with your estimates. 

Does your organization prefer a hybrid approach with room to experiment? Make it your mission to understand how things are done and what might happen to your project schedule if you shift things around. For instance, if you work in construction project management , will painting baseboards before installing carpet have a huge impact on the quality of work or time needed to get the job done?

Have conversations with the people who have a stake in your project.

Do everything you can to understand your process, but don’t just read a book or a manual. Feel free to ask how, why, and when things are done. The more you know, the better you can strategize with your team or clients to find alternate ways to make project estimates work and save on effort.

Include your team in any discussions related to project estimation.

Be sure to talk about the process you’d envision taking on when estimating projects, as it will impact how you think about effort and scope. You never want to sign on for a project your team isn’t invested in.

Step 3: Study project estimation techniques and trends

No matter where you work, things will change. A career in project management means you have to always stay on top of trends, changes, and deliverables in your industry. It isn’t easy, but it’s worth it because it will directly affect your success as a project manager.

So how can you improve your project estimation process?

Approach your job as though it’s continuing education.

Read relevant trade publications, websites, and blogs. Attend training and networking events. There are growing numbers of local meetups and conferences on project management and estimation.

Learn different ways to estimate projects.

It’s also important to understand different approaches for estimating projects so you can determine what works best for you. Here are a few project estimation techniques you may want to learn more about:

• Top-down estimating : This estimation technique takes a broad look at the project as a whole, then breaks the total estimate down into major phases of work. It’s typically used when you have limited information about the project to work from.
• Bottom-up estimating : The bottom-up approach is considered more accurate than top-down estimation because it starts with a detailed list of tasks and estimates each step. Individual task estimates are then combined to create an overall project estimate.
• Analogous estimating : This top-down technique compares the current project to similar past projects to quickly produce a general project estimate. 
• Parametric model estimation : Parametric modeling also uses past projects to inform new project estimates. It takes forecasting a step further by applying past data to current project specs for more accurate cost estimation.
• Three-point estimating : This approach estimates a project based on 3 different scenarios: best-case (or optimistic), worst-case (or pessimistic), and most likely. Estimates for all 3 scenarios are then added up and divided by 3 to generate a simple average.

Step 4: Use historical data to create better project estimates

Without a doubt, historical data can help you with new projects. When history’s documented, you can analyze the information to help you create better estimates. 

Start by asking your team to track their time on tasks.

This will give you a better sense of a project’s overall level of effort. It’s not about playing big brother to make sure people are doing their work. It’s being honest about what it takes to get the job done while also being profitable.

Of course, every project is unique.  But seeing how long your team spent on a certain task or deliverable will give you a sense for estimating a similar task on a new project.

Check your tracked time, and use it to create a realistic project estimate. 

If nothing else, review your project history to make sure you’re not habitually underestimating project costs or hours.

As project managers, we tend to underestimate project tasks, thinking we’re doing our clients and team a favor. But underestimating a project does everyone a disservice and causes stress when budgets and timelines go over their estimates.

Use project baselines to compare estimates with actuals.

You can mark your originally planned schedule, compare it against your actual work as the project progresses, and note where there might have been issues and how those issues might have impacted your level of effort. This will help you determine where you have room to improve your estimation of certain project tasks.

Step 5: Ask detailed project questions to improve cost estimation

Whether you’re estimating a project based on a Request for Proposal (RFP), a discussion, or a brief written message, you need to know every possible detail of the project before you can provide a realistic estimate.

Take time to understand your project's triple constraints.

These are the things that could cause your project to go over budget: time, cost, and scope. If you keep track of these 3 things, you’ll be a better project estimator. You can use our online gantt chart software to help estimate your RFP.

Ask questions that help create an estimate based on what your clients need—not what you think they need.

Here are some questions that can help you estimate project time and budget more accurately. This list could go on and on depending on the level of information you’re provided.

• What’s the goal of the project?
• How will you and your client determine if the project is successful?
• What returns will you and your clients see as a result of the project?
• Who will participate from the client side?
• What range of services does the project require?
• What’s your client’s budget for the project?
• Is there technology involved? If yes, what is the technology?
• Does your client employ anyone with expertise on the topic?
• What is the timeline for the project, and will your client require your services after your work is complete?

Be persistent, and get the answers you need. 

If your client isn’t inclined to answer every question, take it as a sign. If answering important questions now is too much to help you form a good estimate, will being a good partner when the project is underway be too much for them too? 

Use your judgment in this respect. Not every estimate becomes a real project, so not every request needs to become a real estimate.

Step 6: Use a WBS to get granular with your estimate

A work breakdown structure (WBS) is a project planning technique that breaks a project into smaller components. Creating a WBS for any plan or set of tasks helps you get granular about the work that needs to be done on any given project. 

If you can map it all out and estimate each element, you should be able to create a solid project estimate. Learn how to create a work breakdown structure for your projects, and download a free WBS template.

Break your project down into phases, tasks, and subtasks. 

This step provides a framework for detailed cost estimation, as well as guidance for schedule development and control. Our example shows a basic WBS for a common deliverable—moving to a new house! Notice the tasks and subtasks we’ve taken into consideration. Is anything missing?

Apply a time estimate to each component in your WBS.

If you estimate your projects based on units—whether it be weeks, days, or hours—using a WBS will help you quickly understand if your project estimate will exceed the intended budget. Let's take our project estimation example further and assign estimated hours to each step. 

Example: Pack current house - 8.5 days total

This estimate includes the time needed to wrap objects, pack boxes, and prep for movers. Here’s how the estimated timing breaks down by room:

• Kitchen - 1 day
• Bathroom - 0.5 days
• Bedroom 1 - 0.5 days
• Bedroom 2 - 0.5 days
• Living Room - 1 day
• Dining Room - 1 day
• Basement - 2 days
• Garage - 2 days

This exercise can be extremely helpful during the sales process when a client tells you they have X dollars to spend. You can easily map a set of tasks or deliverables to something that works for both the dollar amount and the client’s goals.

Just remember, it could change when you dig into the actual work. (Time estimates should be based on a combination of experience and hypotheses.) 

Use your WBS to negotiate project cost and scope.

If a potential client comes back and says your project estimate is more than they want to spend, lean on your WBS to find opportunities to scale back. This enables you to create a project estimate that maps to a specific budget, while also working out a solid set of project requirements .

For instance, I could likely remove the cleaning step from my moving WBS to cut down the time and cost (though someone might be unhappy about that). 

Step 7: Assign hourly estimates to tasks and people in TeamGantt

Using these project estimation techniques as a foundation for your project will help you with the final step: turning it into a project plan . TeamGantt gives you a more formalized way to outline your WBS and calculate a project’s time and effort.

List out your project tasks , and add the estimated hours.

If you’ve organized your project into phases, TeamGantt will automatically calculate the total estimate for each task group as you enter hourly estimates for individual tasks.

Then assign resources to tasks in your project plan. 

From there, you can schedule people and tasks against other project work.

Estimating projects and tasks in TeamGantt

Let’s take a closer look at how hourly estimation works in TeamGantt so you know how to add and assign estimates to your tasks and teams.

How to add Estimated Hours to a task in TeamGantt

First, make sure Estimated Hours is enabled on your project by going to Menu > Project Settings > Enable Hours and selecting Yes . (Note: Hourly estimation is only available on Advanced plans.)

Once you’ve confirmed hourly estimation is enabled on your project, you’re ready to add estimates to tasks in your gantt chart. To assign hours to a task, simply click into the text field in the Estimated Hours column, and enter your estimate:

Don’t see the Estimated Hours column for your project? Click View > Estimated Hours to enable this column on your gantt chart.

How to assign estimated hours to your team

One of the biggest benefits of using hourly estimation in TeamGantt is being able to determine your team's workload more accurately. To do this, you’ll need to take project estimation one step further by adding estimated hours to the people assigned to the tasks. 

There are 3 different ways to add hourly estimates to people or labels . It all depends on your particular project scenario.

Option 1: Assign both users and estimated hours to a task at the same time.

• Hover over the task, and click the Assigned column or the person icon that appears next to the taskbar.
• Next, select the resources you'd like to assign to the task, and enter either the Avg Hours/Day or Total Hours . (The other field will populate automatically.)

Option 2: Add estimated hours after users have already been assigned to a task.

• Hover over the Estimated Hours column, then click into the text field to enter the total estimated hours for the task.
• A pop-up window will appear, asking if you'd like to adjust the hours for the users/labels assigned the task. If you select the checkbox before clicking Yes or No , your preference will be noted for all future instances. (You can adjust this preference anytime by going to My Preferences .)

Option 3: Assign people to tasks after estimated hours have already been added.

• First, hover over the task, and click the Assigned column or the person icon that appears next to the  taskbar.
• Next, click either the Fix button at the bottom of the user assignment window or simply select users to assign hours to.

Note: When a task's length is changed—for instance, a 2-day task is extended to a 4-day task or vice versa—you'll be prompted to choose between increasing/decreasing users' assigned hours accordingly or leaving the daily assigned hours as-is. Learn how to set your hourly scheduling preferences.

How to use Estimated Hours to determine team availability

Now that you’ve assigned estimated hours to your team, you'll have an even better understanding of how busy everyone is. Just click the Availability tab found at the bottom of your project's gantt chart, and toggle to Hours Per Day :

Any day that includes over 8 hours of work will automatically be highlighted in red to indicate a potential overload. 

Sign up for a 30-day trial, and try TeamGantt with hourly estimation for free.

Build your project estimation confidence with practice

Ready to dig in and estimate a project of your own? Start with some practice so you’ll feel confident in your estimating skills.

Create an example project of your own, and list out all the steps that go into completing it. Then run it by one of your team members to see what they think. Did you miss anything? Did you underestimate the hours? Doing a test run will help you prepare for your first real estimate or hone your project estimation skills for your next one.

There’s no right or wrong way to create a project estimate. Your approach to estimating projects will include a mixture of project knowledge, historical review, client inquisition, and a ton of gut instinct.

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Client management

Understanding project cost estimation: A complete breakdown

It doesn’t matter how much time you spend planning a project, creating proposals, or talking to your client—if you don’t get your project cost estimation right, all of your hard work will be for nothing. 

Project cost estimations help you predict how much you should charge a client for an upcoming project. But if you get it wrong, you’re suddenly tied to a project that doesn’t make your agency a profit and wastes valuable team resources . 

Accurately predicting the cost of a project isn’t a simple process. It requires looking at similar projects your agency has already worked on, how much time was spent on it, and if the profitability was worth your agency’s while. 

This blog will break down the following: 

What is project cost estimation?

3 common methods to help you estimate projects

How estimations go wrong and how to fix them

The tools you need to accurately predict costs

Let's get started. 

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Project cost estimating is when a project manager predicts how much a project will cost to complete by calculating time, resources, and other expenses. 

Estimating the cost of a project happens well before the project work starts. The project's manager uses this figure to create an accurate quote for a client and decide whether or not there are enough resources available to complete the project within a realistic budget.

That's what makes project cost estimation – or rather accurate project cost estimation – such an essential part of the project planning process. It's one of the major factors that will determine whether or not an agency has the capacity to take the work on, and even more importantly, whether the project can make a profit. 

So why are project cost estimations such a headache for project managers? 

Well, estimations are difficult to get right.

It’s more than just math. Accurately predicting the cost of a project requires historical datasets, accurate resource availability, and real-time tracking to narrow down a figure that you can use to give a quote to your future client. 

The path to a successful project cost estimation plan

When preparing a project cost estimation, project managers must consider a bunch of factors, from the people who will be working on it to time and equipment costs. 

The easiest way to do this is to break expected costs down into two categories: 

Direct costs: Costs directly associated with the project, like expenses and resources. These costs will cover everything that is directly tied to any task or milestones within a project.

Indirect costs: Anything that cannot be tied to a specific area in your estimation. These costs may cover things that your agency pays for on an ongoing basis that cannot be tied to the project itself, like specific software or materials.

Once you've outlined the obvious costs expected for a project, you need to consider the not-so-obvious expenses . 

These costs are known as assumptions and give your estimate some safety padding by considering contingency costs. These costs will take into account gaps in estimations from similar projects you've done in the past, like time to cover extra meetings with the client or hiring an external contractor. 

All of this is made even easier with the right toolkit. 

Teamwork.com’s ​​Project Time Budget gives project managers access to real-time reporting of project tasks. Use this feature to easily track efficiency and time utilization to create accurate project cost estimates based on your data.

As the tool calculates budgets using the sum of estimated time on existing tasks, it can produce accurate forecasting and timeline development in seconds. 

3 common methods to help you estimate the cost of a project

Luckily, there are some pretty straightforward methods to more efficiently calculate the estimated cost of the project. Let's cover the three most common methods:

1. The bottom-up estimation

Bottom-up estimating is a process that forecasts how much a project will cost by breaking it down into individual tasks and estimating how much each of them will cost to complete. 

Estimating the cost of a project using the bottom-up approach requires collecting information from past projects and asking your team for input on how long they think specific tasks will take.

Start by listing all of the tasks within the project that are a part of your estimation. Then, estimate how long each task will take a team member to complete. 

Again, the right toolkit will speed this process up. Teamwork.com's project budgeting features allow you to calculate how much each task will cost based on estimated hours and rates.

For example, if you are trying to figure out how much it'll cost to create reports for your clients once the project kicks off, add the typical time it takes you to prepare a report in the estimated hours section. 

Do this for each task in the project, and you’ll be left with an accurate bottom-up estimation of billable hours for the project. 

2. The 3-point estimation

If you’re strapped for time, the three-point estimation may be a good project cost estimation to use.  

This method is loosely based on the Program Analysis and Review Technique (PERT). This process considers the time you'll spend on the project along with general costs and timelines. It then asks you to predict three outcomes for the project: if it goes well, OK, and bad.

Let’s say a client has hired your agency to design a new branding kit for them. You’ve done similar projects in the past, charging clients roughly $6,500 and managing to make a healthy profit margin. 

You then create an estimation using historical project costs based on three scenarios: a pessimistic cost, an optimistic cost, and a likely cost. Your likely cost will be your historical figure (which is $6,500), but you also need to estimate the other two scenarios. So, you could place your pessimistic cost at $9,500 and your optimistic cost at $5,000. 

You can either choose one of these scenarios as your rough project estimate. Or, add them all together and divide them by three to get an estimation that's somewhere in the middle. 

In our case, that would be $6,500 + $9,500 + $5,000 ÷ 3 = $7,000.  

Your likely estimate has to be based on historical project data if you're using this method. If it's not, it'll throw your entire estimation off, which could be devastating to the accuracy of your project cost estimation. 

3. The parameter estimation

Like the bottom-up estimation, the parameter estimation relies on past project data to help make your new estimation more accurate. 

Start by estimating how much time you think your team will spend on each task. Then, dig out some data from similar projects your agency has completed in the past and compare them.

We might sound like a broken record, but the right tools save you a lot of time here. Teamwork.com's utilization tools automatically keep a record of how long you estimated a task to take in the past and its actual time.

This method is different from the bottom-up estimation because it realizes that a designer will have a different billable rate than a content writer. As resources costs are more accurate, the final cost estimation will be as well. 

For each task, calculate: 

Task Duration in Billable Hours × Employee's Hourly Rate = Task Cost

While it's recommended to do this calculation for every task – making it more time-consuming than other methods on our list – the parameter estimation will likely give you the most accurate cost projection.

How project cost estimations go wrong and how to fix them

Project cost estimations go wrong because they involve so much more than just a simple calculation. Many factors that crop up once a project kicks off, like a lack of staff or scope creep, can throw a project cost estimation off.

However, there are some factors that you can control to keep your project cost estimations as accurate as possible: 

Start off easy and don’t estimate costs too far in advance

If you're just getting started with your cost estimations, it might not be the best idea to predict project costs 6 or 12 months away. There's a good chance that by the time the project work starts, your staffing and operational costs go up.

This means your cost estimation could be out-of-date and cost your agency more than what you currently expect. Starting off with just the immediate projects ahead of you might make the most sense.

However, if your enterprise agency has the experience of booking projects several months in advance, there are ways to make this easier. Simply use Teamwork.com's Advanced Resource Scheduler to plan projects months in advance, while viewing all potentially available resources you'll have at that time.

This will help your plan your budget more efficiently and ultimately give your team the time they need to kick off a new project or onboard a new client.

Tighten up the project scope

Broad project scopes rarely help with cost estimations. Estimating the cost of a project without a detailed scope can result in inaccurate task costs and expenses.

If a detailed scope isn’t available, use a similar scope from a past project to get a more accurate estimate rather than just generalizing costs. Additionally, you can use our project scope template to better manage and prepare for scope creep on your upcoming projects.

Don’t burn out your team

If a cost estimation is based on your team working at 90% capacity for six weeks straight, you can quickly run into problems. If a team member is sick or goes on annual leave, it'll throw the entire estimation off.

And if your estimate is based on them working at such a high capacity, there's also a risk you'll burn them out during the project. Keep your utilization capacity at around 80% when estimating a project cost to be on the safe side. 

Now that you know how to create a project cost estimation and the do's and don'ts of the process, let's take a look at how the right tools can help. 

Say goodbye to burnout

Maximize your resources by spotting when team members are over capacity, so you can pivot workloads, prevent bottlenecks, and avoid burnout.

It shouldn't be that surprising, but project management software can be your secret weapon to accurate project cost estimation. If your team is using it to work on projects, the right software can also help you track team productivity and figure out utilization rates are already being tracked.

You may not know how long it usually takes one of your designers to create a logo for a client, but Teamwork.com does. These historical datasets are key to getting more accurate project cost estimations. 

Here are some examples of how using a tool like Teamwork.com can help you estimate a project's cost more accurately. 

1. The Profitability Report

Teamwork.com’s Profitability Report helps project managers understand how profitable projects are using real-time analytics and tracking. 

The report is a data gold mine, tracking task costs, estimated time vs actual time, budgets, and overall profit. Each of the calculations made inside the reports is based on the costs and billable rates tied to your team members by analyzing the number of billable/non-billable time hours they log for each project. 

Let’s say an agency builds websites for clients with small brick-and-mortar retail outlets, and a potential new customer has just asked them for an estimation on how much a new site will cost them. 

A project manager can pull up all of their past projects and look at how long a similar website build costs, taking into account timelines and profitability. 

2. Financial Budgets

The accuracy of any project cost estimation will be how closely it matches the project’s budget once work wraps up. Teamwork.com's Financial Budget feature allows project managers to set specific budgets before work starts instead of relying on spreadsheets.

As team members log their time (whether billable or non-billable), Teamwork.com will automatically deduct their hourly rate from the project's budget and show how much time and money is left.

This allows project managers to track total project spending and get notifications if the budget reaches a certain threshold percentage. If an unexpected cost does come up, project managers can also add expenses to a project by detailing the expense name, cost, and date.

Next time you take on a project like this, you’ll then have a paper trail of any unexpected costs that hit so you can include them in your next project cost estimation. 

Wrapping up

Accurately estimating the cost of a project takes a lot more than a calculator and a spreadsheet. 

Project managers need to factor in team workloads, cost assumptions, and any unexpected expenses that have hit projects in the past. By pulling historical project data to use with cost estimation methods, project managers can actually predict how much a project will cost based on work they’ve already completed for other clients. 

Thanks to project management software, estimating the cost of a project is now a quick job. 

Want to make quotes more accurate and your project pipeline more profitable? Try Teamwork.com for free today !

Síle is a Senior Content Marketing Manager at Teamwork.com. She has been working in the project management software space for over 7 years, exclusively serving the agency sector. She loves providing agencies with actionable insights and captivating content to help navigate the ever-evolving landscape of project management.

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Project Cost Management: Process, Importance, Examples, And Plan, And Tools

Written By : Bakkah

27 Feb 2024

Table of Content

What is Cost management definition?

Importance and benefits of project cost management, project cost management best practices, project cost management process, project cost management template, what are cost management tools, how to create a cost management plan, effective project cost management methods, how to calculate project costs, who is responsible for project cost management, project cost management examples, challenges of cost management , project management cost with bakkah learning:, popular articles.

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Project Cost Management is the process of planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget. Project Cost Management includes activities such as cost estimation, budget development, cost control, and monitoring expenditures throughout the project lifecycle. Effective cost management is crucial for budget control, resource optimization, risk mitigation, stakeholder confidence, competitive advantage, and project success. 

Best practices of Project Cost Management include comprehensive planning, regular monitoring and reporting, risk management, clear communication, cost control measures, change management, continuous improvement, and the utilization of technology.

Successful project cost management involves the collaboration of project managers, finance teams, and other relevant stakeholders to develop realistic budgets, identify cost-saving opportunities, and mitigate financial risks . By implementing robust cost management practices, organizations can optimize resource allocation, enhance project performance, and maximize return on investment. 

Additionally, continuous evaluation and adjustment of cost management strategies based on project progress and changing circumstances are essential to adapt to unforeseen challenges and ensure the project's financial viability.

 Cost management involves a series of activities aimed at ensuring that the project is completed within the allocated financial resources while delivering the intended value and meeting stakeholders' expectations. 

This process encompasses various stages, including cost estimation, budget development, cost control, and monitoring of expenditures throughout the project lifecycle. Effective cost management requires accurate forecasting, diligent tracking of expenses, proactive risk management and regular reporting to stakeholders to ensure transparency and accountability.

Project cost management is crucial for several reasons:

1. Budget Control: 

Effective cost management ensures that a project stays within its allocated budget. By accurately estimating costs, tracking expenses, and implementing cost-saving measures, organizations can prevent overspending and avoid financial risks, ensuring the project's financial health and viability.

2. Resource Optimization: 

Proper cost management enables organizations to optimize resource allocation, including finances, manpower, materials, and equipment. By identifying and eliminating inefficiencies, reallocating resources as needed, and prioritizing spending, projects can operate more efficiently, enhancing productivity and reducing waste.

3. Risk Mitigation: 

Cost management helps identify and mitigate financial risks that may impact project outcomes. By proactively identifying potential cost overruns, fluctuations in resource prices, or unexpected expenses, organizations can develop contingency plans and strategies to mitigate these risks, minimizing the impact on the project's timeline and budget.

4. Stakeholder Confidence: 

Transparent and effective cost management builds trust and confidence among project stakeholders, including clients, investors, and sponsors. Providing regular updates on budget status, demonstrating prudent financial management practices, and delivering projects within budget constraints enhance stakeholder satisfaction and credibility, fostering positive relationships and future opportunities.

5. Competitive Advantage: 

Efficient cost management can give organizations a competitive edge by allowing them to deliver projects more cost-effectively than their competitors.

6. Project Success: 

Ultimately, successful project cost management contributes to the overall success of the project. By ensuring that the project is completed within budget, on time, and according to quality standards, organizations can achieve their objectives, deliver value to stakeholders, and sustain competitiveness in the marketplace. Effective cost management is therefore essential for achieving project goals, maximizing return on investment, and driving organizational success.

Some best practices for project cost management include:

1. Planning : 

Begin with comprehensive planning that includes detailed cost estimation and budgeting. Break down the project into manageable tasks, identify all potential costs, and develop a realistic budget based on accurate estimates.

2. Regular Monitoring and Reporting: 

Implement a robust system for monitoring project costs regularly. Track expenses against the budget, identify variances, and analyze the reasons behind them. Provide timely and accurate reports to stakeholders to keep them informed about the project's financial status.

3. Risk Management: 

Anticipate potential cost risks and develop strategies to mitigate them. Identify common cost drivers, such as resource shortages, scope changes, or market fluctuations, and develop contingency plans to address them effectively.

4. Clear Communication: 

Foster open and transparent communication among project team members, stakeholders, and relevant departments. Ensure that everyone understands the budget constraints, cost objectives, and their roles in managing project costs effectively Cost Control 

5. Measures : 

Implement cost control measures to optimize spending and prevent cost overruns. This may include negotiating better prices with suppliers, implementing cost-saving initiatives, or reevaluating the scope to align with the budget.

6. Change Management: 

Establish a formal change management process to handle scope changes or variations that may impact project costs. Assess the financial implications of proposed changes, obtain approval from relevant stakeholders, and update the budget and plans accordingly.

7. Continuous Improvement: 

Regularly review project cost management processes and performance to identify areas for improvement. Collect feedback from team members, conduct post-project reviews, and incorporate lessons learned into future projects to enhance cost management practices.

8. Utilization of Technology: 

Leverage project management software and cost tracking tools to streamline cost management processes, automate reporting, and improve accuracy. Utilizing technology can also facilitate real-time collaboration and decision-making among project stakeholders.

By following these best practices, organizations can effectively manage project costs, minimize financial risks, and increase the likelihood of project success.

Project cost management is the process of planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget. It involves several key processes:

1. Cost Estimation:  

This involves estimating the costs of the resources (such as labor, materials, equipment) needed to complete the project activities.

2. Cost Budgeting: 

Once the costs are estimated, a budget is developed, which outlines how much will be spent on each activity or work package

3. Cost Control:  

During the execution phase, cost control involves monitoring project costs to ensure they stay within the approved budget. This includes tracking expenses, identifying variances, and taking corrective actions if necessary to keep costs in line.

4. Resource Planning: 

Efficiently planning and allocating resources to minimize costs while meeting project objectives.

5. Risk Management: 

Identifying and assessing potential risks that could impact project costs, and developing strategies to mitigate these risks.

6. Procurement Management:  

Managing the procurement process to obtain goods and services needed for the project at the best possible price.

Overall, effective cost management helps ensure that the project is completed within budget constraints while delivering the expected results.

A project cost management template typically includes sections for various aspects of cost management throughout the project lifecycle. Here's a basic template outline:

Project Cost Estimation:

• Identify all resources needed for the project (labor, materials, equipment, etc.).
• Estimate the cost of each resource.
• Use historical data, expert judgment, and other estimation judgment, and other estimation techniques

Cost Baseline Development:

• Develop a baseline budget that outlines the total cost of the project.
• Break down the budget by phase, deliverable, or work package.

Cost Tracking and Monitoring:

• Establish a system for tracking actual costs incurred during project execution.
• Compare actual costs to the baseline budget regularly.
• Identify and address any cost variances promptly.

Cost Control Measures:

• Implement measures to control costs and prevent budget overruns.
• Define thresholds for acceptable cost variances.
• Develop a process for approving and managing changes to the budget.

Resource Allocation:

• Allocate resources based on project needs and budget constraints.
• Ensure resources are utilized efficiently to minimize costs.

Risk Management:

• Identify potential cost risks and their impact on the project.
• Develop strategies to mitigate cost risks and minimize their likelihood of occurrence.

Procurement Management :

• Identify procurement needs for goods and services required for the project.
• Develop procurement plans and strategies to obtain goods and services at the best possible cost

Financial Reporting:

• Generate regular reports on project financials, including budget status, actual costs, and cost variances.
• Communicate financial status to stakeholders and project team members.

Documentation and Lessons Learned:

• Maintain documentation related to project costs, including estimates, budgets, and cost reports.
• Document lessons learned regarding cost management for future projects.

Continuous Improvement:

• Review cost management processes regularly and identify areas for improvement.
• Implement changes to enhance cost management effectiveness for future projects.

Cost management tools are software applications or platforms designed to assist project managers and teams in planning, tracking, analyzing, and controlling project costs effectively. These tools typically offer a range of features to streamline various aspects of cost management. Some common cost management tools include:

1. Project Management Software: 

Comprehensive project management platforms often include built-in features for cost management, such as budget tracking, expense management, and reporting. Examples include: 

• Microsoft Project

2. Spreadsheet Software : 

Spreadsheet programs are commonly used for cost management due to their flexibility and familiarity. They can be customized to create budget templates, track expenses, and perform cost calculations. Examples include:

• Microsoft Excel
• Google Sheets
• Apple Numbers

3. Cost Estimation Software : 

These tools specialize in helping project managers estimate project costs accurately. They may use historical data, industry benchmarks, and mathematical models to generate cost estimates. Examples include:

4. Expense Management Tools: 

These tools streamline the process of tracking and managing project expenses, including reimbursable costs, invoices, and receipts. Examples include:

• Zoho Expense

5. Financial Management Software: 

Dedicated financial management platforms offer features for budgeting, forecasting, and financial reporting, which can be useful for project cost management. Examples include:

6. Time Tracking Software : 

While primarily used for tracking time spent on tasks, time tracking tools can also help indirectly in cost management by providing insights into resource utilization and labor costs. Examples include:

7. Procurement Management Software: 

For projects involving procurement of goods and services, procurement management tools can help streamline the procurement process, track vendor contracts, and manage supplier relationships. Examples include:

8. Business Intelligence Tools:

Advanced analytics and reporting tools can be used to analyze project costs, identify trends, and generate insights for better decision-making. Examples include

These tools can vary in complexity and functionality, so it's important to choose the ones that best fit the specific needs and requirements of your project and organization. Additionally, integrating multiple tools may be necessary to cover all aspects of cost management effectively.

Creating a cost management plan involves several key steps to ensure that project costs are effectively planned, monitored, and controlled. Here's a step-by-step guide to creating a cost management plan:

1. Define Objectives and Scope:

Clearly define the objectives of the cost management plan.

Identify the scope of the plan, including which projects or phases it applies to and the key stakeholders involved.

2. Identify Cost Categories:

Break down the project costs into categories such as labor, materials, equipment, overhead, contingency, etc.

Determine which costs are direct (specifically attributed to the project) and which are indirect (shared across multiple projects or overhead).

3. Estimation Techniques:

Choose appropriate cost estimation techniques based on the nature of the project and available information.

Common techniques include analogous estimation, parametric estimation, and bottom-up estimation.

4. Cost Baseline Development:

Develop a baseline budget that represents the total estimated cost of the project.

Break down the budget by phase, deliverable, or work package to track costs at a granular level.

5. Cost Control Measures:

Define measures to control costs and prevent budget overruns.

Establish thresholds for acceptable cost variances and develop a process for managing changes to the budget.

6. Resource Allocation:

Allocate resources based on project needs, budget constraints, and resource availability.

Ensure resources are utilized efficiently to minimize costs and maximize productivity.

7. Risk Management:

Identify potential cost risks that could impact the project budget.

Develop strategies to mitigate these risks and minimize their likelihood of occurrence.

8. Procurement Strategy:

Determine the procurement needs for goods and services required for the project.

Develop a procurement strategy to obtain these items at the best possible cost, considering factors such as quality, schedule, and budget.

9. Roles and Responsibilities:

Clearly define the roles and responsibilities of team members involved in cost management.

Assign specific individuals or teams to oversee cost estimation, budgeting, tracking, and control.

10. Communication Plan:

Establish a communication plan to keep stakeholders informed about project costs.

Define reporting mechanisms, frequency of updates, and the format of cost-related communications.

11. Documentation and Reporting:

Document all cost-related information, including estimates, budgets, actual costs, and cost variances.

Develop a system for generating regular cost reports and distributing them to stakeholders

12. Review and Update:

Regularly review the cost management plan throughout the project lifecycle.

Update the plan as needed to reflect changes in project scope, budget, or other factors.

By following these steps, you can create a comprehensive cost management plan that helps ensure your project stays on budget and delivers value to stakeholders.

Effective project cost management involves various methods and strategies to ensure projects stay within budget. Here are some key methods:

1. Cost Estimation : 

Accurately estimating project costs at the outset is crucial. Techniques like analogous estimation, parametric estimation, and bottom-up estimation can be used.

2. Budget Allocation: 

Once costs are estimated, allocate budgets to different project phases and activities. This helps in tracking and controlling expenses.

3. Cost Tracking: 

Regularly track expenses against the budget using tools like cost tracking software or spreadsheets. This helps in identifying cost overruns early.

4. Change Management: 

Implement a robust change management process to evaluate and approve changes to the project scope, timeline, or budget. This prevents unauthorized scope creep and cost increases.

5. Resource Management: 

Efficiently manage resources to avoid wastage and optimize costs. This includes human resources, materials, equipment, and subcontractors.

6. Risk Management: 

Identify potential risks that could impact project costs and develop mitigation strategies. Contingency reserves can be allocated to handle unforeseen events.

7. Vendor Management: 

Negotiate contracts with vendors and suppliers to get competitive prices and favorable terms. Regularly review vendor performance to ensure value for money.

8. Earned Value Management (EVM):  

EVM integrates cost, schedule, and scope to assess project performance. It helps in forecasting future costs and identifying variances from the baseline plan.

Calculating project costs involves several steps:

1. Identify Resources:  

List all resources required for the project, including personnel, equipment, materials, and any external services.

2. Estimate Costs: 

Estimate the cost of each resource item. For personnel, this involves calculating labor costs based on salaries, wages, benefits, and overhead. For materials and equipment, research current market prices or obtain quotes from suppliers. For external services, solicit bids or estimate based on past experiences.

3. Allocate Costs: 

Allocate costs to specific project tasks or activities. Break down costs by phase, milestone, or deliverable to create a detailed cost breakdown structure (CBS).

4. Account for Contingencies: 

Include contingency reserves to account for unforeseen events or changes in scope. Typically, this is a percentage of the total project cost, based on risk assessment and historical data.

5. Calculate Total Project Cost: 

Sum up all estimated costs, including direct costs (e.g., labor, materials) and indirect costs (e.g., overhead, administrative expenses) to determine the total project budget.

6. Monitor and Update: 

Continuously monitor project expenses against the budget throughout the project lifecycle. Update cost estimates as needed to reflect changes in scope, schedule, or resource availability.

7. Analyze Variances: 

Analyze variances between actual costs and budgeted costs to identify areas of overruns or savings. Adjust future cost estimates and project plans accordingly to keep the project on track financially.

By following these steps, project managers can effectively calculate project costs and ensure financial transparency and accountability throughout the project.

Project cost management is a collaborative effort involving multiple stakeholders within an organization. The primary roles responsible for project cost management include:

1. Project Manager: 

The project manager oversees all aspects of project cost management. They are responsible for developing the project budget, monitoring expenses, managing cost estimates, and ensuring that the project stays within budgetary constraints.

2. Finance Department : 

The finance department provides expertise in financial planning and analysis. They may assist in creating cost estimates, tracking expenses, managing financial resources, and ensuring compliance with financial regulations.

3. Procurement Team: 

The procurement team is responsible for sourcing and acquiring resources needed for the project. They play a crucial role in negotiating contracts, obtaining quotes, managing vendor relationships, and controlling procurement costs.

4. Project Team Members:

Team members contribute to cost management by accurately tracking their time and expenses, adhering to budget guidelines, and efficiently utilizing resources allocated to them.

5. Stakeholders : 

Stakeholders, including clients, sponsors, and senior management, are involved in project cost management by providing input on budget priorities, approving budget allocations, and monitoring financial performance against project objectives.

By engaging these key stakeholders and fostering effective communication and collaboration among them, organizations can ensure successful project cost management throughout the project lifecycle.

Here are some examples of project cost management in various industries:

1. Construction Project: 

In a construction project, cost management involves estimating costs for materials, labor, equipment, and subcontractors. Examples of cost management activities include preparing a cost baseline, tracking actual costs against the baseline, identifying cost variances, and implementing cost control measures to ensure the project stays within budget. 

For instance, a project manager might negotiate with suppliers to obtain discounts on materials, optimize resource allocation to minimize labor costs, or identify opportunities to reduce waste and improve efficiency on the construction site.

2. Information Technology Project: 

In an IT project, cost management encompasses estimating expenses for hardware, software licenses, development resources, and ongoing maintenance. Examples of cost management activities include creating a budget for the project, monitoring spending against the budget, identifying cost-saving opportunities, and adjusting the budget as needed to align with project priorities. 

For instance, a project manager might explore options for using open-source software to reduce licensing fees, negotiate with vendors to obtain favorable pricing on hardware purchases, or prioritize project features based on their cost-benefit ratio.

3. Marketing Campaign: 

In a marketing campaign project, cost management involves budgeting for advertising, creative services, promotional materials, and campaign execution. Examples of cost management activities include allocating funds to different marketing channels, tracking expenses for each campaign component, analyzing return on investment (ROI) for marketing initiatives, and optimizing spending to maximize the campaign's effectiveness.

For instance, a marketing manager might use cost-per-acquisition metrics to evaluate the efficiency of various advertising channels, adjust the allocation of funds based on campaign performance, or negotiate pricing with vendors to lower production costs for promotional materials.

4. Manufacturing Project: 

In a manufacturing project, cost management includes estimating expenses for raw materials, production equipment, labor, and overhead costs. Examples of cost management activities include developing a manufacturing budget, monitoring production costs in real-time, identifying opportunities to improve cost efficiency, and implementing lean lean manufacturing practices to reduce waste and increase productivity. 

For instance, a production manager might implement Just-In-Time (JIT) inventory management to minimize inventory holding costs, conduct value engineering to identify cost-saving opportunities in product design, or invest in automation technologies to streamline manufacturing processes and reduce labor costs.

These examples illustrate how project cost management is essential in various industries to ensure that projects are completed within budgetary constraints while maximizing value for the organization.

Several challenges can arise in the process of cost management within projects. Some of these challenges include:

1. Accurate Estimation: 

It can be difficult to accurately estimate project costs, especially in complex projects with many variables. Uncertainties in material prices, labor rates, and project scope can lead to inaccurate cost estimates, which may result in cost overruns later in the project.

2. Scope Changes:  

Changes in project scope can impact costs significantly. Managing scope creep and effectively  incorporating changes while controlling costs requires careful planning and communication with stakeholders.

3. Resource Allocation : 

Allocating resources efficiently while minimizing costs is a challenge, particularly in projects with competing priorities and limited resources. Poor resource allocation can lead to inefficiencies, delays, and increased costs.

4. Risk Management: 

Identifying and managing risks that could impact project costs is essential but challenging. Anticipating and mitigating risks such as material shortages, supplier delays, or regulatory changes requires proactive risk management strategies.

5. Vendor Management:  

Working with vendors and subcontractors introduces additional complexities in cost management. Ensuring that vendors deliver goods and services on time and within budget, while maintaining quality standards, requires effective vendor management and communication.

6. Cost Tracking and Control: 

Tracking and controlling costs throughout the project lifecycle can be challenging, especially in large, complex projects. Without robust systems and processes in place, costs can escalate quickly, leading to budget overruns and project delays.

7. External Factors : 

External factors such as economic fluctuations, changes in market conditions, and geopolitical events can impact project costs unpredictably. Adapting to these external factors and mitigating their impact on project costs requires agility and flexibility in cost management.

Addressing these challenges requires a comprehensive approach to cost management, including accurate estimation, effective risk management, proactive communication, and continuous monitoring and control of project costs. By addressing these challenges proactively, project teams can improve cost predictability and deliver projects within budgetary constraints

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Conclusion:

In conclusion, Project Cost Management is indispensable for project success, ensuring that projects are completed within budget constraints while delivering value to stakeholders. 

By implementing effective cost management practices and addressing challenges proactively, organizations can optimize resource allocation, mitigate financial risks, and increase the likelihood of project success. 

Training and certification programs, such as those offered by Bakkah Learning, provide professionals with the necessary skills and knowledge to excel in project cost management and advance their careers in the field.

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Estimating Cost of a Project: Techniques and Examples

Estimating cost is an important process in project management as it is the basis for determining and controlling the project budget. Costs are estimated for the first time at the beginning of a project or even before a project has started. Subsequently, the (re-)estimation of the project cost is repeated on an ongoing basis to account for more detailed information or changes to the scope or timeline.

For instance, if the earned value management measures that are used for controlling project cost indicate significant variances from the budget, a re-estimation of the cost and schedule and a revisiting of the overall budget can be inevitable.

The methods introduced in this article are tools and techniques of the “Estimate Costs” process that is part of PMI’s Knowledge Area “Project Cost Management” (see PMBOK®, 6 th edition, ch. 7.2).

What Is a Cost Estimate?

Rough order of magnitude vs. definitive estimate, estimate to complete (etc) and estimate at completion (eac), when are cost estimated, why is cost estimation important in project management, comparison of estimation techniques, expert judgment       , analogous estimating , parametric estimating, bottom-up estimating, three-point estimating.

A Cost estimate is a quantified expectation of how many resources are required to complete a project or parts of a project.

Such cost estimates are often expressed in currency units. However, other units such as man-days can also be used if the currency amounts are not applicable or irrelevant.

There are different types of cost estimates. The Project Management Body of Knowledge lists the rough order of magnitude (ROM) and the definitive estimate. Both types differ in respect of their accuracy, the project phases in which they are used as well as the available tools and techniques. Some projects use additional, sometimes industry-specific types of estimates.

Cost estimating involves different tools and techniques which typically include

• Expert judgment,
• Analogous estimating,
• Parametric estimating,
• Bottom-up estimating,
• Three-point estimating, and
• Cost of quality.

Read on to learn the details of these techniques, supplemented with examples and practical considerations.

What Are the Types of Cost Estimates?

According to the PMBOK®, there are 2 types of cost estimates:

• Rough order of magnitude (ROM) with an accuracy of -25% to + 75% (other frameworks quote a range of +/-50%) and
• Definitive estimate with an accuracy range of -5% to +10%.

Some sources also list so-called preliminary estimates and budget estimates as further gradations of estimate types. There are also industry-specific types of estimates such as design and bid estimates in construction projects ( source ). However, the current PMI project management framework only refers to the 2 above-mentioned types.

If the budget has to be revisited part way through a project, a so-called estimate to complete (ETC) is determined.

The obvious difference between these 2 types of estimates is the accuracy: the ROM is rather inaccurate with a broad range of possible outcomes. It is therefore typically used in project initiation phases where a ballpark figure is sufficient to get a project started.

The definitive estimate is determined in the course of the project when more information and resources for accurate estimates are available.

Read this article for more details on the ROM and the differences between ROM and definitive estimate .

If partway in a project it turns out that the budget baseline (based on previous estimates) cannot be met, a re-estimation of the project cost is required.

This is done by determining an estimate to complete (ETC) which is used to calculate a new estimate at completion (EAC) that replaces the initial budget at completion and thus becomes the new cost baseline of a project.

Costs are estimated at different points in time throughout the project. The PMBOK states that the process is performed “periodically throughout the project as needed” (source: PMBOK®, 6 th edition, ch. 7.2).

The first point to estimate cost is during the initiation phase, e.g. when the project business case or the project charter is created. For these documents, a project manager has to determine the amount of resources that is required to complete the project.

As the information that is available at that point is usually not very detailed, the project manager will likely end up producing a rough order of magnitude estimate rather than a definitive estimate. Later in the project when more information is available, this order of magnitude estimate will be replaced with a definitive estimate.

After the project initiation phase, the cost will be re-assessed during the planning phase, using the techniques introduced in this article.

In subsequent phases, costs are typically (re-)estimated if relevant new information and details become known or if changes to the project scope or timeline occur. One of the common reasons for re-estimating cost is, for instance, when the indicators of the project controlling suggest that the original budget baseline cannot be met.

Estimating costs is one of the core activities of project management and planning. This is because a project is defined as being subject to at least three fundamental constraints : scope , budget and time. Cost estimates are obviously addressing the budget constraint; hence they are highly relevant for the management of a project. The initial rough cost estimate is usually included in the project charter as well as in the business case of a project.

The estimation of costs is also necessary to compute the project budget which is subject to the approval of the project sponsor(s). In fact, the process “determine budget” uses a technique called “cost aggregation” which directly refers to the outputs of the “estimate cost” process.

Cost estimates are the basis for allocating budget to work packages and deliverables which can be politically sensitive within a project as well as among its stakeholders. Therefore, budget determination and assignment require some stakeholder involvement, communication and, in many cases, their approval.

In addition, cost estimates are input parameters for the earned value and variance analyses as well as forecasting of project costs .

Tools and Techniques for Estimating Project Cost

This section provides an overview of the tools and techniques for estimating project costs. These methods refer to chapter 7.2.2 of PMI’s Project Management Body of Knowledge .

Click on the links to the detailed articles on these techniques to find further explanations and practical examples.

This table compares the approaches to estimating project costs and highlights the differences between these techniques.

This technique is suggested by the PMBOK (ch. 4.1.2.1) as a way to produce a cost estimate.

If you or your team have experience with the kind of work that is in the scope of a project, you can use expert judgment to produce an estimate. This requires a certain level of familiarity with the subject of a project and its environments such as the industry and the organization.

Expert judgment can be applied to both bottom-up and top-down estimating. Its accuracy depends greatly on the number and experience of the experts involved, the clarity of the planned activities and steps as well as the type of the project.

Two examples of expert judgment are:

• Estimating the rough order of magnitude at the beginning of a project. At that time, estimates are often performed top-down due to a lack of team members. more accurate estimation techniques (such as parametric estimating) may also not be available due to a lack of data.
• (Re-)estimating the efforts needed to generate the deliverables of a work breakdown structure (WBS) by asking those responsible for work packages and activities to estimate their resource requirements. This type of expert judgment can lead to comparatively accurate results.

Besides being an estimation technique on its own, expert judgment is also inherent to the other estimation techniques. For instance, if the comparability of previous work and the current project is assessed or adjustments to parametric estimates are determined.

Analogous estimating refers to the use of observed cost figures and related values in previous projects (or portions of a project). In order to be accurate, the type and nature of these reference activities must be comparable with the current project.

“Analogous estimating, also called top-down estimating, is a form of expert judgment.” Source: Heldman, Kim. PMP: Project Management Professional Exam Study

This technique uses historical data in the form of values and parameters to determine the expected resource requirements of a current project. The historic values are adopted for the current work and can be adjusted for differences in scope or complexity. Analogous estimating is categorized as a gross value estimating approach.

In general, analogous estimates are used if a project has access to historical data on similar types of work while the details and resources for more accurate estimates in the current project, such as parametric or bottom-up estimating, are not available.

Parametric estimating is a statistical approach to determine the expected resource requirements. It is based on the assumed or proven relationship of parameters and values. Simple examples are the building cost per square foot in construction projects or the implementation cost per data field in IT projects.

If, for instance, the cost of implementing a new data field in an IT system were $20,000 according to historical data, and a project required 15 new data fields, the total cost of this part of the project would be 15 x $20,000 = $300,000.

The input data can be obtained from previous projects or external data sources such as industry benchmarks or publicly available statistics.

In practice, this technique is employed with a broad variety of sophistication and accuracy. It can be used with a simple ‘rule of three’ calculation but also in conjunction with a complex statistical or algorithmic model that may consider multiple quantitative and qualitative parameters for detailed regression analyses.

In projects that do not use an explicit statistical correlation analysis, some expert judgment is required to assess whether it would be reasonable to apply the historic parameters to the current project. Complexities of projects and activities vary and may therefore require certain adjustments.

For instance, building a highway in a mountainous region likely produces a higher cost per mile than in a flat area. IT development projects in complex IT architectures or systems tend to require more resources than a less complex environment.

Another consideration concerns the expertise and experience of the project team. If a previous project was delivered by highly skilled and experienced resources while the current team is just at the beginning of its learning curve, using unadjusted historic data may understate the estimated cost.

Similar to analogous estimates, adjustments can be made to adapt the parametric estimates to the current project.

Depending on the quality of the input data and its applicability to the current type of work, the parametric estimation technique can produce very accurate figures. However, the higher the accuracy desired the more resources are needed to perform the data gathering and statistical analyses.

Bottom-up estimation refers to a technique that involves estimating the cost at a granular level of work units. The estimates for all components of a project are then aggregated in order to determine the overall project cost estimate.

In practice, these estimates are often performed at the lowest level of the work breakdown structure (WBS), e.g. for work packages or even activities.

While there is no clear rule on who should be performing this estimation, it seems to be a good practice in project management: asking those project team members who are operationally in charge of the respective work packages or activities to estimate there on work.

Thus, this approach to estimating costs often comes with significantly higher accuracy than top-down estimations. However, obtaining and aggregating these granular estimates normally requires some resources and can potentially become a political challenge, especially in large or complex projects.

Three-point estimating is a technique that usually leverages on bottom-up estimates, analogous or expert estimates. The concept requires three different points of estimates: the optimistic (best case), pessimistic (worst case) and the most likely cost estimate.

Based on these 3 points, a weighted average cost estimate is determined that overweighs the “most likely” point. This can be done by assuming a triangular distribution, a PERT or beta distribution.

Read this article for further explanation and examples of this technique.

In this article, we have discussed the techniques of cost estimating as suggested by the PMBOK. Note that the level of detail and granularity of the estimates usually increases throughout the project.

In the initiation phase, the rough order of magnitude (ROM) is often the only type of estimate that can be obtained. Definitive estimates will usually require techniques such as analogous, bottom-up and parametric estimating that may only become available in later stages of a project.

Parametric and bottom-up estimates are usually the techniques that provide the most accurate cost projections. They are commonly used if the budget needs to be revisited and replaced with a new estimate at completion.

When a budget is determined and approved, earned value analysis and variance analysis help project managers control the cost and value generated in a project. You will find more details on the measures and the techniques in this article .

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How to Calculate ROI to Justify a Project

• 12 May 2020

Understanding how to calculate the potential return on investment (ROI) of a project is an essential financial skill for all professionals to develop.

If you’re an employee, knowing how to calculate ROI can help you make the case for a project you’re interested in pursuing and have taken the lead on proposing. If you’re a manager, understanding ROI can give you greater insight into your team's performance . If you’re an executive, working knowledge of ROI can make it easier for you to identify which projects should be greenlit and which should be passed over. Once ROI is proven, it may be possible to replicate success by applying lessons learned from the first project to other segments of the business.

If you’re unfamiliar with accounting and finance , the prospect of determining the ROI of a project may seem beyond your abilities. However, it’s not an overly complicated process. By understanding the basics of financial valuation, which can enable you to put a monetary value on companies, projects, or anything that produces cash flows, anyone can learn to calculate the ROI of a project.

Access your free e-book today.

What Is Return on Investment?

Return on investment (ROI) is a metric used to denote how much profit has been generated from an investment that’s been made. In the case of a business, return on investment comes in two primary forms, depending on when it’s calculated: anticipated ROI and actual ROI.

Anticipated vs. Actual ROI

Anticipated ROI , or expected ROI, is calculated before a project kicks off, and is often used to determine if that project makes sense to pursue. Anticipated ROI uses estimated costs, revenues, and other assumptions to determine how much profit a project is likely to generate.

Often, this figure will be run under a number of different scenarios to determine the range of possible outcomes. These numbers are then used to understand risk and, ultimately, decide whether an initiative should move forward.

Actual ROI is the true return on investment generated from a project. This number is typically calculated after a project has concluded, and uses final costs and revenues to determine how much profit a project produced compared to what was estimated.

Positive vs. Negative ROI

When a project yields a positive return on investment , it can be considered profitable, because it yielded more in revenue than it cost to pursue. If, on the other hand, the project yields a negative return on investment , it means the project cost more to pursue than it generated in revenue. If the project breaks even, then it means the total revenue generated by the project matched the expenses.

Return on Investment Formula

Return on investment is typically calculated by taking the actual or estimated income from a project and subtracting the actual or estimated costs. That number is the total profit that a project has generated, or is expected to generate. That number is then divided by the costs.

The formula for ROI is typically written as:

ROI = (Net Profit / Cost of Investment) x 100

In project management, the formula is written similarly, but with slightly different terms:

ROI = [(Financial Value - Project Cost) / Project Cost] x 100

Check out our video on return on investment below, and subscribe to our YouTube channel for more explainer content!

Calculating the ROI of a Project: An Example

Imagine that you have the opportunity to purchase 1,000 bars of chocolate for $2 apiece. You would then sell the chocolate to a grocery store for $3 per piece. In addition to the cost of purchasing the chocolate, you need to pay $100 in transportation costs.

To decide whether this would be profitable, you would first tally your total expenses and your total expected revenues.

Expected Revenues = 1,000 x $3 = $3,000

Total Expenses = (1,000 x $2) + $100 = $2,100

You would then subtract the expenses from your expected revenue to determine the net profit.

Net Profit = $3,000 - $2,100 = $900

To calculate the expected return on investment, you would divide the net profit by the cost of the investment, and multiply that number by 100.

ROI = ($900 / $2,100) x 100 = 42.9%

By running this calculation, you can see the project will yield a positive return on investment, so long as factors remain as predicted. Therefore, it’s a sound financial decision. If the endeavor yielded a negative ROI, or an ROI that was so low it didn’t justify the amount of work involved, you would know to avoid it moving forward.

It’s important to note that this example calculates an anticipated ROI for your project. If any of the factors affecting expenses or revenue were to change during implementation, your actual ROI could be different.

For example, imagine that you have already purchased your chocolate bars for the agreed-upon $2 apiece and paid $100 to transport them. If the most that the store will pay you is $2.25 per chocolate bar, then your actual revenues drop substantially compared to your projected revenues. The result is a reduced net profit and a reduced actual ROI.

Actual Revenues = 1,000 x $2.25 = $2,250

Net Profit = $2,250 - $2,100 = $150

ROI = ($150 / $2,100) x 100 = 7.14%

Circumstances are rarely as straightforward as this example. There are typically additional costs that should be accounted for, such as overhead and taxes. In addition, there’s always the possibility that an anticipated ROI will not be met due to unforeseen circumstances, but the same general principles hold true.

How to Use Finance to Pitch Your Project

Have you ever pitched a project to senior management, only to have the idea shot down under the guise of “not making financial sense?" It happens more often than you might think. By learning how to calculate ROI for projects you’re interested in pursuing, you can self-evaluate them before they're raised up to decision-makers within your organization and defend them as they’re being considered.

Similarly, by understanding how to calculate ROI after a project you’ve spearhead is done, you can better speak to the contributions that you and your team have made toward shared company goals.

High-performing businesses are successful because they make smart decisions about when and where they allocate available resources. Calculating the ROI of a project before it moves forward can help ensure that you’re making the best possible use of the resources you have available.

To learn more ways that you can use financial concepts to improve your efficacy and advance your career, explore our online finance and accounting courses . Download your free flowchart to determine which is right for you.

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Project Management

How to create a cost breakdown structure (with examples).

May 9, 2024

‘How much will this project cost me?’

This is probably one of the most common but important questions that any client or internal stakeholder will ask you. And if the estimate you provide is not accurate or even close to realistic, it can put the project at risk. 

Of course, a cost estimate can’t always be accurate to the last dollar, but imagine quoting X for a project, only to realize you will require 2X the budget when the project actually begins.

Not a situation you want to find yourself in.

This is where a Cost Breakdown Structure (CBS) can help you get a clear picture of your project finances. It breaks down all the anticipated costs into manageable categories, giving you a clear picture of where your money goes. This empowers you to make informed budgeting decisions and manage project costs efficiently.

Plus, it will also help you track your project for potential cost overruns early on, helping you deliver the project on time and within the stipulated budget.

But what exactly is a CBS, and how does it differ from a work breakdown structure (WBS)?  We’ll explore these questions and more in this guide.

Why is cost breakdown structure important?

Difference between cost breakdown structure and work breakdown structure, 1. work breakdown structure, 2. identify costs involved in each activity, 3. understand cost opportunity, step 1: know all the activities and resource requirements, step 2: identify cost categories, step 3: estimate the cost of work, step 4: build a contingency plan for your cbs, step 5: sense check, cost breakdown structure analysis: a critical tool, implementing cbs with clickup, ace your project budget plan with clickup, frequently asked questions (faq).

What is a Cost Breakdown Structure in Project Management?

Project management involves managing multiple aspects of a project, including the scope, time, and cost. While keeping your project on track and meeting deadlines is crucial, staying within budget is equally important. This is where a cost breakdown structure (CBS) becomes an essential tool.

CBS is a document that details all the costs that will be incurred in a particular project. Each line or row in the CBS stands for a cost item associated with the project. It breaks down these costs into clearly defined categories, providing a detailed roadmap for your project finances.

In any project management lifecycle , the most critical part is ensuring that the project is delivered on time and within the stipulated budget. If either goes awry, there can be complications to the project’s overall success. With cost breakdown structures added to your project management strategy, you can:

• Improve budgeting and cost estimation by identifying all potential elements of the cost structure upfront. This allows you to avoid unpleasant surprises down the road and minimize the risk of expenses growing beyond a specific limit
• Plan your project more accurately , as you can identify potential project cost risks and activities early on, ensuring you can develop mitigation strategies or minimize the impact of these risks
• Clearly communicate the expectations of a project to all stakeholders, including clients, sponsors, and team members. This ensures transparency and ensures everyone is aligned on the project’s goal

Cost breakdown structure can seem a lot like work breakdown structure (WBS) since we list all the activities and stakeholders involved in both. However, while CBS focuses on cost control or managing project expenses, WBS is about understanding all the activities needed to deliver a successful project. 

Some of the subtle differences include:

Breaking Down the Cost Breakdown Structure

The cost breakdown structure is created using multiple components, including:

The foundation of your CBS is your WBS. This document outlines the project deliverables and tasks that make up your project. Think of it as a blueprint of what needs to be done.

For any CBS, there are four main cost categories to consider:

• Labor costs: Salaries, wages, and benefits of team members assigned to the task. Think of it as the cost of human effort
• Material costs: The raw materials, supplies, and equipment needed to complete the task. This could be anything from printer ink to lumber, depending on your project
• Equipment costs: Rentals or purchases of specialized equipment required for the task
• Indirect costs : These are factors other than the direct costs that can add up to your project budget. These include office rent, utilities, insurance, administrative costs, and more

CBS plan doesn’t just help with cost planning; it also helps you to understand potential courses of action. For example, if you have to create a website for a client.

If the cost of hiring external resources is much higher than expected, you can make proactive decisions like completing some tasks in-house. This helps minimize overall project costs and helps you take control over the project’s quality. 

How to Create a Cost Breakdown Structure

Now that you understand the power of a CBS, let’s delve into the practical steps involved in creating one. You can create detailed cost breakdown structures using project management software or a tool that helps you analyze or monitor all the activities and resources involved in a certain project. To create a detailed and accurate CBS, you can follow the steps below:

The first step to successful project planning and cost estimation is knowing the activities and resources needed for your project. This typically involves:

• Project scope document: This document outlines the project goals, deliverables, and timelines. It serves as the foundation for both your WBS and your CBS
• Work breakdown structure (WBS): A well-defined WBS is essential for your CBS. It provides the framework for identifying cost elements associated with each project task
• Cost estimation tools: Various cost estimation tools are available, ranging from simple spreadsheets to more sophisticated software. Choose a method that best suits your project’s complexity and budget

The next step is estimating the required cost for each task, activity, or resource. These tasks can be divided into multiple aspects depending on their impact and work area, such as:

• Labor costs: Salaries, wages, and benefits of team members assigned to the tasks.
• Material costs: Raw materials, supplies, and equipment needed to complete the tasks.
• Equipment costs: Rentals or purchases of specialized equipment required for the tasks
• Office rent and utilities
• Administrative costs
• Software subscriptions

By considering both direct and indirect costs, you minimize the risks of any unknown task or cost factor being added to your budget. 

Once you have factored in all the cost factors that will impact your budget, it is time to start estimating the cost of completing a particular action item . For example, if you want to conduct X task, how much time do your team members take to complete it? How many resources will they need to complete it? These answers allow you to factor in the overall budget needed to complete X task.

Once you have done this for all the tasks in your project, it can be used to provide a final cost for the project. This is a crucial process, especially when estimating the budget for large-scale projects like construction projects. 

By closely tracking the tasks and resources required for a particular project and other impacts using construction management software , you can ensure that your projects get completed within the defined timeline and budget. 

Even after meticulous planning, unforeseen events can add to your project costs. For example, if you have to purchase materials from a supplier and they are out of stock, you may need to procure them from another source. The cost for these can be higher, or you may even have to pay extra to the same supplier if the materials you need are low on stock. 

To mitigate these risks, include a contingency margin in your CBS. This is a buffer allocated for unexpected expenses that might arise during the project. The size of your contingency margin will depend on the inherent risk factors associated with your project.

To jump-start your planning, use the ClickUp Contingency Plan Template and keep your business safe and secure.

This template offers you both list and board views, helping you draw your Contingency Plan and use it effectively for your projects. It helps you create a clear roadmap for unexpected events by:

• Analyzing potential risks and their impact on your operations
• Identifying necessary resources and personnel
• Testing alternative scenarios to ensure the best-case outcomes

The last step in creating a cost breakdown structure is thoroughly reviewing your plan. Look for any inconsistencies or missing information. Share your CBS with key stakeholders for input and finalize the document after incorporating their feedback.

For any project, delays are often costly. For example, if we were a construction firm, a small delay in procuring resources could mean stalling of work, and this would end up increasing the expenditure of the overall project. This is why using CBS analysis is crucial for organizations. 

With regular cost breakdown structure analysis, you can ensure that your project financials and timelines are constantly monitored, helping eliminate cost risks . This also helps with:

• Proactive cost management, as you can identify cost overruns early on and take corrective actions, such as adjusting resource allocation or negotiating with suppliers, to stay within budget
• Improving project control and management, as you can monitor aspects of WBS when analyzing your CBS documentation
• Identifying potential risks , including cost or resource planning, enabling you to minimize their impact on your overall project

When conducting a CBS analysis, make sure you look for standard impacts to your project, such as:

• Cost variances: Track any deviations between budgeted costs and actual costs incurred. Analyze the reasons for these variances and take corrective actions as needed.
• Project milestones: Conduct a CBS analysis at key project milestones to assess financial performance and identify areas for course correction. Use Milestones in ClickUp to visualize your goals at a glance and ensure you are well on track to achieve them.
• Project scope changes: Any changes to the project scope can impact costs.  Analyze your CBS to understand the financial implications of scope changes and ensure they are aligned with the overall budget.

To get the most accurate estimate for your project, you need to be able to break down all the tasks, including all the resources, actual costs, logistics costs, and every activity involved. For most companies, this often proves to be difficult as all their activities and teams work in silos and on different platforms.

This is where an end-to-end project management software like ClickUp can help make things much more streamlined and efficient. 

ClickUp goes beyond basic task management, offering a robust suite of features that perfectly complement your CBS needs. With it, you can:

• Break down project deliverables into manageable tasks and subtasks, creating a clear visual roadmap. This enables you to better estimate the project budget based on the activities and resources involved
• Track associated costs by assigning estimated costs to each task, categorize expenses, and track actual costs incurred. This provides a centralized location for managing all project finances
• Visualize cost breakdowns by category, track budget variances, and gain valuable insights into project financials
• Share your CBS document with team members, assign tasks with cost estimates, and keep everyone informed on project finances through real-time updates

With ClickUp Project Management , you get advanced features that can help you:

• Plan and prioritize all your project details with ease, helping your entire team get a clear understanding of the scope, allocation, and activities
• Leverage ClickUp Brain , an AI-based project management assistant, to simplify your day-to-day work.  It can automatically generate action items and subtasks, summarize comment threads, create data tables, find relevant details within ClickUp and connected apps, and create and share automated progress updates. Use it as your AI project manager
• Gain consensus faster and kickstart projects with clarity using a single platform to collaborate on your project vision, estimate costs, and deliver projects faster and on budget

It also provides ready-to-use, fully customizable estimation templates to help you get started with CBS and WBS project estimations instantly. For instance, the ClickUp Project Budget with WBS Template makes cost tracking easy and simple by breaking your project into tasks.

Using this template, you can simplify project budgeting activities as it allows you to:

• Map out activities and cost estimates
• Organize all your project data in one place
• Track your spending continuously so you do not go over budget

It includes a detailed work breakdown structure (WBS), including:

• Custom Statuses: To mark task status as Cancelled, Done, In Progress, On Hold, and To Do
• Custom Fields: To categorize and add attributes to manage your tasks and easily visualize your project activities and budget
• Custom Views: To visualize your information in multiple views for project tracking and management
• Project Management: Improve project budget and WBS tracking with time-tracking capabilities, tags, dependency warnings, emails, and more

These templates provide a pre-defined structure for your WBS, cost estimation fields, and budget tracking functionalities without having to do all the tasks manually or start from scratch.

So here’s the ultimate guide to help you ace project planning and estimate project budgets. It provides a clear and comprehensive picture of your project finances, empowering you to make informed budgeting decisions, identify potential cost risks proactively, and ultimately deliver projects on time and within budget.

With ClickUp, you can make your entire project management process much more effective and track budgets and tasks on the same platform.

Whether it’s project managers or your finance or commercial department, they can all work together, plan projects, and collaborate as required. Or, as Michael Scott would say, it’s a triple WIN.

The all-in-one project management software lets you manage workflows, documents, real-time dashboards, and more, helping your team move faster, work smarter, and save time.

Ready to take control of your project costs? Sign up for ClickUp today and experience the benefits of a streamlined and collaborative CBS approach!

1. What is included in a cost breakdown structure?

A cost breakdown structure (CBS) includes all the costs incurred in a certain project. This includes four main cost categories:

• Labor costs : The money spent on the people who will execute the project
• Material costs : Any materials that the business buys, including raw materials, parts and components, manufacturing supplies, insurance, and freight
• Equipment costs: The actual equipment
• Overhead costs or indirect costs: Expenses not directly allocated to a specific cost, such as office space, utilities, benefits, and taxes

2. What is the cost breakdown method?

The cost breakdown method refers to the process of creating a cost breakdown structure. This involves identifying all project activities from the Work Breakdown Structure (WBS), assigning costs to each activity, and summing them up to get the total project budget.

3. What is the difference between a cost breakdown structure and a work breakdown structure (WBS)?

A Work Breakdown Structure (WBS) outlines the project deliverables by breaking them down into smaller, more manageable tasks. A CBS focuses on the financial aspects of the project, assigning costs to each element of the WBS. Together, they provide a comprehensive view of project scope and finances.

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How to Estimate the Cost of a Freelance Project

Deciding what to charge is one of the most important parts of any freelancing project. Charge too much and you’ll risk scaring your potential client away. Charge too little and you’ll set yourself up for disappointment and struggle to run a profitable business.

Unless you offer productized services such as a fixed-price photography package, each of your projects will be unique. That means you’ll need to estimate the cost and timeline of every freelance project before sending a proposal and contract to the client.

This process can take a lot of time and be quite intimidating, especially for new freelancers. To make matters worse, many clients fail to respond once they receive your quote resulting in hours of wasted time and effort.

For the first few years of your freelancing career, it’s valuable to know your effective hourly rate and track how long it takes you to complete your projects. This information will help you refine your rate and create more accurate project estimates, even if you don’t charge hourly.

Eventually, you’ll be charging enough money that the exact hours aren’t important and you can use daily or weekly rates (combined with your experience) to create accurate estimates.

You can also charge for value using value-based pricing , but we’ll consider that out of scope for the sake of this article. In fact, estimating the cost and timeline of a project has little to do with the way you present the project to the client.

Getting the right inputs

Before you can accurately estimate the cost or timeline of a project, you need to have a clear understanding of the work involved to meet the client’s project objectives. That requires having conversations with the client until you develop such an understanding.

A great way to start the conversation is with a discovery meeting where you can introduce yourself to the key project stakeholders and begin to learn about their needs. This is your opportunity to ask questions to solicit as much detail as possible about their business goals and project goals.

But you can’t just ask any questions. You need to ask specific questions designed to get you the most helpful information possible.

There are two main types of questions you should ask:

• General questions about their business goals and the project context. This will help you understand the underlying problems and goals that are motivating this project. Freelance projects can often drift into subjectivity, so having this context will ground each discussion in objectivity.
• Specific questions about the scope of work. This will help you get the detailed information you need to accurately estimate the cost and timeline.

These are some of the best questions to ask new clients during a discovery meeting:

• What prompted you to start this project? Why now? Why not six months ago or six months from now?
• What business goals are you trying to achieve? What does success look like on this project? Failure?
• What are your timeline expectations for this project? Is it important, urgent, or both? How much flexibility do we have here?
• What specific features or functionality do you need? How do those align with your business goals? What is essential vs. nice-to-have?
• What are your budget expectations for this project? Is there a cost you’re not willing to exceed? Are you gathering other quotes?
• Are there any constraints or limitations I should be aware of? Anything else I should know before starting this project?

When you ask these questions, ask them with confidence. Practice saying them out loud before the meeting if needed. Craft your questions carefully and adjust them so you’re comfortable with them.

Ensure you’re the one “driving” the meeting so you get the chance to ask your questions. It helps to send the client a brief agenda ahead of time so you can set appropriate expectations on how the meeting will go and what you hope to get out of it.

Taking the lead may feel unnatural to more introverted freelancers, but you shouldn’t expect the client to share all the details you need. You need to be aware of what information you need and be prepared to ask the right questions.

You may need to schedule multiple discovery meetings or follow up with more questions via email until you’re confident in your ability to create an accurate cost and timeline estimate.

Creating the Estimate

If you don’t have much experience estimating freelance projects, this process might feel like guesswork at first — and that’s ok. Even after you’ve gathered all the details about the client’s needs, you still might not know how to estimate the project.

Again, that’s ok. No estimate is perfect, just do the best you can with the information you have. Whether you’re planning to charge hourly, daily, weekly, fixed-price, or value-based, it’s a good idea for most freelancers to create an hourly estimate as a starting point.

To determine the total project cost, simply multiply the total number of hours by your hourly rate:

Example: 50 hours x $100 per hour = $5,000 total project cost.

Step 1: Estimate Hours

First, you’ll need to write down how many total hours you think it will take to complete the project. I like to do this in a Google Spreadsheet .

It’s easiest to do this by breaking the project down into “chunks” of work. For a web design project, this might be estimating how long it will take to design each page, then adding the total hours together. Then, you’ll want to include hours for meetings, emails, and revisions to your work.

You should charge for every hour you spend doing work for this client, including research, analysis, design, development, emails, and phone calls.

Master Financial Spreadsheets

6 powerful Google spreadsheets to help you organize and manage of your freelance finances.

If you plan on presenting multiple options to your client, you need to reflect that in your estimate as well. This process can take up to a few hours depending on the size of the project.

Creating an accurate estimate also requires brutal honesty. Really imagine yourself doing the work. What can you really get done in an hour without any distractions? Use this honesty to your advantage. You can always adjust your estimate later!

Step 2: Set Your Rate

Next, you’ll need to decide on an hourly rate. If this is your first project, this might feel arbitrary, but there are some factors you should consider:

• Industry Experience: if you’ve got a lot of industry experience, but not a lot of freelancing experience, you can still charge more for that experience.
• Geographic Location: If you live in a big city, you can charge more than if you lived in a rural area. In fact, clients will expect you to charge a higher rate.
• Market Rates: The market needs to support your rate. If every other virtual assistant is charging $75/hr, it might be difficult for you to charge $150/hr.
• Value to Client: If your client is trying to generate $250k of sales next year, you should probably charge more than $1,000 for the project.
• Your Financial Needs: You need to earn enough to make a living. Calculate your desired annual net income annually and work backward from there.

Also, consider how much you’d like to earn for the work and how confident you are charging that rate. You also need to consider what client expectations are in your industry. Just because you think you’re worth $150/hour doesn’t mean clients will be willing to pay that rate.

Search for common rates in your industry online and let that influence your decision if you aren’t sure. Just be sure to look at many sources and take an average!

This can vary greatly, but as a broad generalization, here’s how clients perceive hourly rates across industries and geographies in the United States:

• $25/hr or less is quite low and often perceived as “cheap”.
• $25-$50/hr is below average. This is an ideal range for most new freelancers.
• $50-$75/hr is average. This is a good range once you’ve got more experience.
• $75-$100/hr is above average, but still considered reasonable.
• $100 – $150+ per hour is considered premium.

It’s unusual for most freelancers to charge above $150 per hour. At that point, they’re likely using fixed rates. value-based pricing, or they run their own business. An example might be a lawyer who has their own law firm or a CPA who has their own accounting firm.

Pro Tip: You should feel free to adjust these numbers after seeing the final total to something you feel comfortable and confident presenting to the client.

Lastly, feel free to adjust your rate over time. You’re likely just figuring things out and you may need to adjust your rate up and down until you find a rate that works well for you. That is not unethical, it’s just a natural part of becoming a freelancer!

Step 2a: Determine the Timeline

I could write an entire article about this topic, but for now, I’ll keep it simple. To determine an approximate timeline for the project, you need to consider:

• How many hours a day can you dedicate to the project?
• How many days do you plan to work on the project each week?
• How responsive is the client?
• How will you handle revisions?
• Do you or the client have time off coming up?

The key takeaway here is to understand that the total number of hours does not always translate accurately to the total calendar time you’ll spend on the project. That’s because you can’t charge for the downtime between email or phone correspondences.

For this reason, the timeline should always be considered an estimate regardless of your billing strategy. That’s why I always like to reinforce this by providing the client with a range in weeks.

For example, if the project is going to take 80 hours and you can dedicate 20 hours per week to the project, you might think the project will take 4 weeks. But more than likely, it will take closer to 5 or 6 weeks when factoring in weekends, communication delays, and revisions.

In this case, I’d tell the client the project will take 4-6 weeks, rather than setting the expectation that the project will be done in exactly 4 weeks. This will also take the pressure off you to deliver the final outcome on a specific date when you aren’t in control of all the variables.

Step 3: Refining Your Estimate

Now that you have a rate and a total number of hours, you can calculate the total cost of the project. Again, the formula is:

Formula: Hours x Rate = Project Cost

But too often, freelancers overthink the total cost. You might think it’s too high or too low. I’ve never charged that much before. What if the client rejects my proposal?

I encourage you to give yourself more permission to make decisions, mistakes, and adjustments as you learn and grow. Accept that not everything will be perfect and that it will take time to find your rhythm. In this case, that means giving yourself more permission to adjust your estimate after you’ve done your calculation.

Let’s say you live in New York and choose a rate of $50 per hour x 72 hours, that’s a total cost of $3,600. If that seems too high , feel free to adjust it down to $3,000. If that seems too low , feel free to adjust it up to $4,200.

Perhaps one of the most underrated questions in the freelance world is: “what amount of money will make you happy to do your best work for this client?”

What amount of money will make you happy to do your best work for this client?

Yes, your estimate should be accurate, honorable, and ethical, but you also need to feel happy and confident with the final price. This doesn’t always mean you’ll feel comfortable , but you should feel confident about its accuracy and be able to justify it to the client if needed.

I remember the first time I charged $5,000 for a website. I was definitely NOT comfortable, but I knew the cost was justified, so I was confident.

Over the years, I’ve found that the more I charge, the more confident I become. You’ll get a huge confidence boost each time a client says “yes” to working with you!

Presenting Your Estimate to the Client

When you’ve finished your estimate, you’ll need to present the cost and timeline to the client in a proposal . It’s extremely important to understand that you don’t need to share your exact estimate with the client. The breakdown you created for yourself can be different from what you send to the client.

Project Proposal & Contract Bundle

Get the exact proposal and contract template I use to close high-value freelance projects.

Sometimes your proposal will include line items and sometimes it won’t. Sometimes you’ll estimate the number of hours, but present a fixed-price or value-based price to the client.

When you’re presenting the cost of the project to the client, you don’t necessarily want to refer to it as an estimate anymore. This will feel too informal to the client. They need to be confident that the cost you’re presenting is accurate, even if you’re charging hourly.

⚠️ The most common and detrimental miscommunication between freelancers and clients happens at this stage.

If you create an estimate based on hours and present the client with a total cost , the client will interpret the total cost as a fixed price . That’s a problem because it likely wasn’t your intent to charge a fixed rate or commit to that exact cost, even if things take longer than expected.

The advantage of hourly rates is that the price isn’t final and can change if the work takes more time (or less time) than expected. If you work faster, you make less money. If you work slower, you make more money. That’s the theory, but not how things typically happen in practice.

Unless you can charge more if things take longer, then this isn’t an advantage at all.

If you think hourly rates are starting to sound strange, you’re right .

👉 Freelancers don’t want to work faster to make less money and clients don’t want to pay more for you to do the job slower.

This is the main reason most experienced freelancers will tell you not to charge hourly rates. Fixed pricing eliminates this strange incentive and sets clearer expectations with the client.

Wrapping It Up

Estimating the cost and timeline of a freelance project can feel confusing and intimidating at first, but with practice, it will get easier and feel more natural.

Remember, gather as much detailed information upfront as possible and do your best to estimate the total time or effort it will take you to do the work. Then, set a reasonable rate based on your experience, geographic location, and the value the project will provide to the client.

Finally, calculate the total cost + timeline and present the project to the client in the form of a proposal .

Give yourself permission to make adjustments over time. You’ll gain valuable insights every time you create an estimate and whenever a client accepts or rejects your proposal. These efforts are never a complete waste of time!

Last updated on June 18th, 2023

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• DOE G 413.3-20 Chg 1 (Admin Chg), Change Control Management Guide Dated Jul 29, 2011 Status Current

Consists of all costs specific to a project incurred prior to the start-up of facility operation. All research and development, operating, plant, and capital equipment costs specifically associated with a project.

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FERC Stands By Transmission Project Cost Recovery Assurance Plan

By Shayna Greene

The Federal Energy Regulatory Commission defended its decision to grant an incentive intended to assure utilities that they can recover all of their costs for a project if it’s abandoned or canceled.

The Industrial Energy Consumers of America—and other consumers of electric transmission and power services— challenged FERC’s approval of ITC Midwest LLC’s incentive request for the Iowa portion of the Midcontinent Independent System Operator electric transmission project.

The petitioners, in their March brief , argued the relevant FERC orders aren’t consistent with the commission’s obligation to protect customers from excessive rates and charges and should be vacated.

New transmission ...

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Biden's new student loan forgiveness plan would cost an extra $84 billion: report

Eliminating unpaid interest on student loans alone costs approximately $58 billion.

Much of the new plan is already covered under SAVE, but key new provisions raise the price tag considerably. ( iStock )

President Joe Biden's new student debt elimination proposal would bring relief for millions more Americans, but a Penn Wharton Budget Model (PWBM)  analysis  shows it could add another $84 billion to an already costly plan.

The Biden Administration  released a formal proposal  to provide student debt relief to over 30 million borrowers. The new plan also proposes to eliminate accrued interest for 23 million borrowers and automatically discharge debt for borrowers eligible for loan forgiveness under SAVE, closed school discharge or other forgiveness programs, even if not enrolled. Additionally, student debt for borrowers who entered repayment for 20 or more years would be discharged. The plan would also provide relief to borrowers who experience hardship in paying back their loans.

"These distinct forms of debt relief are designed for borrowers struggling with their loans – and that's a lot of people," Under Secretary of Education James Kvaal said. "There are 25 million borrowers whose interest is growing faster than they can pay it down. That fact alone shows how badly President Biden's student loan relief is needed."

PWBM said that the new plan would cost an extra $84.06 billion on top of the $475 billion price tag for the Saving on a Valuable Education (SAVE) Plan, bringing the total cost to around $559 billion for both plans. 

The biggest cost of the plan is waiving up to $20,000 for millions of borrowers whose balances have grown because of unpaid interest. That part of the plan is estimated to cost roughly $58 billion. The second-largest cost, $19 billion, stems from eliminating student debt for borrowers in repayment for 20 years or more (or 25 years with graduate student debt). 

Private student loan borrowers can't benefit from federal loan relief. But you could lower your monthly payments by refinancing to a lower interest rate. Visit Credible to speak with an expert and get your questions answered. 

BUY A HOME IN THESE STATES TO GET STUDENT LOAN DEBT RELIEF

Student loan cancellation keeps coming

More people are becoming eligible for student loan cancellation as they hit 10 years of payments. Since the launch of SAVE, nearly 8 million borrowers have received relief, including 4.5 million with a $0 monthly payment. Student loan forgiveness has reached millions even as the  Supreme Court blocked Biden's original debt forgiveness plan  last June.  

The latest round of cancellations targets $7.4 billion in student loans for 277,000 borrowers, the Department of Education said in a  statement . This brings the total debt forgiven over Biden's presidency to $153 billion.  

Biden's SAVE plan could lower borrowers' monthly payments to zero dollars, reduce monthly costs in half and save those who make payments at least $1,000 yearly. Yet roughly three out of four borrowers who make $75,000 or less annually, and would benefit from the SAVE plan, still need to be enrolled, according to a recent Student Debt Crisis Center (SDCC)  survey .

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Biden student loan forgiveness plan faces legal challenge

Republican-led states  filed suit  against President Joe Biden and the U.S. Department of Education to stop the SAVE Plan. A total of 18 states have joined one of two lawsuits challenging the plan.

The lawsuits seek to halt the SAVE plan immediately, arguing that the U.S. Department of Education has no authority to alter student loan repayment plans. This would cancel more than $156 billion in student loan debt .  

The lawsuit also argues that the U.S. Supreme Court determined that Biden's original forgiveness program violated federal law and that only Congress can authorize the forgiveness of student loans involving taxpayer money. 

A  statement from the Education Department  said Congress gave the agency the authority to define the terms of income-driven repayment plans.

If you hold private student loans, you won't be enrolled in a federal income-driven repayment plan, but you could refinance your loans to a lower rate. Visit Credible to compare options from different lenders without affecting your credit score.

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US's largest public utility ignores warnings in moving forward with new natural gas plant

Travis Loller

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Copyright 2024 The Associated Press. All rights reserved

President and CEO of the Tennessee Valley Authority Jeff Lyash listens during a board of directors meeting, Wednesday, May 8, 2024, in Nashville, Tenn. (AP Photo/George Walker IV)

NASHVILLE, Tenn. – The nation’s largest public utility is moving ahead with a plan for a new natural gas plant in Tennessee despite warnings that its environmental review of the project doesn't comply with federal law. The Tennessee Valley Authority announced in April that it would replace the aging coal-burning Kingston Fossil Plant with gas amid growing calls for the agency's new board of directors to invest in renewables.

The board, with six of nine members appointed by President Biden , is expected to meet on Thursday in Nashville, a day after a planned protest by a coalition of environmental groups demanding the utility stop investing in fossil fuels.

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Decommissioning the Kingston plant, the site of a massive 2008 coal ash spill , is part of TVA's overall plan to reduce its reliance on coal. In analyzing alternatives to replace the plant, the utility considered either a new 1,500-megawatt gas plant or 1,500 megawatts of solar combined with 2,200 megawatts of battery storage. TVA concluded that a 2027 deadline for retiring the current plant does not give it enough time to develop the renewables alternative.

The Environmental Protection Agency asked the utility in a March 25 letter to redo several aspects of its analysis, citing “numerous” concerns with the plan to install new gas turbines . Among other things, the EPA accused the utility of defining the Kingston project so narrowly that only its predetermined choice of a new gas plant would meet the parameters, making the evaluation process a “foreordained formality.” EPA said the utility did not adequately explain the need for the 2027 closure or look at possible alternatives.

The EPA said the environmental review does not meet the requirements of the National Environmental Policy Act, which requires federal agencies like the Tennessee Valley Authority to assess the environmental impact of proposed actions before making a decision.

TVA declined to follow the Environmental Protection Agency's suggestion for a do-over. It decided in April to forge ahead with gas — continuing to follow a plan of action that the EPA says fails to consider recent changes in the energy sector, including falling prices for renewables, billions of federal dollars for clean energy projects, and ever stricter environmental regulations . The corporation remains off track to meet the Biden administration's goal of eliminating carbon pollution from power plants by 2035 to try to limit the effects of climate change .

The utility said in a statement that “we met with EPA following the letter and addressed their concerns.” EPA, meanwhile, maintained in an email to The Associated Press that its request that TVA revise its environmental impact statement still stands.

Dennis Wamsted, an energy analyst at the Institute for Energy Economics and Financial Analysis, said even with TVA's 2027 deadline, “They could build twice the amount of solar that they say they need and twice the amount of battery storage they say they need.”

Other utilities are taking advantage of price drops, technical improvements and government incentives to build out solar, including in Texas and Florida.

By 2030, Florida Power and Light expects solar to account for close to 40% of its generation, Wamsted said.

“This is a big utility with, you know, the same daily responsibilities as TVA,” he said. “And they are building out solar as fast as they can.”

TVA provides power to 10 million people across seven Southern states. Florida Power and Light serves over 12 million people in that state.

Even if solar doesn't produce power 24 hours per day, the amount of energy it does produce is knowable and can be planned for, Wamsted said. It can also be paired with batteries that store excess energy during the day to release back to the grid at night. That is already happening on a large scale in California where batteries are providing more than 20% of the power in the system on many evenings, he said.

In Wamsted's view, many utilities resist the transition to renewables primarily because they are unfamiliar.

He points to an area called the Southwest Power Pool that runs from Oklahoma to Canada and now sees days where 60% or 70% of the system is wind-powered. In the late 2000s, he spoke to grid operators there who were afraid to go above 5% or 10% because they had never done it before, he said.

TVA's Kingston project is not its first clash with the EPA over gas. The environmental regulator made many of the same criticisms a year ago when the utility decided to build a new 1,450-megawatt natural gas plant at its coal-burning Cumberland Fossil Plant . The Sierra Club and other groups are suing over that decision as well as an earlier one to install gas turbines at a retired coal plant in New Johnsonville. Both lawsuits claim that TVA's environmental reviews are perfunctory, in violation of the law — similar to the EPA's criticism of the Kingston plant.

Democratic Sen. Ed Markey, of Massachusetts, a frequent TVA critic, said in a statement to The Associated Press that the corporation should listen to the EPA.

“The National Environmental Policy Act isn’t optional — it’s the bedrock of our environmental protection and community engagement laws,” he said.

Although TVA has not embraced renewables, the utility still says a majority of its energy is carbon-free because 42% comes from nuclear and another 9% is from hydropower. Purchased wind and solar make up another 4% of its energy portfolio. The utility currently produces 1 megawatt of its own solar and has 20 megawatts of battery storage. The Kingston project includes another 3-4 megawatts of solar and 100 megawatts of battery storage. TVA estimates that the new gas plant will produce 1.68 million tons (1.52 million metric tons) of greenhouse gases a year, noting that that is a steep decline from Kingston's current emissions.

Nationally, coal provided about 16% of U.S. electricity last year, down from about 45% in 2010. Natural gas provides about 43% of U.S. electricity, with the remainder from nuclear energy and renewables such as wind, solar and hydropower.

The Tennessee Valley Authority has said it intends to build 10,000 megawatts of solar by 2035. Wamsted contends that is too far in the future.

“It should be, ‘We’re going to build as much solar as we possibly can now,’ because it’s now that we really need to worry about,” he said. “We don’t need to worry about 10 years from now or 15 years from now.”

Associated Press writer Jonathan Mattise contributed to this report.

Copyright 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.

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A Plan to Remake the Middle East

While talks for a cease-fire between israel and hamas continue, another set of negotiations is happening behind the scenes..

This transcript was created using speech recognition software. While it has been reviewed by human transcribers, it may contain errors. Please review the episode audio before quoting from this transcript and email [email protected] with any questions.

From New York Times, I’m Michael Barbaro. This is The Daily.

[MUSIC CONTINUES]

Today, if and when Israel and Hamas reach a deal for a ceasefire fire, the United States will immediately turn to a different set of negotiations over a grand diplomatic bargain that it believes could rebuild Gaza and remake the Middle East. My colleague Michael Crowley has been reporting on that plan and explains why those involved in it believe they have so little time left to get it done.

It’s Wednesday, May 8.

Michael, I want to start with what feels like a pretty dizzying set of developments in this conflict over the past few days. Just walk us through them?

Well, over the weekend, there was an intense round of negotiations in an effort, backed by the United States, to reach a ceasefire in the Gaza war.

The latest ceasefire proposal would reportedly see as many as 33 Israeli hostages released in exchange for potentially hundreds of Palestinian prisoners.

US officials were very eager to get this deal.

Pressure for a ceasefire has been building ahead of a threatened Israeli assault on Rafah.

Because Israel has been threatening a military offensive in the Southern Palestinian city of Rafah, where a huge number of people are crowded.

Fleeing the violence to the North. And now they’re packed into Rafah. Exposed and vulnerable, they need to be protected.

And the US says it would be a humanitarian catastrophe on top of the emergency that’s already underway.

Breaking news this hour — very important breaking news. An official Hamas source has told The BBC that it does accept a proposal for a ceasefire deal in Gaza.

And for a few hours on Monday, it looked like there might have been a major breakthrough when Hamas put out a statement saying that it had accepted a negotiating proposal.

Israeli Prime Minister Benjamin Netanyahu says the ceasefire proposal does not meet his country’s requirements. But Netanyahu says he will send a delegation of mediators to continue those talks. Now, the terms —

But those hopes were dashed pretty quickly when the Israelis took a look at what Hamas was saying and said that it was not a proposal that they had agreed to. It had been modified.

And overnight —

Israeli troops stormed into Rafah. Video showing tanks crashing over a sign at the entrance of the city.

— the Israelis launched a partial invasion of Rafah.

It says Hamas used the area to launch a deadly attack on Israeli troops over the weekend.

And they have now secured a border crossing at the Southern end of Gaza and are conducting targeted strikes. This is not yet the full scale invasion that President Biden has adamantly warned Israel against undertaking, but it is an escalation by Israel.

So while all that drama might suggest that these talks are in big trouble, these talks are very much still alive and ongoing and there is still a possibility of a ceasefire deal.

And the reason that’s so important is not just to stop the fighting in Gaza and relieve the suffering there, but a ceasefire also opens the door to a grand diplomatic bargain, one that involves Israel and its Arab neighbors and the Palestinians, and would have very far-reaching implications.

And what is that grand bargain. Describe what you’re talking about?

Well, it’s incredibly ambitious. It would reshape Israel’s relationship with its Arab neighbors, principally Saudi Arabia. But it’s important to understand that this is a vision that has actually been around since well before October 7. This was a diplomatic project that President Biden had been investing in and negotiating actually in a very real and tangible way long before the Hamas attacks and the Gaza war.

And President Biden was looking to build on something that President Trump had done, which was a series of agreements that the Trump administration struck in which Israel and some of its Arab neighbors agreed to have normal diplomatic relations for the first time.

Right, they’re called the Abraham Accords.

That’s right. And, you know, Biden doesn’t like a lot of things, most things that Trump did. But he actually likes this, because the idea is that they contribute to stability and economic integration in the Middle East, the US likes Israel having friends and likes having a tight-knit alliance against Iran.

President Biden agrees with the Saudis and with the Israelis, that Iran is really the top threat to everybody here. So, how can you build on this? How can you expand it? Well, the next and biggest step would be normalizing relations between Israel and Saudi Arabia.

And the Saudis have made clear that they want to do this and that they’re ready to do this. They weren’t ready to do it in the Trump years. But Mohammed bin Salman, the Crown Prince of Saudi Arabia, has made clear he wants to do it now.

So this kind of triangular deal began to take shape before October 7, in which the US, Israel, and Saudi Arabia would enter this three way agreement in which everyone would get something that they wanted.

And just walk through what each side gets in this pre-October 7th version of these negotiations?

So for Israel, you get normalized ties with its most important Arab neighbor and really the country that sets the tone for the whole Muslim world, which is Saudi Arabia of course. It makes Israel feel safer and more secure. Again, it helps to build this alliance against Iran, which Israel considers its greatest threat, and it comes with benefits like economic ties and travel and tourism. And Prime Minister Benjamin Netanyahu has been very open, at least before October 7th, that this was his highest diplomatic and foreign policy priority.

For the Saudis, the rationale is similar when it comes to Israel. They think that it will bring stability. They like having a more explicitly close ally against Iran. There are economic and cultural benefits. Saudi Arabia is opening itself up in general, encouraging more tourism.

But I think that what’s most important to the Crown Prince, Mohammed bin Salman, is what he can get from the United States. And what he has been asking for are a couple of essential things. One is a security agreement whose details have always been a little bit vague, but I think essentially come down to reliable arms supplies from the United States that are not going to be cut off or paused on a whim, as he felt happened when President Biden stopped arms deliveries in 2021 because of how Saudi was conducting its war in Yemen. The Saudis were furious about that.

Saudi Arabia also wants to start a domestic nuclear power program. They are planning for a very long-term future, possibly a post-oil future. And they need help getting a nuclear program off the ground.

And they want that from the US?

And they want that from the US.

Now, those are big asks from the us. But from the perspective of President Biden, there are some really enticing things about this possible agreement. One is that it will hopefully produce more stability in the region. Again, the US likes having a tight-knit alliance against Iran.

The US also wants to have a strong relationship with Saudi Arabia. You know, despite the anger at Mohammed bin Salman over the murder of the Saudi dissident Jamal Khashoggi, the Biden administration recognizes that given the Saudis control over global oil production and their strategic importance in the Middle East, they need to have a good relationship with them. And the administration has been worried about the influence of China in the region and with the Saudis in particular.

So this is an opportunity for the US to draw the Saudis closer. Whatever our moral qualms might be about bin Salman and the Saudi government, this is an opportunity to bring the Saudis closer, which is something the Biden administration sees as a strategic benefit.

All three of these countries — big, disparate countries that normally don’t see eye-to-eye, this was a win-win-win on a military, economic, and strategic front.

That’s right. But there was one important actor in the region that did not see itself as winning, and that was the Palestinians.

[MUSIC PLAYING]

First, it’s important to understand that the Palestinians have always expected that the Arab countries in the Middle East would insist that Israel recognize a Palestinian state before those countries were willing to essentially make total peace and have normal relations with Israel.

So when the Abraham Accords happened in the Trump administration, the Palestinians felt like they’d been thrown under the bus because the Abraham Accords gave them virtually nothing. But the Palestinians did still hold out hope that Saudi Arabia would be their savior. And for years, Saudi Arabia has said that Israel must give the Palestinians a state if there’s going to be a normal relationship between Israel and Saudi Arabia.

Now the Palestinians see the Saudis in discussions with the US and Israel about a normalization agreement, and there appears to be very little on offer for the Palestinians. And they are feeling like they’re going to be left out in the cold here.

Right. And in the minds of the Palestinians, having already been essentially sold out by all their other Arab neighbors, the prospect that Saudi Arabia, of all countries, the most important Muslim Arab country in the region, would sell them out, had to be extremely painful.

It was a nightmare scenario for them. And in the minds of many analysts and US officials, this was a factor, one of many, in Hamas’s decision to stage the October 7th attacks.

Hamas, like other Palestinian leaders, was seeing the prospect that the Middle East was moving on and essentially, in their view, giving up on the Palestinian cause, and that Israel would be able to have friendly, normal relations with Arab countries around the region, and that it could continue with hardline policies toward the Palestinians and a refusal, as Prime Minister Benjamin Netanyahu has said publicly, to accept a Palestinian state.

Right. So Michael, once Hamas carries out the October 7th attacks in an effort to destroy a status quo that it thinks is leaving them less and less relevant, more and more hopeless, including potentially this prospect that Saudi Arabia is going to normalize relations with Israel, what happens to these pre-October 7th negotiations between the US, Saudi Arabia, and Israel?

Well, I think there was a snap assumption that these talks were dead and buried. That they couldn’t possibly survive a cataclysm like this.

But then something surprising happened. It became clear that all the parties were still determined to pull-off the normalization.

And most surprisingly of all, perhaps, was the continued eagerness of Saudi Arabia, which publicly was professing outrage over the Israeli response to the Hamas attacks, but privately was still very much engaged in these conversations and trying to move them forward.

And in fact, what has happened is that the scope of this effort has grown substantially. October 7th didn’t kill these talks. It actually made them bigger, more complicated, and some people would argue, more important than ever.

We’ll be right back.

Michael, walk us through what exactly happens to these three-way negotiations after October 7th that ends up making them, as you just said, more complicated and more important than ever?

Well, it’s more important than ever because of the incredible need in Gaza. And it’s going to take a deal like this and the approval of Saudi Arabia to unlock the kind of massive reconstruction project required to essentially rebuild Gaza from the rubble. Saudi Arabia and its Arab friends are also going to be instrumental in figuring out how Gaza is governed, and they might even provide troops to help secure it. None of those things are going to happen without a deal like this.

Fascinating.

But this is all much more complicated now because the price for a deal like this has gone up.

And by price, you mean?

What Israel would have to give up. [MUSIC PLAYING]

From Saudi Arabia’s perspective, you have an Arab population that is furious at Israel. It now feels like a really hard time to do a normalization deal with the Israelis. It was never going to be easy, but this is about as bad a time to do it as there has been in a generation at least. And I think that President Biden and the people around him understand that the status quo between Israel and the Palestinians is intolerable and it is going to lead to chaos and violence indefinitely.

So now you have two of the three parties to this agreement, the Saudis and the Americans, basically asking a new price after October 7th, and saying to the Israelis, if we’re going to do this deal, it has to not only do something for the Palestinians, it has to do something really big. You have to commit to the creation of a Palestinian state. Now, I’ll be specific and say that what you hear the Secretary of State, Antony Blinken, say is that the agreement has to include an irreversible time-bound path to a Palestinian state.

We don’t know exactly what that looks like, but it’s some kind of a firm commitment, the likes of which the world and certainly the Israelis have not made before.

Something that was very much not present in the pre-October 7th vision of this negotiation. So much so that, as we just talked about, the Palestinians were left feeling completely out in the cold and furious at it.

That’s right. There was no sign that people were thinking that ambitiously about the Palestinians in this deal before October 7th. And the Palestinians certainly felt like they weren’t going to get much out of it. And that has completely changed now.

So, Michael, once this big new dimension after October 7th, which is the insistence by Saudi Arabia and the US that there be a Palestinian state or a path to a Palestinian state, what is the reaction specifically from Israel, which is, of course, the third major party to this entire conversation?

Well, Israel, or at least its political leadership, hates it. You know, this is just an extremely tough sell in Israel. It would have been a tough sell before October 7th. It’s even harder now.

Prime Minister Benjamin Netanyahu is completely unrepentantly open in saying that there’s not going to be a Palestinian state on his watch. He won’t accept it. He says that it’s a strategic risk to his country. He says that it would, in effect, reward Hamas.

His argument is that terrorism has forced a conversation about statehood onto the table that wasn’t there before October 7th. Sure, it’s always in the background. It’s a perennial issue in global affairs, but it was not something certainly that the US and Israel’s Arab neighbors were actively pushing. Netanyahu also has — you know, he governs with the support of very right-wing members of a political coalition that he has cobbled together. And that coalition is quite likely to fall apart if he does embrace a Palestinian state or a path to a Palestinian state.

Now, he might be able to cobble together some sort of alternative, but it creates a political crisis for him.

And finally, you know, I think in any conversation about Israel, it’s worth bearing in mind something you hear from senior US officials these days, which is that although there is often finger pointing at Netanyahu and a desire to blame Netanyahu as this obstructionist who won’t agree to deals, what they say is Netanyahu is largely reflecting his population and the political establishment of his country, not just the right-wingers in his coalition who are clearly extremist.

But actually the prevailing views of the Israeli public. And the Israeli public and their political leaders across the spectrum right now with few exceptions, are not interested in talking about a Palestinian state when there are still dozens and dozens of Israeli hostages in tunnels beneath Gaza.

So it very much looks like this giant agreement that once seemed doable before October 7th might be more important to everyone involved than ever, given that it’s a plan for rebuilding Gaza and potentially preventing future October 7th’s from happening, but because of this higher price that Israel would have to pay, which is the acceptance of a Palestinian state, it seems from everything you’re saying, that this is more and more out of reach than ever before and hard to imagine happening in the immediate future. So if the people negotiating it are being honest, Michael, are they ready to acknowledge that it doesn’t look like this is going to happen?

Well, not quite yet. As time goes by, they certainly say it’s getting harder and harder, but they’re still trying, and they still think there’s a chance. But both the Saudis and the Biden administration understand that there’s very little time left to do this.

Well, what do you mean there’s very little time left? It would seem like time might benefit this negotiation in that it might give Israel distance from October 7th to think potentially differently about a Palestinian state?

Potentially. But Saudi Arabia wants to get this deal done in the Biden administration because Mohammed bin Salman has concluded this has to be done under a Democratic president.

Because Democrats in Congress are going to be very reluctant to approve a security agreement between the United States and Saudi Arabia.

It’s important to understand that if there is a security agreement, that’s something Congress is going to have to approve. And you’re just not going to get enough Democrats in Congress to support a deal with Saudi Arabia, who a lot of Democrats don’t like to begin with, because they see them as human rights abusers.

But if a Democratic president is asking them to do it, they’re much more likely to go along.

Right. So Saudi Arabia fears that if Biden loses and Trump is president, that those same Democrats would balk at this deal in a way that they wouldn’t if it were being negotiated under President Biden?

Exactly. Now, from President Biden’s perspective, politically, think about a president who’s running for re-election, who is presiding right now over chaos in the Middle East, who doesn’t seem to have good answers for the Israeli-Palestinian question, this is an opportunity for President Biden to deliver what could be at least what he would present as a diplomatic masterstroke that does multiple things at once, including creating a new pathway for Israel and the Palestinians to coexist, to break through the logjam, even as he is also improving Israel’s relations with Saudi Arabia.

So Biden and the Crown Prince hope that they can somehow persuade Bibi Netanyahu that in spite of all the reasons that he thinks this is a terrible idea, that this is a bet worth taking on Israel’s and the region’s long-term security and future?

That’s right. Now, no one has explained very clearly exactly how this is going to work, and it’s probably going to require artful diplomacy, possibly even a scenario where the Israelis would agree to something that maybe means one thing to them and means something else to other people. But Biden officials refuse to say that it’s hopeless and they refuse to essentially take Netanyahu’s preliminary no’s for an answer. And they still see some way that they can thread this incredibly narrow needle.

Michael, I’m curious about a constituency that we haven’t been talking about because they’re not at the table in these discussions that we are talking about here. And that would be Hamas. How does Hamas feel about the prospect of such a deal like this ever taking shape. Do they see it as any kind of a victory and vindication for what they did on October 7th?

So it’s hard to know exactly what Hamas’s leadership is thinking. I think they can feel two things. I think they can feel on the one hand, that they have established themselves as the champions of the Palestinian people who struck a blow against Israel and against a diplomatic process that was potentially going to leave the Palestinians out in the cold.

At the same time, Hamas has no interest in the kind of two-state solution that the US is trying to promote. They think Israel should be destroyed. They think the Palestinian state should cover the entire geography of what is now Israel, and they want to lead a state like that. And that’s not something that the US, Saudi Arabia, or anyone else is going to tolerate.

So what Hamas wants is to fight, to be the leader of the Palestinian people, and to destroy Israel. And they’re not interested in any sort of a peace process or statehood process.

It seems very clear from everything you’ve said here that neither Israel nor Hamas is ready to have the conversation about a grand bargain diplomatic program. And I wonder if that inevitably has any bearing on the ceasefire negotiations that are going on right now between the two of them that are supposed to bring this conflict to some sort of an end, even if it’s just temporary?

Because if, as you said, Michael, a ceasefire opens the door to this larger diplomatic solution, and these two players don’t necessarily want that larger diplomatic solution, doesn’t that inevitably impact their enthusiasm for even reaching a ceasefire?

Well, it certainly doesn’t help. You know, this is such a hellish problem. And of course, you first have the question of whether Israel and Hamas can make a deal on these immediate issues, including the hostages, Palestinian prisoners, and what the Israeli military is going to do, how long a ceasefire might last.

But on top of that, you have these much bigger diplomatic questions that are looming over them. And it’s not clear that either side is ready to turn and face those bigger questions.

So while for the Biden administration and for Saudi Arabia, this is a way out of this crisis, these larger diplomatic solutions, it’s not clear that it’s a conversation that the two parties that are actually at war here are prepared to start having.

Well, Michael, thank you very much. We appreciate it.

On Tuesday afternoon, under intense pressure from the US, delegations from Israel and Hamas arrived in Cairo to resume negotiations over a potential ceasefire. But in a statement, Israel’s Prime Minister Benjamin Netanyahu made clear that even with the talks underway, his government would, quote, “continue to wage war against Hamas.”

Here’s what else you need to know today. In a dramatic day of testimony, Stormy Daniels offered explicit details about an alleged sexual encounter with Donald Trump that ultimately led to the hush money payment at the center of his trial. Daniels testified that Trump answered the door in pajamas, that he told her not to worry that he was married, and that he did not use a condom when they had sex.

That prompted lawyers for Trump to seek a mistrial based on what they called prejudicial testimony. But the judge in the case rejected that request. And,

We’ve seen a ferocious surge of anti-Semitism in America and around the world.

In a speech on Tuesday honoring victims of the Holocaust, President Biden condemned what he said was the alarming rise of anti-Semitism in the United States after the October 7th attacks on Israel. And he expressed worry that too many Americans were already forgetting the horrors of that attack.

The Jewish community, I want you to know I see your fear, your hurt, and your pain. Let me reassure you, as your president, you’re not alone. You belong. You always have and you always will.

Today’s episode was produced by Nina Feldman, Clare Toeniskoetter, and Rikki Novetsky. It was edited by Liz O. Baylen, contains original music by Marion Lozano, Elisheba Ittoop, and Dan Powell, and was engineered by Alyssa Moxley. Our theme music is by Jim Brunberg and Ben Landsverk of Wonderly.

That’s it for The Daily. I’m Michael Barbaro. See you tomorrow.

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• May 8, 2024   •   28:28 A Plan to Remake the Middle East
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• May 6, 2024   •   29:23 R.F.K. Jr.’s Battle to Get on the Ballot
• May 3, 2024   •   25:33 The Protesters and the President
• May 2, 2024   •   29:13 Biden Loosens Up on Weed
• May 1, 2024   •   35:16 The New Abortion Fight Before the Supreme Court
• April 30, 2024   •   27:40 The Secret Push That Could Ban TikTok
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• April 26, 2024   •   21:50 Harvey Weinstein Conviction Thrown Out
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Hosted by Michael Barbaro

Featuring Michael Crowley

Produced by Nina Feldman ,  Clare Toeniskoetter and Rikki Novetsky

Edited by Liz O. Baylen

Original music by Marion Lozano ,  Elisheba Ittoop and Dan Powell

Engineered by Alyssa Moxley

Listen and follow The Daily Apple Podcasts | Spotify | Amazon Music | YouTube

If and when Israel and Hamas reach a deal for a cease-fire, the United States will immediately turn to a different set of negotiations over a grand diplomatic bargain that it believes could rebuild Gaza and remake the Middle East.

Michael Crowley, who covers the State Department and U.S. foreign policy for The Times, explains why those involved in this plan believe they have so little time left to get it done.

On today’s episode

Michael Crowley , a reporter covering the State Department and U.S. foreign policy for The New York Times.

Background reading :

Talks on a cease-fire in the Gaza war are once again at an uncertain stage .

Here’s how the push for a deal between Israel and Saudi Arabia looked before Oct. 7 .

From early in the war, President Biden has said that a lasting resolution requires a “real” Palestinian state .

Here’s what Israeli officials are discussing about postwar Gaza.

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The Daily is made by Rachel Quester, Lynsea Garrison, Clare Toeniskoetter, Paige Cowett, Michael Simon Johnson, Brad Fisher, Chris Wood, Jessica Cheung, Stella Tan, Alexandra Leigh Young, Lisa Chow, Eric Krupke, Marc Georges, Luke Vander Ploeg, M.J. Davis Lin, Dan Powell, Sydney Harper, Mike Benoist, Liz O. Baylen, Asthaa Chaturvedi, Rachelle Bonja, Diana Nguyen, Marion Lozano, Corey Schreppel, Rob Szypko, Elisheba Ittoop, Mooj Zadie, Patricia Willens, Rowan Niemisto, Jody Becker, Rikki Novetsky, John Ketchum, Nina Feldman, Will Reid, Carlos Prieto, Ben Calhoun, Susan Lee, Lexie Diao, Mary Wilson, Alex Stern, Dan Farrell, Sophia Lanman, Shannon Lin, Diane Wong, Devon Taylor, Alyssa Moxley, Summer Thomad, Olivia Natt, Daniel Ramirez and Brendan Klinkenberg.

Our theme music is by Jim Brunberg and Ben Landsverk of Wonderly. Special thanks to Sam Dolnick, Paula Szuchman, Lisa Tobin, Larissa Anderson, Julia Simon, Sofia Milan, Mahima Chablani, Elizabeth Davis-Moorer, Jeffrey Miranda, Renan Borelli, Maddy Masiello, Isabella Anderson and Nina Lassam.

Michael Crowley covers the State Department and U.S. foreign policy for The Times. He has reported from nearly three dozen countries and often travels with the secretary of state. More about Michael Crowley

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