Project Chapter 5

1. What is project cost estimation?
Cost estimating, by definition, is the practice of predicting the final total cost of a project that
has an outlined project cost estimation. It is the fundamental part of project cost management
(a discipline used by project managers since 1950 to manage costs). Cost estimation validates
the project budget and enables the monitoring and controlling of project costs when the
project is in progress. The approximate project cost is then being referred to as a cost estimate
or a planned price. It includes all project expenses and is fairly difficult to forecast, since the
project scope is an ever-changing phenomenon. Oftentimes, project cost estimation is much
like looking into a crystal ball.
2. Why project cost estimation is important
There are many reasons why cost estimation is an indispensable part of project management. A
cost estimate reflects if the project is financially viable. First things first, an accurate cost
estimate is essential for deciding if the project is feasible or not for the company at the
moment. In this light, a cost estimate answers if the project can be completed with available
resources in the given time period and still bring value to the organization.
Cost estimation helps to stay on schedule and on track. At the end of the day, sound project
estimates are important to ensure that actual effort, once the project is in progress, matches
the estimated targets that were set at the beginning of the project to the greatest possible
extent. Thus, estimates are one of the foundational pillars for safeguarding client expectations
and your company’s bottom line.
It's essential to note that it doesn't matter whether you're using PMI, PRINCE2 or something
else for project control or Scrum, Waterfall, etc. for project execution. The estimates of the
work to be performed will always be the foundation for your project. Unless you of course have
a client with an unlimited supply of cash and in that case you're probably the luckiest (and only)
supplier in the world.
3. Factors involved in project cost estimation

It won’t hurt to repeat that cost estimation should cover each small element required for the
project - labor, material, training, you name it. And since it’s difficult to account for all, initial
cost estimates can rarely be called credible and reliable. They are typically revisited and
modified when the project’s scope becomes more explicit.
In all cases, ensuring that you have priced your project correctly requires that you have
estimates you are fairly certain will hold water. When the client has accepted the project and it
starts going over time and budget it can quickly turn your client and other stakeholders
extremely sour. So, let's try to avoid this as best we can. When calculating your project’s cost,
you might benefit from distinguishing between direct and indirect costs, as eventually your
project price will have to factor in both.
Direct & indirect costs

Direct costs are expenses closely related to your project. They will include labor needed to
complete the project together with software, equipment and raw materials, depending on the
industry you’re in. While the labor (your employee’s salaries) is less fluctuating, the prices on
equipment will most likely vary.
In turn, indirect costs, also known as ‘overhead’ and ‘administrative’ entail the spending on
supplies that fuel your company’s day-to-day operations as a whole, not appointed to the
delivery of a particular project or service. Office equipment, rent, and utilities can all be
considered indirect costs. Just like direct, indirect costs can be either fixed or variable.
Both types of costs are important and should be considered when estimating a project.
Assuming that you’re in a company that provides professional services, the typical cost
categories include, but are not limited to human resources, travelling spending, training fees,
material resources, research expenses, contingency reserves, etc.
4. Types of Project Cost

Project Management Workflow, Dan Epstein and Rich Maltzman describe the different kinds of
costs that make up the whole cost of a project. The 5 costs they cover are:
Direct cost
Indirect cost
Fixed cost
Variable cost
Sunk cost
Let's look at each of these in turn.
Direct cost
Direct costs are those directly linked to doing the work of the project. For example, this could
include hiring specialized contractors, buying software licenses or commissioning your new
building.
Indirect cost
These costs are not specifically linked to your project but are the cost of doing business overall.
Examples are heating, lighting, office space rental (unless your project gets its own offices hired
specially), stocking the communal coffee machine and so on.
Fixed cost
Fixed costs are everything that is a one-off charge. These fees are not linked to how long your
project goes on for. So if you need to pay for one-time advertising to secure a specialist
software engineer, or you are paying for a day of Agile consultancy to help you start the project
up the best way, those are fixed costs.
Variable cost
These are the opposite of fixed costs - charges that change with the length of your project. It's
more expensive to pay staff salaries over a 12-month project than a 6 month one. Machine hire
over 8 weeks is more than for 3 weeks. You get the picture.
Sunk cost
These are costs that have already been incurred. They could be made up of any of the types of
cost above but the point is that they have happened. The money has gone. These costs are
often forgotten in business cases, but they are essential to know about. Having said that,
stop/continue decisions are often (wrongly) based on sunk costs. If you have spent £1m,
spending another £200k to deliver something that the company doesn't want is just wasting
another £200k. Epstein and Maltzman write:
"Sunk cost is a loss which should not play any part in determining the future of the project."
Unfortunately, project sponsors and other senior executives (and even project managers) often
value completion over usefulness and it does take courage to suggest to your sponsor that you
stop a project that has already seen significant investment.
5. Types of cost estimates
Types of Cost Estimates
The following are different types of cost estimation,
a) Preliminary Cost Estimate

The preliminary cost estimate is also known as an approximate cost estimate, abstract cost
estimate, or budget estimate. It is generally prepared in the preliminary phase of project
planning to know the approximate cost of the project.
By this estimate, the project authority can judge the financial position and policy for the
administration section. The preliminary cost of the project is calculated from the cost of similar
type projects practically. In this estimate, the cost of an important item of work is calculated
individually to know the necessity and utility of each item of work. In this estimate important
item of work includes the cost of lands, cost of roads, electrification, water supply costs, cost of
each building, etc.
b) Plinth Area Cost Estimate

The plinth area estimate is prepared by considering the cost per plinth area of a similar type of
construction in the locality. It is an area covered by external dimensions of the building at the
floor level and plinth area rate of the building which is the cost of a similar building with
specifications in that locality. The plinth area estimate of the proposed building is prepared by
multiplying the plinth area of the building with the plinth area rate. For example, if the plinth
area of the proposed building is about 100 sq. in a particular locality and the plinth area rate of
a building in the same locality is 2000 per sq. then, the cost of the building by plinth area
estimate is 100 X 2000 = 200000. The open areas, courtyards, etc. are should not be included in
the plinth area. For multi-storied construction cost of each floor must be calculated separately.
c) Cube Rate Cost Estimate

The cubical content of the building is obtained by multiplying the plinth area with the height of
the building. The height of the building is considered from floor level to the top of the roof
level. This method is more appropriate for high-rise buildings. The cube rate cost estimate
method is more accurate than the plinth area estimate. The cubical rate of construction is
obtained by dividing the total construction cost by its cubical content. The cost of the proposed
project is calculated by multiplying the cubic rate of similar types of buildings situated in that
location with a cubic content of future work.
Suppose, the cubic rate in an area is Rs. 5000 / m3 and the area of the proposed construction is
1000m3 Approximate cost of construction = 5000 x 1000 = Rs. 50, 00,000
d) Approximate Quantity Method Cost Estimate

In this method of the estimate, Total length of the wall of the whole construction is calculated
and this length is multiplied by the rate per running meter which gives the cost of the building.
For foundation and superstructure rate per running, the meter is calculated separately. For cost
estimation of foundation rate per running, the meter is calculated by considering quantities
such as excavation cost, brickwork cost up to plinth. The superstructure quantities like,
brickwork for the wall, woodworks, floor finishing, etc. are considered for deciding the rate per
running meter.
e) Detailed Cost Estimate

A detailed estimate is prepared after approval of a preliminary estimate competent
administrative authority. In this estimate, each item of work is measured accurately and the
cost is calculated separately. It is the most accurate estimate among the other method of
estimation. The cost of an item of work is calculated from current market rates and the total
estimated cost is calculated. For miscellaneous expenditure, the contingencies amount of 3 to 5
% of the estimated cost is added to the total estimated cost. A detailed estimate is a major
estimate required to get final financial sanction from the competent authority. The detailed
estimate should include the following details and documents.
General Specifications
Detailed Specifications
Drawings/plans – layout plans, elevation, sectional views, detailed drawings, etc.
Designs and calculations – In the case of buildings design of foundations, beams, slab, etc.
f) Revised Cost Estimate

The revised estimate is prepared when the original sanctioned cost of the project is exceeded
by 5% or more. Its detailed estimate but improper estimating or underestimated cost of the
project, it needs to be revised. The reason behind preparing a revised estimate may sudden
increase in the cost of materials, cost of transportation, etc. the major reason behind the
preparation of this estimate should be mentioned on the last page of the revised estimate.
g) Supplementary Cost Estimate
The supplementary cost estimate is a supplement to a detailed estimate and it is prepared
freshly when there is a requirement of additional works during the progress of the original
work. After approval of the supplementary estimate, the total estimated cost should include a
detailed estimate cost as well as the cost of supplementary work for which sanction is required.
h) Annual Repair Cost Estimate

The annual repair cost estimate is known as the annual maintenance estimate which is
prepared to know the costs of maintenance of building which will keep the structure in a safe
condition. It includes the cost of whitewashing, painting, minor repairs, etc. are considered
while preparing an annual repair estimate for a building.

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1. What is project cost estimation?

3. Factors involved in project cost estimation

Direct & indirect costs

4. Types of Project Cost

a) Preliminary Cost Estimate

b) Plinth Area Cost Estimate

c) Cube Rate Cost Estimate

d) Approximate Quantity Method Cost Estimate

e) Detailed Cost Estimate

f) Revised Cost Estimate

h) Annual Repair Cost Estimate

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