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Estimating project costs to near accuracy is a tricky and stressful job. If you get it right, you complete a project successfully within the set time and budget. But if you get it wrong, you could find yourself seeking additional funding, reducing the project’s scope, and convincing stakeholders and customers to spend extra money or time.
An effective cost estimation predicts the resources — time, money, and people — needed to complete a project within the defined scope to ensure that the project is viable for a business. Unfortunately, most businesses fail to estimate the cost of their projects accurately. According to a PMI study, 28 percent of all projects are derailed because of inaccurate cost estimates.
Why Does Project Forecasting Go Wrong?
Several moving parts contribute to project cost estimation errors. It’s a factor of direct and indirect costs and unforeseen circumstances. Direct costs include employee salaries; cost of specific materials, supplies, and equipment required for the project; travel and meal expenses; subcontractors that provide additional support; and money spent to address any project-specific risks. Indirect costs are common costs and overheads, such as employee benefits, office space rent, office supplies, and administrative overheads that are shared among several projects and departments.
As the project progresses, several uncertainties, like the complexity of the project, changes in scope, reduced productivity, prolonged project schedules, poor allocation of resources, and more push projects beyond their estimated costs. For instance, when the scope of the project is changed, you might have to hire additional resources with new skills to complete the project, adding extra cost that was initially not accounted for. As a result, projects that showed great promise at the bidding stage falter, causing disappointments and frustrations in their middle and closing phases and derailing billing and profits.
Create Accurate Project Forecasts and Manage in Real Time
For near accurate cost estimation, you need to have these pieces of information first: scope of the project, work breakdown structure, activities list and their sequence of execution, resources needed for each task or activity, and estimated time to complete the activity. Once all of this information is ready, Replicon’s configurable project time tracking solution automatically calculates the project cost estimate while accounting for all project hours in real time and controlling project budgets dynamically. You can even leverage historical trends like performance, costs, and hours, along with real-time insights to create profitable project forecasts.
Let’s take a look at how it’s done.
Create Work Breakdown Structure (WBS)
Once the project scope has been finalized, you need to create a work breakdown structure (WBS) to plan schedules, estimate costs, and determine risks. WBS is a hierarchical fragmentation of the overall scope of work to be carried out by the project team to achieve the project objectives and produce the required deliverables. It provides a visual representation of all parts of a project, along with an ongoing view of the project progress.
Replicon lets you create a complex WBS based on your project needs. With each task mapped to a deliverable, it’s much easier to accurately estimate the cost to complete them. You can enter a cost estimate to the project as a whole, or to each task within the project.
Estimate Cost of Resources
Once the tasks are well laid out, managers need to identify who will be working on those tasks and specify when and how long they will work on them. For resource forecasting in project management, a skills database helps managers to identify the best-suited resources for the project. Replicon then lets you assign rates to every resource. You can assign a single fixed rate or multiple rates based on a resource’s skill, location, availability, or other criteria. All of the billable hours for a particular project will be billed at that specific rate based on the timesheet entries. Replicon automatically pulls the rates of all the resources involved in the project to accurately forecast the project cost.
To optimize schedules and ensure the actual cost does not overrun the estimates, establish start and end dates by including some padding for any potential hiccups. Work backward from non-negotiable deadlines to define a timeline that will support in-time delivery of projects without incurring extra costs.
Track Actuals Against Estimates in Real Time
Tracking actual costs in real time based on the timesheet information from the resources and comparing them with the estimates is imperative to check and improve the accuracy of your budgeting skills. With Replicon, you can track multiple types of project costs and normalize them to compare with the estimates. For each project, you can assign the cost type to be either CapEx or OpEx. Replicon will use the predefined normalization rules and assigned hourly cost rate to reflect the actual cost amount, which can then be easily compared with the estimated cost.
Create Effective Estimates with Replicon
When estimating project costs, you need the best solution to help you calculate a more accurate budget, taking into account all potential costs. Replicon’s Time Tracking solution acts as a single source of truth and gives complete visibility into cost estimates versus actuals to help you see challenges that may lie ahead, and take corrective measures to avoid cost overruns. The custom dashboards and reports help you identify projects and teams that consistently go over budget, enabling you to proactively address issues and curtail the behavior. Read our case studies to find out how our time tracking platform has helped our customers.