How to Estimate Project Cost High Level

Sooner or later, we will alll need to estimate costs and though there is an entire science on this subject and it can fill many books - sometimes you just need a "high level" number or a "ballpark figure" just to assess whether a project will be cost prohibitive or not to do.

I just want to share with you what my "rule of thumb" process when estimating technology project costs and I hope it helps you now and in the future. I found that the numbers I get from this process are within 10-18% of where the science will take me - enough to drive a decision on whether to proceed with the project or not.

My Definitions:

• Base Estimate - Ideal Estimate assuming all things go right
• Base Budget - the internal budget we use to actually move the project forward
• Planning Budget - the budget we use for planning and budget requests 

Calculations:

1. Base Estimate = summation of all the resource costs you need for the project (eg Labor, Hardware, Software Licenses, Conference and Travel, Support and Sustain costs, Implementation and Training Costs)

2.Base Budget = Base Estimate + Impact of Known Risks (see below how to estimate)

3.Planning Budget = Base Budget * Unknown Risks/Contingency Factor (see below for rule of thumb)

How to estimate the Known Risks

1.Analyze the risks you identified and determine which are related or dependent to each other (if one risk happens - the other will happen too) and classify them into risk groups

2. For each risk group identified - estimate the dollars it would take to recover the proejct or the business if the risk happens * probability of it happening (there is a more accurate way that includes impact - talk to me if interested) . Note - if the probability is > 50% - then it is an issue, not a risk.

Sum the resulting dollars

  

How to estimate the Unknown Risk Factors/Contingency Factor - this is more a gut feeling based on experience or parametric analysis of historical projects

If your gut or experience is telling you that

1.There is a low probability of unknowns - add 5-10%

2.There is a medium probability of unknown - add 10-15%

3. There is a major probability of unknown - add 15-20%

 Sum your numbers.

Estimating Project Costs based on One-liner Scope Statements

A lot of project managers typically encounter situations wherein they are asked to give a high level estimate of cost and schedule for certain projects during the initiation process - much too early to have the detailed requirements that most PMs would need to give an accurate estimate. Some companies go through this exercise to plan for next year's budget.

In my experience, these numbers are typically used for planning purposes or initial feasibility assessments and the following formula has shown great success in this exercise so far for the software development projects that I lead.

1. Base project costs which include labor (direct and indirect), hardware costs(whether purchased or leased), software licenses, separated by capitalizable costs and expensed costs which may differ based on your company policy +

2. Risk Costs (which is the amount required to recover the project and only for those risks with a 25-50% probability of happening that is identified as risks that are still recoverable - anything more than that is not a risk - it is an issue!). This risks reduce/increase as the project develops. The total of 1 and 2 is then multiplied by

3. A factor as contingency (which is dependent on how much you know of the project at the point of estimation although I typically use the following: 30 - 40% for one-liner scope statements and more if less is known and 20-30% for more developed requirements). This contingency reduces as the project develops. The new total is then multiplied by

4. A factor for management contingency and the factor that typically works for me is 10%

Some things to remember:
1. Labor rates may vary but you can use a blend rate for estimation purposes
2. Labor rates may increase/decrease over the time of the project so blend with this in mind
3. Ongoing Support and Maintenance Costs considerations including depreciation for the capitalizable items