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Project Cost Estimation Tools and Techniques

Have you ever been associated or involved in preparing project budget? If yes, then you might be fully aware of its complexity. Add to that the dynamic project environments and higher uncertainty and you have a daunting challenge on your hand. Let us look at some of the stats to give you a better understanding of what I am talking about.

According to PMI’s Pulse of Profession: The high cost of low performance report 2016, only 53% of projects are completed within the original budget. The report further adds that 30% of projects failed in past 12 months due to inaccurate project cost estimates. What does these stats reflect? It clearly shows that inaccurate cost estimate is a key factor that leads to project failure. In this article, we will look at tools and techniques used in project cost estimation.

Project Estimation

PMI defines project estimation as a “Critical part of project planning that involves a quantitative estimate of project costs resources and duration.” It is evident from the aforementioned definition that project estimation is a huge umbrella under which project cost estimation and other aspects of project planning lie.

What is Project Cost Estimation?

Project cost is an approximation of probable costs of a project. It can also be defined as, “The process of forecasting a future result in terms of project cost, based on information available at the time.” The Cost associated with every project activity is calculated. Combining the cost of all activities will give you the total cost of the project.

Why Project Cost Estimation is Important?

You might be thinking that I have understood what project estimation and project cost estimation is but do we really need project cost estimation? The answer is emphatic yes. Let me tell you why. By estimating project costs correctly, project managers can get an idea of required resources to complete the project. They will be fully aware of how much money each project activity will take for completion.

Moreover, they can easily set milestones based on the estimated costs. Getting an idea about how long each project activity will take to complete will no longer be an issue with correct cost estimate in front of you. In short, accurately estimating project cost will save project managers from the hassle and take you one-step closer to project success.

Factors to Consider In Project Budgeting

Some of the factors that you must take into account while preparing the project budget are as follows:

  1. Specification and Scope
  2. Duration
  3. Location
  4. Project Team

Specification and Scope

Project specification and project scope are two of the key determinants that will directly affect your project costs. The larger the project scopes the more project specification it contains and it increases the overall cost of the project. In some cases, scope creep can lead to project failure therefore; you need to tackle it in the initial phase of the project.  Similarly, you should be on the same page with clients on project specification and project scope.


If you are starting a big project that will take years, estimating cost could be challenge due to frequent changes in prices. This increases the complexity of budget and makes it tough to predict the amount of money needed to complete the project.


Another factor that will contribute to variations in costs is location. International factors such as laws and regulations can create problems and lead to delays. Depending upon the type of project, the cost varies greatly from country to country. For physical projects such as construction, the cost of transportation and materials will be higher if you are operating it from a remote location but this is not the case when you are developing software for clients.

Project Team

Probably the most important consideration when preparing a project budget is how many people you need to complete this project efficiently. The higher the number of team members the higher will be the project cost. That is where human resource department of the company comes in, making sure you have a qualified team to complete projects before the deadline.

Techniques and Tools for Project Cost Estimation

Some of the most common project cost estimation techniques and tools are as follows:

Analogous Estimation

The analogous estimation method uses past data of similar projects to estimate costs for the project. This estimation technique is used during the initial phase of the project. One of the biggest downsides of using this estimation technique is low accuracy, which is quite evident because of usage of old data.

Parametric Estimation

In parametric estimation method, statistical modeling is used to estimate project costs. Although, it also uses past data of various key factors, but it estimates the cost of different parameters. The cost drivers and parameters will vary from industry to industry.

Three Point Estimation

The three-point estimation method specifies a range of activity cost by using three estimates:

  1. Best case (B)
  2. Most likely (M)
  3. Worst case (W)

One of the biggest advantages of using this technique for estimating project cost is that it gives you much more accurate and balanced estimates as compared to other project cost estimation techniques. The formula used for three-point estimation is:


E = (B + 4M + W)/6

Bottom-up Estimation

For project managers looking for accurate project cost estimates, bottom-up estimation technique is an ideal choice. Estimated cost of every package is calculated, which is then summed up into a single overall cost estimate. Even though, this cost estimation method takes more time as compared to other techniques but its precise cost estimation results worth the wait.

Expert Judgment

Another method to estimating project costs is through expert advice. Project managers can benefit from the extensive knowledge and experience of experts in the field in expert judgment. This technique targets factors that are specific to your project and provide you the most accurate cost estimates. This makes this project cost estimation technique stand out from the crowd.

Computerized Tools

Combining statistical tools, estimating applications, spreadsheets, simulations and many more comes under computerized tools for project cost estimation. These estimation software comes in handy when comparing cost estimation methods and finding the best cost estimation technique. In addition to this, best productivity management software boosts your productivity and showing useful insights and cost estimates at a glance.


Project cost estimation is an important part of project planning. Accurate project cost estimates can save project managers from many project issues and help them in completing projects within the budget. Use some of the aforementioned project cost estimation tools and techniques to estimate project costs accurately. I hope that this article might have helped you in understanding project cost estimation and tools and techniques used for project cost estimation.