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Why can accurate cost estimates save a project from dire straits?
In the world of project management, accurate cost estimates are the cornerstone of success. Not only because it helps teams make smart decisions during the development phase, but it can also save projects from disaster. According to the U.S. Government Accountability Office, cost estimating is "the process of estimating the future cost of a project by aggregating the various cost elements using established methods and available data, based on current knowledge." p>
"Good estimates are the key to a successful project."
Today, many industries are facing rising cost pressures. From construction to software development, the lack of reliable cost estimates can lead to budget overruns and ultimately project failure. According to the Bureau of Labor Statistics, there are approximately 185,400 cost estimators in the United States, whose work focuses on developing accurate cost forecasts and assisting businesses with budget planning. Even the smallest estimation errors can have significant consequences in the long run.
Cost Estimation Criteria
Accurate cost estimating is typically divided into three activities: preliminary estimate, detailed estimate, and revised estimate. Various industries have different cost estimation methods, such as construction costs, manufacturing costs, and software development costs. In the construction industry, preparing a detailed set of cost estimates is necessary, otherwise, potential construction companies will risk losing their bid. If a company fails to win the bid, it will not only affect its revenue but may also put it in trouble.
Accuracy of cost estimates
“Without good estimates, the outcome of a bidding war is that the work will ultimately result in less profit or even a loss.”
A proper cost estimate must be able to predict actual expenditures, however, this can often only be verified after the project is over. For example, if a project's initial estimate was $1,252,000 and the final expenditure was only $1,172,451.26, this means the estimate was only 6.8% accurate. As the project progresses, any changes in scope or conditions may have an impact on costs. That’s why high-quality estimates must be accompanied by detailed documentation and explanations.
Best Practices for Dealing with Uncertainty
Developing high-quality cost estimates requires following a number of best practices, including clearly identifying tasks, involving broad participation in the estimating process, using valid data, and providing confirmation of project expectations. Doing so not only improves the reliability of estimates, but also gives teams more confidence in the face of uncertainty.
“If you want to develop accurate cost estimates, you must follow certain best practices.”
In more cases, as the accuracy of estimates improves, project managers should also consider adding some contingency budgets to deal with unknown costs that may arise in the future. Early estimates often require higher contingency budgets because of their higher uncertainty.
Conclusion
Taking all of the above into account, being able to develop accurate and reliable cost estimates is critical to the successful implementation of a project. Whether it is a public infrastructure or private enterprise project, the impact of this step should not be underestimated. Of course, in a rapidly changing business environment, whether companies can flexibly respond to budget challenges remains a question that needs to be pondered?
