The Art of Predicting Project Cost

When I first started managing projects, estimating costs was something I just didn't understand. Up until that point, I had only used vendor estimates to calculate the cost of pumps and compressor repairs. Having something that would take over a year to build and with many moving parts seemed impossible, but it dawned on me that the best way to not run out of money was to add more cushion to a project. 

To gain more clarity, I asked my then supervisor what was considered a successful finish on cost and his response really confused me: The projects should finish no more than 10% over and 15% under.

Going under budget was a bad thing? I was baffled. My whole life, the goal was to get things for less. If I were to finish too under budget, how could that be considered a failure?

His response: “We manage capital, and if we aren't spending what we say we are going to spend, that means we aren't doing another project that could be making money for the company.”

That’s all I needed to know. From that moment on, I realized the seriousness and challenge of predicting project cost.

Here are three things to keep in mind to hit your budget target like a pro:

1. Don’t blindly trust the estimates vendors give you.
   An estimate is an estimate—it’s not set in stone. Your job as a project manager is to take the information a vendor gives you, validate it, and then figure out what they could have missed from their thinking.

2. Remember that you’re the pessimist in the room.
   When it comes to budgeting, let the optimism go. You need to think of all the horrible things that go wrong because these things will eat away at your budget. Risks that will definitely materialize need to be planned for in the main budget.

3. Have a contingency budget in place.
   If you think there’s a risk but you’re not sure it will materialize, you can still plan for it in the contingency budget. That way, you don’t need to go back and ask investors for more money. You can explain that you’re not planning on using this money, but if you need to, you’ll let them know. Your contingency budget is your safety cushion.

4. For projects that are a year or longer, don’t forget about escalation costs.
   Prices for project materials change over time and this is something you can plan and predict as a project manager. Let’s say you were in charge of producing 10,000 T-shirts annually for a three-year contract. Perhaps the price of cotton rises by 3% in year two and then by another 3.5% in year three. You need to account for that in your escalation costs.

At the end of the day, budgeting for your project is a balancing act. Much like a dartboard, you want to aim for the bullseye and fall within the range of it. But that range will vary depending on your company and industry.

So what’s considered accurate in your industry? Tell me in the comments below or @TheOmarProject on Twitter.