Business Project Management

Cost Estimation Methods in Project Management

Cost Estimation Method

Reliable cost estimates are necessary for all projects. Without a cost estimate, it would be impossible to prepare a business plan, establish detailed budgets, predict resource requirement or control project costs.

What is Cost Estimation?

In the field of project management, cost estimation is the process of estimating all of the costs associated with completing a project within scope and according to its timeline.

Initial, high-level estimates are often used in the earliest stages of project planning and can determine whether or not a project is ultimately pursued. Once a project is approved and an organization chooses to move forward with it, more detailed and granular cost estimates become necessary in order to appropriately allocate different resources.

A thorough cost estimate should include both the direct and indirect costs associated with bringing a project through to completion. Depending on the specifics of the venture, this will likely include various overhead costs (utilities, labor, etc.), labor costs (including both time and wages paid), materials and equipment costs, vendor fees (if the project requires third-party workers, freelancers, or other contractors), and more.

The problem with estimating is that some uncertainty is always involved. Some of the factors contributing to this uncertainty include:

  • Project Duration: The longer the project, the higher the uncertainty. Similar to the planning horizon, if a shorter project takes place, the more likely the costs are will be.
  • Planning Horizon: The longer the planning horizon, the higher the uncertainty. This can be the entire project or just a particular phase, so you can better calculate the costs for the periods similar to the current one.
  • People: The numbers and skills of people will be a major factor in their calculation of costs. You might even not know the specific people who will be on the project early. This increases the cost estimates’ uncertainty
  • Experience with Similar Projects: The less experience you have in such projects the more uncertainty you have. You will accurately estimate the cost of the project when you run similar projects.

However, professional project managers use some tools and techniques to develop more accurate cost estimates.

Classes of Cost Estimates

Cost estimates may be characterized by varying levels of accuracy, depending on calculation techniques used and phases of the project’s life cycle when the estimation process took place.

Today, one can find many systems for categorizing cost estimates in terms of their accuracy. Below, you will find the one created by the U.S. Department of Energy:

  • Class 5 Estimate (lowest accuracy level) can be received during the initial phase of project planning.  Its only aim is to screen and evaluate different project and cost concepts. Methods: Analogies, judgment and parametric models.
  • Class 4 Estimate (low accuracy level) can be obtained when the project plan is defined by 1-15%. Its primary function is to analyze performance feasibility. Methods: Equipment-factored or parametric models.
  • Class 3 Estimate (medium accuracy level) can be developed when the project is defined by 10-40%. It serves to authorize and control budgets. Methods: Semi-detailed unit cost analysis.
  • Class 2 Estimate (high accuracy level) can be obtained when the project is defined by 30-70%. It supports cost control activities and biddingMethods: Detailed unit cost analysis.
  • Class 1 Estimate (highest accuracy level) can be received when the project plan is mature by 65-100%. It helps verify cost estimates or design compelling bids. Methods: Detailed unit cost analysis.

As you can already see from the above classification, some types of estimation methods are best to utilize when the project is still in the early phase of its development. At the same time, others require extensive knowledge of project details.

To better comprehend which approach is appropriate for your situation, let’s take a closer look at 10 cost estimation techniques.

Methods of Cost Estimation in Projects

  1. Analogous Estimating
  2. Expert Judgement
  3. Parametric Estimating
  4. Bottom-up Estimating
  5. Three-point Estimating
  6. Data Analysis (Alternative analysis/Reserve analysis)
  7. Project Management Information system


The cost estimate is based on historical data from similar projects. Known differences between the projects could be adjusted for the estimate. This type of estimation is generally used in the early project phases and is less accurate than other methods.


Uses experts’ experience and knowledge to estimate project costs. This technique will consider specific factors for the project but it can also be biased.


To develop a cost estimate uses statistical modeling. This uses historical data from key cost drivers to calculate cost/duration for various parameters. For example, in some construction projects, square footage is used.


The estimation of the project’s overall cost estimate will be used by the costs of each work package which will be summarized or roll-up. In general, this form of calculation is better than other approaches since costs are considered from a more granular perspective


Three-point estimates originated with the Program Evaluation and Review Technique (PERT). This method uses three estimates to define an approximate range for an activity cost: Most Likely (Cm), Optimistic (Co), and Pessimistic (Cp). The cost estimate is calculated using a weighted average: Cost Estimate = (Co + 4Cm + Cp)/6


Reserve analysis is used to determine, if any, the extent of contingency reserve that the project should be allocated.


Cost of Quality (COQ) includes money that is expended in the course of the project to prevent losses and money that is spent during and after the project. Assumptions about the COQ can be included in the project cost estimate during cost estimation.


Vendor analysis can be used to estimate the cost of the project by comparing bids from multiple vendors


Project management software includes the cost estimation of software applications, spreadsheets, applications for simulation and statistical software tools, which are particularly useful for examining alternatives to cost estimation

Read also: Top Down Estimation in Project Management


With the best cost estimation method, you can keep all stakeholders informed from project initiation to project closeout. Reasonable cost estimates assist you in making informed decisions and securing the best projects within your budget. They also make it easier to capture, plan, manage, and report on tasks. When estimation is clear, the team can do a lot more in a short period of time. Select the appropriate estimation approach for your workflow.