If you run a professional services business, chances are that you are constantly bidding for projects and your pricing model is very fluid. In a bid for a constant stream of business, new entrepreneurs tend to operate on a “get what you can” basis by varying their pricing. While this may be a good strategy to get started, many companies find it difficult to undo legacy and switch to a cleaner model of making estimates and managing costs. Time time and tediousness of it along with shortage of resources leads companies from neglecting them.
Consequences of Bad Cost Estimation
Cost estimation is a crucial aspect in project and business management that plays a major role in a good return on investment (ROI) and an absence of it can have an adverse consequences on the project and the company:
When there is an inaccurate estimation of costs, there is a direct impact on the profitability of the project. When cost is overestimated or underestimated, the profit would be understated or overstated respectively.
Inefficient Allocation of Resources
An inaccurate estimation of cost within one area of the project also means there is an inaccurate distribution of resources within the project. This results in an over or under-allocation of resources, thus affecting productivity.
Inaccurate cost estimations create inaccurate financial information that affects the decision-making process on different projects. Incorrect figures may result in unnecessary or detrimental effects on the company, affecting profitability.
Things To Keep In Mind While Making Cost Estimates
With that, companies often aim to keep the inaccuracies of cost estimates to as low as possible. Here are some things to keep in mind while making cost estimates:
Avoid Human Errors & Biases
Estimates are often justified based on experience or subjective notions such as gut-feeling due to various reasons such as lack of data or time. Unfortunately, these estimations are subjected human errors and biases that can interfere with the estimation.
Use relevant historical data
Using irrelevant or inaccurate analogies and historical data generates inaccurate estimates due to the difference in circumstances and contexts. Historical data are very rarely identical to the project at hand and problem can occur when the important aspects that are irrelevant are unaccounted for. Hence, when data is critically different, the resulting estimates can become inaccurate. It would be wise to base estimations on relevant historical data while keeping in mind the differences.
Project teams are often made up of different departments/teams that require careful coordination. However, decision makers often neglect the importance of continuous communication between departments/teams, resulting in fragmented business processes and lack of communication. Coordinating between the different departments would reduce this fragmentation and increase visibility in the cost estimation process.
There are various software and tools in the market that can help calculate estimates efficiently and accurately. They are free from human errors and biases and can save you the time spent on unnecessary paperwork that comes with the project.
By taking time to discuss the aspects of cost estimates that have gone wrong, it provides opportunities to improve for the next few projects. Many companies tend to neglect the process of reviewing projects upon completion. However, reflection allows the project team to learn from the mistakes and prevent other similar mistakes from occurring in the future.