As a result, the majority of businesses experience cost overruns, project delays, and burned out employees. In fact, 55% of project managers cite budget overruns as the primary reason for a project’s failure. Evidently, inaccurate cost estimates can have a detrimental impact on both individual projects and the overall health of a business.

In this article, we will delve into the negative consequences of flawed cost estimates and explore how the implementation of automated time tracking software can revolutionize estimating costs to drive profitability.

Why do you need cost estimation in project management?

Seeking approval for a project entails a breakdown of the resources that your team will need in order to accomplish their work. Clients and stakeholders typically have pre-planned budget allocations and constraints that they need to take into account. Accurate cost estimates provide clients with an insight into the projected expenses towards the project and the amount of time it will take to complete, in parallel to the scope of work and quality standards in place. It is a critical factor in getting the green light to commence your contract, operate seamlessly, and deliver the desired results.

In addition, a cost estimation helps your team stick to the budget and avoid overruns on unnecessary expenses. This, in turn, conveys a positive image to your clients that your organization is capable of managing all critical aspects of the project.

On the other hand, running a project without cost estimation will lead to either of these consequences:

• Underestimating Costs: Underestimating project costs can result in financial strain, leading to unexpected budget overruns. This not only diminishes profitability but also hampers the ability to deliver projects on time and meet client expectations. However, there are many causes for underestimation. This includes the lack of historical data from previous projects, the drive to win a client bid over competitors, or the pressure to lock in a project’s approval. All factors considered, understating expenses will create a direct impact on your revenues and your client’s satisfaction.

• Overestimating Costs: On the other contrary, overestimating costs may cause businesses to lose competitive bids, leading to missed opportunities, and slowed growth. This scenario may also result in excessive quoting and driving away potential clients seeking attainable, fairly-priced solutions.

In understanding these benefits of estimating costs and the possible risks associated with inaccurate expense approximation, you will be able to better understand how to create an effective cost estimate.

What should a cost estimate contain?

We have established that an estimate is more complex than a basic list of project costs. It should reflect a detailed outline of every aspect of the work relevant to the project through defining the expenses, inclusions, exclusions, and risks under each task. Note, however, that cost estimates may vary depending on the nature of your business and the uniqueness of the project at hand. Nonetheless, there are general elements for estimates that are essential in all types of projects, across various industries.

A good cost estimate includes a comprehensive breakdown of all potential expenses to be incurred in the project. There are two primary classifications to categorize costs:

• Direct Costs - Expense directly related to the work, such as labor costs, materials, equipment, and software necessary to complete the project.
• Indirect Costs - Expenses the company incurs to operate the business and deliver its commitments, such as office space leases and utilities.

Under these two categories are more detailed breakdowns of specific costs. These particular cost elements may vary depending on your business type and the services you offer. However, the standard expenses that are common across all industries to consider are:

• Labor - The costs that go into the manpower assigned to a project. Typically, the time they spend on tasks is a relevant factor in determining the actual labor costs.
• Materials and Equipment - All expenses on purchasing and maintaining any materials and equipment that are utilized for a project are included in this category.
• Facilities - As part of the overall operating costs of a business, costs on the working space used by teams assigned to a project are considered in the estimate.
• Third-Party Contractors - In certain projects, there is a need to outsource tasks in order to complete the project more efficiently and at the standard required.
• Software and Hardware - Both internal programs and external parts of computers utilized should be part of the estimate, particularly if the project requires specifications and software or apps distinct from standard computer setups.
• Contingency Budget - No matter how planned a project is, there is a risk for unforeseen events to occur. A contingency allocation addresses such emergencies which may include technical support, travel budget, and other variable expenses.

In order to supplement these expenses, your cost estimate should also reflect all relevant information relevant to the project. This will provide better context for the identified costs in parallel to your deliverables and commitments. Additional information may include:

• Job Description - A comprehensive explanation of the work to be undertaken

• Work Schedule - Timelines and target dates of each project deliverable

• Disclaimer - A cost estimate is simply a close approximation of the expenses for the project. It is in everyone’s best interest to have a clause that the itemized costs are subject to change as the project progresses. This also has to be clear with your client so they are aware of the possible amendments as you go along.

• Validity Period - Costs of goods or services you may need for the project may inflate over time. This is why it’s essential to include an expiration date on the estimate, ensuring that it is only applicable for the period it was drafted.

• Terms and Conditions - All specific requirements, payment terms, penalties for late or non-payments, and other legal considerations are discussed in this section.

Now, the next step is drafting an estimate by following the listed content above. To do so accurately, you will also need factual information and relevant data that will validate your cost estimate.

The key to creating accurate estimates is by utilizing historical data. Companies that have practiced due diligence in tracking employee time, progress, and billable expenses are able to generate relevant information that can be used as a solid base for cost estimates.

Through a clear understanding of your team’s actual productivity and actual project costs will enable you to avoid underestimation, make improvements based on past experiences, and develop more precise cost estimates.

Steps to Improve Cost Estimates with Automated Time Tracking Software

1. Collect Precise Data: Manual time tracking methods are susceptible to errors, inconsistencies, and inaccuracies. Implementing automated time tracking software eliminates these risks by capturing precise data on staff hours, project tasks, and activities.

1. Streamline Project Management: Full-featured time tracking software allows project managers to monitor progress in real-time, enabling them to identify potential bottlenecks and allocate resources more efficiently. This streamlining optimizes project workflow and enhances accuracy when estimating project costs.

1. Analyze Historical Data: Automated time tracking software captures and stores historical project data, creating a reliable repository for future cost estimates. By analyzing this data, businesses gain insights into patterns, trends, and potential pitfalls, enabling better cost estimation and reducing the risk of miscalculations.

1. Track Resource Utilization: Accurate cost estimation depends on understanding resource utilization on a granular level. Automated time tracking software offers comprehensive visibility into how resources are allocated, highlighting inefficiencies and identifying opportunities to optimize resource allocation for enhanced profitability.

1. Improve Communication and Collaboration: Efficient collaboration among teams is critical in estimating costs accurately. Time tracking software with collaborative features allows team members to track their progress, communicate updates, and share relevant information in real-time. This fosters transparency, reduces miscommunication, and ensures cost estimation aligns with the most up-to-date project data.

1. Leverage Reporting and Visualization Tools: Automated time tracking software often offers powerful reporting and visualization tools. These features allow decision-makers to generate comprehensive reports and graphs that offer a clear, data-driven understanding of project costs, time allocation, and potential areas for improvement.

Accurate cost estimation is pivotal to achieving profitability and success in business. The negative impact of inaccurate cost estimates on projects and overall business health cannot be understated. However, by implementing automated time tracking software, businesses can streamline project management, collect precise data, analyze historical trends, and optimize resource utilization. These steps enable organizations to improve their cost estimation processes, minimize financial risks, and accelerate profitability in an increasingly competitive landscape.

It’s time to get Productive.

Productively is a time tracker app that lets you elevate work efficiency with advanced time tracking, real-time reports, and powerful analytics. We believe that if you can manage your hours, you can handle everything else.

With a streamlined dashboard that lets you visualize time tracked by days, weeks, months, or even by client and project, you will be able to make more informed decisions based on accurate data. Its seamless invoicing feature allows you to automatically generate account statements for a more organized billing and receivables system. Altogether, it provides a comprehensive view of your teams’ efficiency, hours worked, billables, and profit.

Bolster productivity, reduce unnecessary costs, and improve the way you do business with the app that empowers you to visualize your untapped capacity.

Learn more about us at https://productively.io/schedule/

A recent study by KPMG proves that 67% of project managers believe that the complexity level of programs and projects have drastically increased in the last ten years. These twists and turns have led to the downfall of some organizations that have not been able to cope with the times.

Transversely, such challenges also brought out the best in businesses that were able to adapt, optimize, and execute systematic project strategies.

This proactive approach of monitoring the performance of any project provides significant insights that will enable you to develop smarter estimates, decisions, and solutions swiftly. In project management, this method is called forecasting.

What is forecasting in project management?

From the term itself, forecasting is a process of predicting the possible outcome of any plan or strategy. These assumptions, however, aren’t merely wild guesses. In a business setting, most projects gain early validation because of the anticipated results, the same way that some projects are put off or ultimately canceled.

As such, forecasts should be based on the most recent data available on the project you are currently working on. Ideally, a project is approximately 20% complete for you to have enough information on where it’s headed. This data will run through a comparative analysis which will serve as the backbone for a smart forecast. It means that meticulous observations and insights are required in digesting the data in order to build sharp predictions.

Keep in mind, however, that each project may have multiple possible outcomes. It’s crucial to identify all of these possibilities and determine which of the results will be most beneficial to your business.

Project managers rely on forecasts to be able to make swift and perceptive decisions on the projects they handle. These estimations play a critical role in project management and planning as it provides relevant information that is crucial in addressing challenges and leveraging opportunities.

As projects progress, forecasts have to be optimized based on the latest data you have. Depending on the timeline, updates may be applied periodically in different phases of the project. Doing so will help you make data-driven decisions, consider unknown variables to reduce risks, and increase chances of a successful outcome.

What are the components of a good project forecast?

Before developing the actual forecast, there are three key elements that you first need to consider: the project’s timeline, cost, and quality.

• Project Timeline

In order to develop an accurate project forecast, you need to know how much time is needed for the whole project to be accomplished. To come up with a feasible approximation of the duration, you can simply break down the project into smaller tasks or phases, which will allow you to itemize how much time it takes for each of the activities. Combining the hours together will give you a close estimate of the project’s timeline.

Professional project managers often utilize time tracking software to automate the process of logging hours spent on tasks. These apps also streamlines data so you can easily generate reports on how much time is actually invested in every project or activity. As a result, you’ll have more credible information that will further refine forecasts moving forward.

• Project Cost

Cost estimates may not always turn out to be 100% accurate, given that anything can happen as a project progresses. In this case, your best bet is to obtain historical data from recently completed projects similar to the one in progress. Using previous project costs as reference will enable you to develop realistic estimates.

Note, however, that you will need to consider the scope of work, tools, manpower, and other operating expenses specific to the project you’re working on in modifying the cost estimate.  Furthermore, keeping track of the project expenses as you progress is important in ensuring that your team is operating within the agreed upon budget. A cost monitoring system will help you forecast where you may need to cut costs, and the areas you can allot more resources on.

• Project Quality

Quality is ultimately impacted by costs. However, it’s not impossible to produce excellent products and services with a limited budget. The trick is to prioritize the most essential aspects of a project to ensure that the quality will not be compromised, while sticking to the planned resource allocation.

What’s important is taking the limitations into account when creating your project forecast. How will the compromises affect the results? What are you willing to shelve so you can prioritize another, more valuable task? How will these decisions impact the final outcome?

On the other hand, there are projects willing to go above and beyond for quality assurance. In this case, the project duration and costs will be influenced as it may require more time and budget to get the most qualified people for the tasks, or to procure the finest materials for a product.

How to implement accurate project forecasting with a time tracking software

Time is a critical aspect of project management and forecasting. Alongside budgets, quality, resources, manpower, and other operational requirements of a project, keeping track of timelines and having reliable time data will ease the complexity of developing close-to-accurate estimates.

Here are some useful tips to guide you in ensuring that your project forecasting runs smoothly:

• Develop multiple forecasts

Regardless of how well-planned a project is, there will always be a possibility for unforeseen events to happen, altering the flow and outcome altogether. In fact, a Harvard Business Review study shows that 1 out of 6 IT projects have an average cost overrun of 200% and a schedule overshoot of 70%, ultimately causing the project to fail. Similar results can be found in other industries, whether you’re offering products or services.

Just think of it this way: it’s better to be prepared particularly in time-sensitive and budget-restricted projects. As such, it’s ideal to have at least two comprehensive predictions on-hand that will allow you to shift strategies as the situation requires. Likewise, considering different scenarios and preparing appropriate plans for each will allow you to get closer to predicting the actual results.

• Set up a system for organization

Being organized is the top skill required for any project to be successful. This means monitoring all the tasks being accomplished, addressing issues along the way, and ensuring that timelines as well as budgets are on track. Having a system in place will help employees do their work efficiently and effectively, enabling project managers to optimize plans and forecasts accurately. In turn, this collective effort will lead to higher chances of positive results.

• Utilize automated tools

Because project forecasting and planning relies heavily on data accuracy, exploring tools that can help make collection, reporting, and analysis easier is a wise decision. Automated time tracking software will bring numerous benefits to your organization and the success of the project. It can provide all the essential information you need to develop realistic project forecasts, including:

• Precise data on time spent on each task which is used to improve estimates on project timelines and costs
• An overview of the project’s status- what each person is currently working on and what they have accomplished thus far
• Real-time project expenses including receipts of purchases, labor costs, and other operating expenses

With more reliable data on these key aspects that affect any project, you will be able to develop more targeted strategies, streamline workflows, and improve forecasts to generate the desired results.

• Set feasible timelines and schedules

We’ve established that projects frequently experience unpredictable situations that cause delays or budget overshoots, despite your forecasting and planning. It could be as simple as a key team member being absent, or something more complicated as changes in one of the project objectives– either could set your team off-track. This is why it’s important to schedule tasks ahead of time and have contingencies in your timelines to mitigate the possible impact of these unforeseen events.

Through a time tracking app, you will gain better visibility into the progress of tasks and determine which activities take longer to complete than estimated. Likewise, you will have access to view who is working on what which allows you to redirect certain tasks as the need arises. In result, you will have reliable references to improve project forecasts that encounter less delays and budget overshoots.

• Actively track performance and optimize forecasts as necessary

While an automated software generally records and reports time and employee performance, it’s still necessary for you and the project managers to proactively monitor the data. Close observation of the movements in your timelines, costs, and quality will help you mitigate or resolve any issues before they impact the project. Addressing such challenges may somehow affect the duration and budget of the project, which is why it’s important to update your forecasts based on the most recent developments.

It is then imperative to have a time tracking software which offers a streamlined dashboard that’s easy to view, navigate, and customize according to your project’s or organization’s requirements. Through this automated tool, you can manage projects effectively and optimize forecasts based on accurate data.

Forecasting and planning increases the chances for your project’s success

Reliable forecasts are what separates successful projects from those that fail. By making intelligent and informed predictions while considering all possible scenarios and risks, you will be able to approach each phase of your project with data-driven courses of action.

Keep in mind that project forecasting is generally a complex and continuous process that takes plenty of time, the right tools for data collection, and comprehensive analysis. With tools that automate certain aspects of the project management process, such as a time tracking software, you will be able to focus on interpreting data and monitoring progress which will lead to improved forecasting.

It’s time to get Productive.

Productively is a time tracker app that lets you elevate work efficiency with advanced time tracking, real-time reports, and powerful analytics. We believe that if you can manage your hours, you can handle everything else.

With a streamlined dashboard that lets you visualize time tracked by days, weeks, months, or even by client and project, you will be able to make more informed decisions based on accurate data. Its seamless invoicing feature allows you to automatically generate account statements for a more organized billing and receivables system. Altogether, it provides a comprehensive view of your teams’ efficiency, hours worked, billables, and profit.

Bolster productivity, reduce unnecessary costs, and improve the way you do business with the app that empowers you to visualize your untapped capacity.

Learn more about us at https://productively.io/schedule/

Learn more about us at https://productively.io/schedule/