Accurate cost estimation is critical for the success of projects in industries like Aerospace, Defense, Professional Services, and Capital Projects. Yet, even experienced professionals can fall into common traps that lead to budget overruns and delayed timelines. At Twenty5, we’ve identified key mistakes and actionable steps to help you improve your cost estimation process.
1. Inadequate Scope Definition
The Problem: Estimates based on unclear or incomplete project scopes often result in costly revisions and unmet expectations. Without a well-defined scope, it’s nearly impossible to create accurate cost estimates.
How to Avoid It:
Collaborate with stakeholders to clearly define the project’s scope from the outset.
Use a Work Breakdown Structure (WBS) to outline all tasks and deliverables.
Schedule regular scope review meetings to refine and update the scope as needed.
Look for and re-use similar work done before to implement continuous learning, feeding back experiences during prior project delivery into new estimates.
2. Overlooking Risk & Contingency
The Problem: Projects rarely go exactly as planned, and failing to account for potential risks or unexpected costs can derail your budget.
How to Avoid It:
Conduct a thorough risk assessment to identify and document potential challenges.
Incorporate contingency funds into your budget, typically 10–20% of the total cost, depending on project complexity.
Use probabilistic modeling to predict and plan for high-risk scenarios.
Track and mitigate risks during the project delivery life-cycle to stay on top, manage risk reserves, and proactively implement risk mitigation plans.
3. Relying Solely on Historical Data
The Problem: Historical data can provide valuable insights, but relying on it exclusively without accounting for current market conditions can lead to inaccurate estimates.
How to Avoid It:
Adjust historical data for inflation, trends, technological advancements, commodity price changes and changes in costs due to using a different location.
Use a combination of historical data from similar projects, expert judgement and parametric modeling of your project to refine estimates (parametric could be as simple as 'small', 'medium' or 'complex' or as sophisticated as 'how many linear feet of conduit'.
Test and validate your new estimates against actual performance history (compare planned vs. actuals in other words). Understand the reasons behind variances and variance trends.
Run predictive analytics on historical data to understand the underlying cost drivers and how benchmarks and KPIs impact your future costs.
4. Ignoring the Learning Curve
The Problem: Failing to account for productivity improvements over time can lead to overestimated labor costs, especially in repetitive or long-term projects.
How to Avoid It:
Incorporate learning curve analysis into your cost models.
Adjust productivity rates as teams gain experience and proficiency with similar tasks.
Factor in training and development time for new team members to ensure smooth transitions.
Consider full vs. part-time staffing methodologies when incorporating or negotiating productivity adjustments with clients.
5. Poor Communication Between Teams
The Problem: Siloed teams often operate with misaligned assumptions and incomplete information, resulting in inaccurate inputs for cost estimation.
How to Avoid It:
Utilize cross-functional collaboration tools to improve transparency and communication.
Host regular cost review meetings with representatives from all key departments.
Establish a single source of truth for project data to ensure consistency.
Implement common cost structures (WBS, bills of materials, cost element breakdowns etc.) used across both sales and delivery.
6. Underestimating Indirect Costs
The Problem: Many estimators focus heavily on direct costs like labor and materials while neglecting indirect costs such as project management, overhead, and training.
How to Avoid It:
Develop a comprehensive cost breakdown structure (CBS) to include all potential expenses.
Review similar past projects to identify commonly overlooked indirect costs.
Incorporate indirect cost allocation methods into your estimation framework.
7. Failing to Validate the Estimate
The Problem: Skipping validation steps can result in errors, missed assumptions, and a lack of stakeholder confidence.
How to Avoid It:
Review cost estimates with independent experts or third-party consultants.
Conduct peer reviews and sensitivity analyses to test critical assumptions.
Revisit and refine estimates as new information becomes available throughout the project lifecycle.
Refine Your Cost Estimation Strategy
At Twenty5, we understand the complexities of cost estimation in high-stakes industries like Aerospace, Defense, Professional Services, and Capital Projects. By addressing these common pitfalls, you can improve the accuracy of your estimates and ensure the success of your projects.
Twenty5 manages your entire cost estimating, pricing, approval and submittal process for complex programs and engineer-to-order scenarios, with full integration to your CRM and ERP tools to draw in prior performance history and keep sales and delivery project structures in sync.
Looking to refine your cost estimation process? Connect with Twenty5Â for tailored strategies and expert guidance.
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