Why is cost estimation important?

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This question may sound trivial, and the answer may seem obvious to you. But quite often people focus on just getting a ballpark figure, rather than an accurate cost for the project. This can be a huge problem, because ballpark figures are pretty much the equivalent of reading tea leaves, and can be wildly misleading. However, teams choose to go with the ballpark estimation because they either don’t think it’s possible to size the project accurately, or they simply don’t want to spend the time. 

If you also sometimes think that there is no need to start with an estimation and it will just work itself out while you work on the project, continue reading. In this blog we will highlight a few key reasons why you shouldn’t start on a project without an estimation of its cost and size. 

Go or No-go for the stakeholders.

Everything comes with a price, and the price is what stakeholders need to make the right decision. They are the ones that know what the overall business goals are and what outcomes they are targeting. An estimation helps them determine whether a particular project or module is worth the budget. Provided with numbers, stakeholders can give a green light more confidently.

Securing a sufficient budget

Management teams are sometimes given no choice – they know they have to invest in a particular solution. It’s up to them to then secure the budget for it. By knowing upfront how much it will cost, managers are able to plan their budget and execute the planned development in line with their financial goals. Aligning the project’s budget to the company’s cash flow can often be what makes or breaks the project.

A better understanding of the required resources

Even a brief of requirements may not provide an obvious description of what resources are truly required. However, while preparing a cost estimation, the estimator has to look closely at the requirements and determine what they mean and what is actually needed to deliver the project. This ends up providing a very clear picture of both the resources and the experts that will need to be involved.

Setting the project deadline

The question that always comes right after “How much will it cost?” is “When can it be delivered?”. When working on a cost estimation, the estimator is sizing up the project and planning the resources for it. This information can be used to also forecast how long the execution will take, and allows us to predict an accurate delivery date. 

Predicting the profit of the venture

Building new software is not always just an added cost. Maybe you are building a new module for your product. In such cases, it means that spending on such projects can potentially generate a new revenue stream for your business. By knowing how much the initial cost will be, stakeholders can calculate the ROI of the project. 

Spotting edge cases before starting the work

How often does a team member working on a project exclaim, “Uh-oh, we did not think about that!”? A proper cost estimation can help us avoid that. The estimator needs to consult with experts in a few different areas to prepare an accurate estimate. This provides an opportunity to identify possible edge cases that would have an impact on the cost or delivery date, making it much easier to manage the client or stakeholder’s expectations. 

This blog covers just the tip of the iceberg when it comes to the importance of cost estimation. While the numbers may not always be 100% accurate, the process definitely helps reduce the risk of failure.

Depending on the project state or the brief received, various methodologies can be applied to estimate the cost as accurately as possible. You can read about the most common techniques in this article.

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