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What’s it going to cost? Most of us have heard that question more times than we can count. And most of us have asked the question.

Maybe it is your question to a lawyer about how much it’s going to cost to get a defense for your child, who happened to be in the wrong place at the wrong time. Or maybe it is Gov. Bob McDonnell asking his legal team what it’s going to cost to defend him on his appeal to the Supreme Court. I frequently ask the question of my software developer when I ponder new software enhancements. I doubt there are many businesses that engage others without asking about the cost.

When we are buying products, pricing is much easier. When we are buying intellectual labor in a rapidly changing world, estimating costs is incredibly hard. Here are five tips for determining project costs. I won’t discuss how you price the project – before you do that, you have to understand your costs.

Understand what is involved in solving the problem.

Almost every client I have ever worked with and almost every manager that I’ve reported to has been famous for wanting a price before anyone understood the scope. The problem with preliminary estimates is that it’s very hard to go up in price without upsetting the client. It doesn’t matter that you prefaced your estimate with: “this is a preliminary estimate” and finished your estimate with: “now remember, I haven’t fully scoped the work, and this estimate will change after I fully understand your needs.” The dollar amount has been uttered, and the client will not forget that number.

Once you fully understand the scope, break the project down into discrete activities. For expediency’s sake, and given the rapidly changing environment in which we work, don’t try to identify every single little phone call and document review at this point. Just break the project down far enough that you can estimate the cost of each activity. Then, you have a chance of estimating a reliable cost for the project. To learn more about how to do this, read this blog on creating a work breakdown structure.

Understand who will be doing the work.

One problem with estimating intellectual labor costs is that everyone’s brain works a little differently and we all bring a different set of skills to the table. The cost of hiring someone to build a WordPress site will vary depending on the skills and talents of the person you hire. The same is true of hiring a lawyer to draft your estate documents or hiring a consultant to develop a strategic plan for your organization.

To estimate the cost of a project, it is essential to know who is doing the work. Are you going to staff that legal project with a handful of the smartest and fastest lawyers, together with a team of paralegals? OR, a larger contingent of third year associates with one senior attorney? Is the software code being written by someone who is well-versed in the language or someone who is just learning? Are you using contractors who are already spread thinly, and will not have large chunks of uninterrupted time? Be aware that people who have a high level of distractions (and that often applies to the brightest and best) are going to cost your project more. Not only will their rate probably be higher, but the stopping and starting on project deliverables is less efficient.

Understand the quality of the work that is needed.

There is a tendency to believe that all work is to be of the highest quality. This is especially true of lawyers and software developers, for different reasons. In those two areas, it may be a valid assumption, since no one wants software that doesn’t work or a legal team that can’t win the case.

But suppose you want to hire a media firm to create a video for your website? Do you really need a Hollywood grade movie, or do you just need the CEO presenting on an engaging topic, captured in reasonably good quality? Understand what quality your client can afford before you estimate your costs. 

Understand the risk environment.

Estimating costs in a complex, risky environment requires more attention. Understand the level of change, as a rapidly changing environment increases your risks.

For example, estimating costs for a project where you know the small group of players and the industry is simpler than estimating costs in a project with multiple state or federal agencies involved. The sheer presence of a government bureaucracy adds significant risk which needs to be factored into your costs. Communications will take more time. Media attention can distract you from progress. And, there may actually be risks that are so significant that you may need to purchase some kind of insurance protection.

I can’t think of many industries today that aren’t facing a rapidly changing environment. However, there are many small to mid-size companies that are content to operate in a silo and ignore the changes in their industries. On a smaller, shorter term project this may not be much of a problem, but if the project investment is considered a longer-term investment, that may not be the smartest approach.

Understand the level of documentation and the kind of reporting that is needed.

If you are producing weekly status reports and your documentation is scattered amongst different templates in different formats, plan to spend extra time simply managing this documentation and producing these reports. Find out what kind of reporting is really needed. Not every project needs the same level of oversight. Are you doing earned value reporting? It takes time, and that increases your costs. This blog discusses some reasons to be cautious with earned value reporting if you are relying on intellectual labor for your work products.

If you are in doubt on your plans for cost management documentation, here’s a great article by Elizabeth Harrin on Cost Management Documents (And Which Ones You Really Need).

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Estimating costs is hard, and it’s not an exact science. But it’s a little easier when you know what you are doing. Check out these coaching and consulting plans if you need help. And sign up for our newsletter.