The following is a quick post on identifying pitfalls in cost estimation when managing a project. I personally find this concept very useful in my everyday job. At the end, I will provide a little tip that I learned in graduate school. I hope this helps you as much as it helps me!
Poorly Defined Scope, not enough padding, omissions and failure to analyze risk are all common pitfalls for cost estimation for projects. For example, not breaking down the scope enough and not understanding the overall scope can lead to poor budget estimation. To remedy this, one should spend a good amount of time working on the Work Breakdown Structure (WBS) during the planning phase. Spending enough time during the planning phase can make a huge difference with budget estimates. As well, general omissions to things that should be on the budget is a common pitfall for estimations of projects. For example, some items are taken for granted or not in the budget just because of human error.
Failure to analyze all risks is another issue that can lead estimation pitfalls.Neglecting or ignoring risk can lead underestimating a budget. On the flip side, over preparing for certain risk can lead to serious inflation of your estimate. To remedy this, one should spend enough time identifying all risk. The PM should speak to stakeholders and members of the team to identify all risk that can arise in the project. Lastly padding is a common pitfall of cost estimation. Some PM do not allow themselves enough contingency room in projects. This leads to the estimate being below the total cost of the project. The rule of thumb should be to add about 20% contingency to your initial estimates. 10% for known unknowns, and another 10% for unknown unknowns.