Examples of Project Cost Assumptions
Assumptions are an integral part of project cost estimations. Each is an educated best guess that, although based on currently available factual information, is not 100 percent certain. Cost assumptions do, however, allow a project manager to estimate total projects costs and move forward with budget allocations by supplying cost estimates along with corresponding cost assumptions. Their significance lies in the negative impact that cost assumptions can have on a project budget if ongoing tracking and monitoring over the course of completing the project proves cost assumptions to be incorrect.
Time is the most significant cost-related assumption and one that is the most difficult to get right. Its significance lies in that most every other assumption relies in part on time. The difficulty lies in accurately determining the time a project will take from its inception to the final project deliverable. An inaccurate assumption has the potential to make almost every other assumption incorrect. For this reason, time assumptions are most often completed for each activity and totaled at the end. A time delay assumption of about 20 percent is then added to account for unexpected or unavoidable delays.
Labor cost assumptions include direct and indirect labor costs. Direct labor cost assumptions are based on an assumption of the total number of hours each project team member will work multiplied by her hourly wage. For example, if a team member is projected to spend 20 hours working on the project at a rate of $15 per hour, the labor cost assumption is $300. Indirect labor cost assumptions are based on time assumptions and wage expectations for administrative personnel who, while not responsible for a specific deliverable, support the project indirectly.
An assumption for indirect cost estimations is that they’ll comprise a specific percentage, such as 20 percent, of the project’s total direct cost estimate. For example, if the project cost estimate is $100,000, an indirect cost estimate will be $20,000 based on a 20 percent cost assumption. Indirect costs are most often considered as a group rather than as individual items. This group commonly includes utilities, rent, equipment rental and, if appropriate, legal and audit assistance. Miscellaneous expenses such as telephone and computer usage, postage and printing and miscellaneous office supplies are sometimes included as well.
Return on investment, or ROI, is an expectation of the average annual return as a percentage of a project’s total cost. ROI is crucial to a small-business owner, especially for costly projects such as replacing computers, installing a computer network or upgrading a mail processing system. Cost assumptions in an ROI calculation include the total capital investment, average after-tax cost savings and average return on investment over a specific period. The total capital investment includes the total cost of ownership over the asset's useful life. Average after-tax cost savings are savings in time, labor and increased productivity. Average ROI is average cost savings multiplied by the total capital investment.