What is Estimated Cost?

Estimated cost is the projection of the amount of costs that will be incurred to build a product or construct something. This amount is derived as part of the capital budgeting process for an internal project, or as part of a sales bid when attempting to sell to a customer.

The party issuing an estimated cost may be held to the amount of the projection under the terms of a fixed price contract. In this case, it makes sense for the contractor to over-estimate the estimated cost, in order to have enough buffer in its pricing bid to ensure that it can earn a profit on the deal.

Characteristics of Estimated Cost

Estimated cost refers to the anticipated or projected expenses associated with a product, service, or project. Here are its key characteristics:

Approximation. Estimated costs are not exact; they are an approximation based on available data, assumptions, and projections.
Purpose-driven. Estimated costs are used to support decision-making, such as budgeting, pricing, project planning, or cost control.
Reliance on data and assumptions. Estimated costs are often derived from historical data, market trends, expert judgments, and assumptions about future conditions.
Dynamic nature. As more information becomes available, estimated costs may be revised to reflect changes in scope, material costs, labor rates, or project conditions.
Variable accuracy. The level of accuracy depends on the stage of the estimation process (e.g., preliminary, detailed) and the quality of inputs.
Subject to uncertainty. Unforeseen factors such as economic fluctuations, supply chain disruptions, or unexpected project delays can affect estimated costs.
Simplification for analysis. To make the estimation process manageable, some complex variables might be simplified, which can impact the precision of the estimate.
Time-sensitive. Costs estimated at a particular time may become less reliable over time due to inflation, market shifts, or technological advancements.