How to Estimate External Labor on Your IT Project
- Daniel Rivera, PMP
- Jul 2, 2021
- 4 min read
Updated: Sep 19
External labor often makes up a large portion of IT project budgets. In fact, for many large-scale initiatives—like ERP implementations, cybersecurity upgrades, or cloud transformations—outside vendors may contribute more hours than internal teams. If estimates are inaccurate, the entire project may face delays, scope reductions, or strained relationships with stakeholders.
Some of the reasons accurate external labor estimation is so important include:
Budget accuracy – Overlooking external costs can quickly lead to overruns.
Vendor negotiations – A clear estimate strengthens your position when negotiating rates and contracts.
Resource allocation – Knowing when and where external labor is needed helps balance workloads between internal and external teams.
Stakeholder trust – Executives expect accurate forecasts. Poor estimates can erode confidence in your ability to manage the project.
The video below goes into detail about estimating External Labor. Also, this article continues below for additional information.
Key Factors That Influence External Labor Costs
Before you jump into formulas or spreadsheets, you need to understand the factors that drive vendor costs. Here are the most common variables to consider:
Type of Vendor or Resource
Specialized consultants often charge premium rates compared to general IT contractors.
Offshore vendors may offer lower hourly rates but introduce risks like time zone differences and communication barriers.
Engagement Model
Fixed-price contracts may provide cost certainty but require precise scoping.
Time-and-materials contracts give flexibility but can inflate costs if scope isn’t tightly managed.
Location
Onshore resources in North America or Western Europe often cost more than nearshore or offshore resources.
Travel costs may also apply if vendors must be onsite.
Experience and Skill Level
Senior architects, security experts, and data scientists will bill higher than junior developers or analysts.
Some roles may require certifications that drive rates up.
Duration of Engagement
Long-term contracts may allow for discounted rates.
Short-term or urgent needs often come at a premium.
Market Conditions
Labor costs can fluctuate depending on demand for certain skill sets (e.g., cloud migration expertise surged during COVID-19).
Step-by-Step Process for Estimating External Labor
Here’s a structured approach you can use to build more accurate external labor estimates:
Step 1: Define the Scope Clearly
You cannot estimate external costs without clear requirements. Define deliverables, timelines, and expected outputs. Engage business stakeholders early to avoid “moving targets” later.
Step 2: Identify Required Roles and Skills
List the external roles you’ll need, such as:
Developers (frontend, backend, full-stack)
Project coordinators
Business analysts
Cloud engineers
Cybersecurity specialists
Trainers or change management consultants
Step 3: Estimate Effort in Hours or Days
Break down project tasks into work packages. For each role, estimate the number of hours or days required. You can use historical data, expert judgment, or tools like Work Breakdown Structures (WBS).
Step 4: Apply Vendor Rates
Research market rates or obtain rate cards from vendors. Multiply estimated effort by these rates. Be mindful of hidden costs like overtime, travel, or per diems.
Step 5: Include Contingency
External projects often involve surprises. Add a contingency buffer—typically 10–20%—to account for risks such as extended timelines, rework, or scope creep.
Step 6: Validate Against Benchmarks
Compare your estimate with past projects or industry benchmarks. If your numbers are way off, revisit assumptions.
Step 7: Review with Stakeholders
Share the estimate with key stakeholders, including finance, procurement, and executive sponsors. Transparency at this stage helps secure buy-in and prevents misunderstandings later.
Common Pitfalls in Estimating External Labor
Even experienced project managers fall into traps when estimating vendor costs. Here are some pitfalls to avoid:
Underestimating onboarding time – External resources need time to ramp up and understand internal systems.
Ignoring communication overhead – Remote or offshore vendors may require more meetings and coordination.
Failing to manage scope creep – Without clear boundaries, vendors may bill extra for out-of-scope work.
Not reviewing contract terms – Payment terms, overtime rules, and rate escalation clauses can impact total cost.
Assuming vendor efficiency – Just because a consultant bills more doesn’t guarantee faster delivery.
Tools and Techniques for Better External Labor Estimates
Fortunately, project managers don’t have to start from scratch. Several tools and techniques can make external labor estimation easier:
Historical Data – Review past projects of similar size and scope.
Expert Judgment – Leverage insights from senior PMs, technical leads, or vendor account managers.
Parametric Estimation – Use statistical relationships (e.g., cost per line of code or per training session).
Analogous Estimation – Compare with previous projects that had similar characteristics.
MS Excel / Project Management Tools – Use built-in formulas like NPV, or project management software to model different scenarios.
Negotiating with Vendors After Estimation
Once you’ve developed an estimate, the next step is vendor negotiation. A strong estimate helps you avoid being overcharged and ensures you’re comparing apples to apples when evaluating proposals.
Best practices include:
Requesting detailed proposals that break down roles, hours, and deliverables.
Using your internal estimates as a baseline during negotiations.
Exploring blended rates (mixing senior and junior resources).
Discussing incentives for early delivery or penalties for delays.
External Labor Estimation Example
Let’s walk through a simplified example:
You’re planning a cloud migration project that requires external support. After scoping, you estimate:
2 cloud engineers at 200 hours each
1 project coordinator at 120 hours
1 cybersecurity consultant at 80 hours
Market rates:
Cloud engineers: $120/hour
Coordinator: $80/hour
Consultant: $150/hour
Estimated cost:
Cloud engineers: 2 × 200 × $120 = $48,000
Coordinator: 120 × $80 = $9,600
Consultant: 80 × $150 = $12,000
Total = $69,600
Adding 15% contingency:
$69,600 × 1.15 = $80,040
This gives stakeholders a realistic view of expected vendor costs, with room for unexpected issues.
Final Thoughts
Estimating external labor on IT projects is not just about crunching numbers. It’s about balancing financial discipline with flexibility, anticipating risks, and maintaining strong vendor relationships. By clearly defining scope, understanding market rates, and using proven estimation techniques, project managers can reduce uncertainty and deliver projects that meet budget and business goals.
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