How To Do A Project Estimation Overview

Why Do Estimates Matter?

Estimating might seem like a painful process, but it's a fundamental part of the role of project management – the process of calculating how much a project might cost is important in defining the parameters of a project.

Estimating successfully is all about getting the right amount of funding to enable you to successfully deliver a project. But creating a project budget that works – delivering worthwhile value for a client at a cost that’s still going to make a respectable profit for the agency is a tricky balance, so how do you do it right?

The challenge is that clients tend to want more stuff done for less. And let’s be honest, agencies want to increase their margins too – doing less, for more.

Estimating Projects Well Isn’t Simple

Whether you like it or not, money talks. Project budgets are usually the overriding factor that trumps all else on a project, and sadly are often the cause of conflict between agencies and clients.

There’s a lot of pressure too – cost estimation process can be stressful and scary – when creating a project budget there’s always guesswork involved (hence why it’s a cost estimate, not an accurate forecast) and if you get the project budget wrong, you can find yourself in the firing line.

Four Reasons Why You Need To Cost Estimate And Create A Project Budget

Here’s why you need to cost estimate your project before getting started:

• Estimates provide a price 

You need to know what you’re going to charge the clients, (and when) so the client can decide whether it’s worth the investment to proceed with the project

• Estimates provide clarity 

When you know how much budget a client has, the process of producing a cost estimate helps define the approach as the team will need to work together to define the overall approach, roles, responsibilities, deliverables, process, and resourcing plan.

• Estimates provide milestones

By breaking a project into phases and tasks, with a level of effort assigned to each, cost estimation provides an opportunity to ‘pulse check’ a project so you can know whether it’s on track or not.

• Estimates dictate a resource plan 

In defining the approach and estimate, it also defines the level of effort you can apply to the project sometimes requiring the timeboxing of activities or limiting the amount of senior oversight.

What Is An Estimate? An Estimate Definition

An estimate is simply an approximate calculation of the effort and costs it might take to complete a project.

It shouldn’t be a guarantee of the final cost, but provide a client with a guide (often a ballpark range estimate) of how much it might cost to do or deliver something so that they can secure budget to start the project. Budgetary estimates are made before a project is officially started.

Typically, a project estimate shows the client:

• Tasks – What’s going to be done.
• Resources – By who.
• Rate – At what billing rate, in what currency, with how much tax.
• Duration – For how many hours or days.

Then add any markup and 3rd party costs (such as hosting, photography, travel or subsistence).

This result will be your estimate total.

So what’s the difference between an estimate and a budget? 

Usually, a project estimate becomes a project budget after the client approves the project estimation. The project budget determines the total cost allocated by the client for the project.

Fixed Price Estimate: The Pro’s And Cons

A fixed price estimate is where the client agreed to pay a fixed price, regardless of the amount of effort applied to the project. Fixed price estimates are great to use when there’s little uncertainty or risk in the project – a price is agreed and then paid.

The advantage of fixed price estimates for the client is that they know if they can secure the budget for the project, they’ll get everything that is offered at that price. However, clients can sometimes be nervous about fixed price estimates (or value-based pricing) as they worry that they’re paying too high a price for the services that are being delivered. Consequently, clients sometimes use ‘best and final fixed price budgets’ to shop a project around and try to get agencies to bid against each other.

The advantage of fixed price budgets for an agency is if you can get the client to agree to a high price, and deliver it more efficiently, you stand to make a bigger profit. The disadvantage is that if you go over the project budget, the client won’t pay any more money for the project. With a fixed price budget the agency carries the project risk so it’s important that the scope of the project is tightly defined.