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.
Play It Safe?
Project managers have a commercial responsibility for delivering projects profitably and on budget. So the easy and safe option can be to over-estimate and add lots of fat to ensure you won’t go over the project budget. But playing it safe could cost your agency the entire project – estimate too high and the project could get written off as too expensive and never get started.
Play It Risky?
The other temptation, especially if you’re a people (or client) pleaser, is to come up with a budget which you know isn’t high enough, but that you know will be palatable for the client. That’s no good either as it simply defers the difficult discussions of needing more budget to later.
Walk The Estimate Tightrope
Getting the balance right between estimating too high or low enables you to manage the tension between these two elements; safety and risk – creating a cost estimation that the client can buy, but that’s high enough to enable you to deliver on budget.
Estimating Projects Well Isn’t Simple
Navigating this little conundrum and getting project budgets right, creating a proper project estimation, and controlling costs is essential to project success. 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, as the project manager, you can find yourself in the firing line.
But if you follow the steps for estimating properly, and combine it with a statement of work, you can be confident that your project budget won’t let you down. In this guide, we’re going to give you the lowdown on how to estimate projects properly and create project budgets that work:
How To Do A Project Estimation Overview
- Learn why you need to estimate and create a project budget
- Understand the basics – what is an estimate and what are the types of estimates you can create?
- Review a simple project budget example
- Follow a checklist of what you need to know before you start your cost estimation
- Learn five project estimation techniques
- Follow a step by step guide to creating a robust project budget
- Check out some project budget tools
- Download a project budget template for a website redesign
Why Do Estimates Matter?
Estimating might seem like a painful process, but it’s a crucial one. And while it might be tempting to copy and paste a cost estimate and send it on its merry way, it’s important for project managers to understand that every cost estimate is unique. Estimating is 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.
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.
But We’re Doing Agile
In the post-waterfall world of agile, there’s a trend to not try to give cost estimates in hours or days at all. Because after all, when is a cost estimate ever right? The alternative is to simply size tasks and get going on a project, see how much you can accomplish and then work out how much you’ll be able to accomplish when you’ve established your velocity. On the face of it, it sounds great – you don’t have to provide any real estimates and you just keep spending until you run out of cash. If you can get away with that, then great. Stop reading now.
The trouble is, that rarely flies – if clients are going to embark on a project, they need to know how much it’s going to cost so they can calculate whether it’s worth doing. They need to be able to calculate the ROI – and decide if the benefits of the projects outweigh the risks and costs. And for that, they need a cost estimate.
What Is An Estimate? An Estimate Definition
Now we’ve made the case for estimating, let’s start with the very basics – an estimate definition. Within project management, an estimate is simply an approximate calculation of the effort and cost it might take to complete a project.
An estimate 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
- + any markup and 3rd party costs (such as hosting, photography, travel or subsistence)
= An 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.
Types Of Estimates
Within digital, we tend to stick to a couple of different types of estimates; fixed price or time and materials (T&M). As much as we’d like to dictate the type of estimate, we provide, we’re limited by our client’s appetite for uncertainty.
Time And Materials (T&M) Estimate: The Pro’s And Cons
A time and materials type of estimate where the client agrees to pay based upon the time spent, and for materials (plus mark up), no matter how much work is required. Time and Materials estimate are great for projects where it’s difficult to accurately estimate the size of the project, or when it is expected that the project requirements are likely to change.
The advantage for the client is that they can keep changing their mind about the requirements, and not have to worry about the contract needing to be changed and if the job doesn’t take as long as originally estimated, they don’t pay for time they don’t use.
The advantage for the agency is that if the job takes longer than expected, the client should keep paying. With a time and materials budget, the client carries the risk.
Sounds great, right? Well in reality, most contracts tend to be weighted in favour of the clients; time and materials contracts are typically capped, with a guaranteed maximum price meaning the client gets money back if the project is completed quickly and the agency takes the risk and has to pay for any overages. Furthermore, because in a time and materials contract the scope is often not clearly defined, sometimes clients start to try to dispute the hours. So for these types of contracts, it’s really important to keep clean and accurate timesheets, tracking the time spent of 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 for 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.
Project Budget Example
Below is an example of a very simple project budget to make a cake. You could provide this budgetary estimate to a client and see if they could secure $1000, to start the project. Then, after refining the cost estimate, you’d create a statement of work, get approval with a purchase order and then you, could get started with making that kick-ass cake. Admittedly, it’s a bit of an expensive cake, but at that price, it’d probably be a very good one.
This estimate example includes some critical project information with the project name, project manager and the date. The estimate breaks down the tasks within phases, and shows who will be doing what task, in each phase of the project, and applying what level of effort. Importantly, this estimate example also shows 3rd party costs (which very generously, we didn’t mark up) and an estimate summary which a client could use as their budget. In this project budget example, we didn’t include a risk budget, change budget, contingency or assumptions because after all, it’s just a cake.
The Pre-estimate Checklist: 5 Things You Need To Know Before Creating A Cost Estimate
As project managers, we can find ourselves on the phone to a client (as they’re going down the lift so we can’t hear them properly), being asked to give them a number; ‘So I need an app – basically like Facebook but a bit different. How much will that be? Can you tell me how much today? I REALLY need to know today. OK? What? I can’t hear you. Just send me the number in the next house. Thanks so much Bye’. But before you do start scrambling around to create a cost estimate, or give any numbers, review this checklist:
- Know the project
- Have a budget
- Have a plan
- Know why you’re estimating
- Know what kind of estimate you need
1. Know The Project
Before you start estimating anything, the first thing you need to get your heard around is why you’re doing the project in the first place. You have to understand the client’s brief, what they’re trying to achieve, and why – you need to understand the desired results of the project and what success looks like to them. Without that basic understanding of the strategic objectives of the project, it’s difficult to know where to put an emphasis of effort in the project.
2. Have A Project Budget
It’s good to have some sense of a client’s budget, before you start doing anything. But often a client will claim they don’t know their project budget.
So when they say they don’t know, it just means you’ll need to discuss a few options – start high, find out what’s above their project budget, and work down from there. Even if they don’t think they’ve got a budget, they obviously will have some idea what they think they’re willing to pay for something, and what they’re not.
But if you can help a client at least work out the limits of their project budget it’ll save a lot of time from having to look at all the possible options, save a lot of time so you can get on with the actual project much faster.
3. Have A Plan For The Project
When you’re estimating a project, it’s much easier to do, if you’ve got some sort of a project plan already defined. The reality is that you’ll need to edit the project plan align with the estimate, and you’ll need to refine the estimate to align with the project plan.
The relationship between cost estimation and project plan is symbiotic; they feed from one another so if you try and dive straight into an estimate with no plan at all, you’ll discover quickly that you’ll need an accompanying project plan for it to have any meaning.
That said, it can also be helpful for project planning if you do a quick top down estimate. Think of it similar to a project plan sketch, to put a stake in the ground and work out how much effort you could afford to apply to different phases of a project to see if it might be feasible.
Top down website estimate example
For example, if you know that you have $100k for a website redesign project, you could split up $100k or 20 weeks of effort (assuming it’s $5k/per person/per week) as below:
Creating this kind of very high-level cost estimation is helpful before you start your project plan to provide a sanity check for over-engineering the process. You might find that if you don’t have any idea of the level of effort you can afford to apply to different phases, you get half way though your project plan and realize you’ve overcooked it.
4. Know Why You’re Estimating
Finally, before you start doing anything, you need to know what you’re trying to achieve with your budget, and the estimate you’re creating; as you won’t always present the actual cost estimate to the client.
Are you estimating to get an accurate project budget? Or are you estimating to hit a specific number? Are you trying to win new business, or sell in a project as a loss leader to get more work down the line? Do you want to invest heavily in the up-front discovery, which can be leveraged for a group of projects down the line, or is it a risky technical project where more effort should be allocated for development?
Cost estimation will always have a context and knowing the full picture of the context will ensure that you don’t waste your time producing something that might be technically correct, but totally inappropriate for the project.
5. Know What Kind Of Estimate You Need
In the runup to a project budget being signed off by a client, there’s a process of defining the budget. So how do you make sure you’re not wasting time, creating a detailed cost estimate that’s way outside of a client’s budget? At different phases of a project, we can use different types of estimates.
Ballpark estimate – When the client is trying to work out if they have the budget to do a project.
The client will need a very rough estimate to decide whether the project is going to be remotely feasible. Usually a ballpark estimate is ranged, so if you think the project might cost $100k, you’d give a (-25% to +50% variance) range of $75k – $150k, to see the client’s budget.
Budget estimate – When the client thinks they have the budget and needs some more detail.
Supposing the client is happy with the ballpark estimate provided, you might then pull together a quick project plan, consisting of a cost estimate and timeline that you can tailor to the client’s budget, supposing you still thought your $100k ballpark was accurate, you might give a (-10% to +20% variance) $90k – $120k range.
Definitive SoW estimate – When you’ve completed all due diligence and need project budget approval.
Assuming the client is still good to go, the final step in the estimate refinement is pulling together the Statement of Work (SoW) which will include the estimate and total project budget. Again, assuming your $100k budget estimate is still valid, you’d estimate (0% to +15% variance) $100k + $15k contingency.
Of course, you can jump straight into a definitive SoW estimate, but having more detail means it will usually take a lot more time to produce. Depending on the type of estimate you’re going to produce, you can use different estimating techniques and estimating approaches to ensure you create an appropriately accurate cost estimate.
5 Project Budget & Cost Estimation Techniques
So what are the project estimation techniques in project management? There are a few different ways to estimate a project and it’s worth being familiar with them so that you know what estimation technique to your project. In this section, we’re going to cover off five estimation techniques:
- Top-down estimation – decide the total, then divide that total into the tasks or phases
- Analogous estimation – use data from similar projects to decide a similar total
- Parametric estimation – using data and variables to calculate the total
- Three point estimation – get three different estimates and take an average to calculate the total
- Bottom-up estimation – estimate all the individual parts and add them together to get the total
Decide the total, then divide that total into the tasks or phases
Top down estimation is a great ballpark estimate technique that involves taking a project budget, and slicing it up so that you allocate a number of hours to phases or tasks of a project. Then you decide (yes, guess) whether the amount that’s allocated for phase or task is appropriate and try to adjust the scope of the project to match the budget allocated.
As we mentioned when discussing, ‘Having a plan for the project’ – top down estimating is a useful technique to use in the early phases of a project when you’re trying to validate if a client’s budget is sufficient to deliver a project.
The disadvantage of top down estimating is that it’s totally inaccurate, and arguably not really estimating at all – it’s carving out chunks of budget for different tasks. It assumes that the overall project budget is determined before the project starts and isn’t going to change.
The advantages of top down estimating is that it can be very quick which can very useful if you’re trying to help a client determine whether or not their budget is viable. It’s also useful in helping a client try and understand what kind of scope their budget might allow for.
Use data from similar projects to decide a similar total
Another great ballpark estimating technique is analogous estimating. Analogues estimating might sound fancy but it just means a project budget like one you’ve done before. An example of analogous estimating would be to say, ‘Last year we three website design projects which each cost us $100k, so here’s a budget for $100k for your website design. ‘
Simple right? Well yes, if you’ve actually got relevant historical data that accurately matches with the current project you’re trying to estimate. It assumes you’ve got data from previous projects that are similar enough to provide a useful comparison.
The disadvantage of analogous estimating is that it’s inaccurate while there may be similarities between projects, projects are always unique – it’s often like trying to compare apples and oranges. Furthermore, for analogous estimates to be viable and useful, they’re heavily reliant on accurate historical data.
The advantage of analogous estimating is that it’s very quick and easy, and can be used with limited information available about the project – similarly to top down estimating, it’s a great estimation technique to use when you just need a ballpark estimate.
Using data and variables to calculate the total
If you’ve got the data, and some more time on your hands – a potentially more accurate ballpark estimating technique is parametric estimating. Parametric estimating takes variables from similar projects and applies them to the current project.
For example, suppose you had a project to develop a 2-minute animation. You might know the cost from a previous project of developing a 30 second animation was $10,000. You could then extrapolate the cost for the current project would be roughly 4 x the cost, or around $40,000.
The advantage of this process is that it’s more accurate than the analogous estimation because it employs more than one data set and uses the statistical relationship between historical data and variables.
The disadvantage is that with digital projects it’s often hard to find useful data points.
Three Point Estimation
Get three different estimates and take an average to calculate the total
Assuming you’re done with ballpark estimating and the client has asked for a proper budget estimate, you need to start using more accurate estimating techniques. A single hourly estimate per task is easiest, but sometimes it’s nice to think in ranges and take a weighted average.
Three point estimation is a way to calculate a realistic cost estimation using a best case estimate, worst case estimate and most likely case estimate. There are different ways of using these numbers, depending on how you want to weight the result but a simple way to use the data is to use the formula
(Best + Worst + Most likely) / 3 = Expected estimate
As an example, after discussing with your team, you estimate the time to design a web page as follows:
- Best – 3hrs
- Worst – 9hrs
- Most likely – 5hrs
(Best + Worst + Most likely) / 3 = Expected estimate
(3 + 9 + 5) / 3 = 5.7 hrs
The advantage of three-point estimating is that it reduces risk – by taking into account best, worst case and most likely outcomes, you get a project estimation which takes into account some of the uncertainty and risk in a task.
The only real disadvantage of three-point estimating is that it takes a bit longer to do!
Estimate all the individual parts and add them together to get the total
When you’re at the point of creating a statement of work, it can be helpful to do a bottom-up estimate. Bottom-up estimating uses a work breakdown structure (WBS) which you can take from your project plan, and breaks down a project into its individual tasks which are then estimates separately and then added together to calculate the total project cost.
The advantage of the bottom-up estimating technique is that it’s most accurate and by being granular, enables robust tracking of a project’s progress against the estimate. You know very quickly if a project is going over budget is tasks start taking longer than were estimated.
The disadvantages of bottom-up estimating is that it’s time-consuming to produce, and can only really be used when you know all the details about every task in a project. Also, by becoming very granular (and estimating at a task level) it can sometimes inflate the cost of an estimate. For this reason, it’s a great technique to use alongside analogous estimation, when you’re trying to validate the appropriateness of your estimate.
Which Estimation Techniques Should You Use?
There’s no right or wrong estimating method – you just need to use an appropriate estimation technique for the budget, timeline and stage that a project is at. Obviously, the more accurate a cost estimation method is, the costlier and more time consuming the process of producing it becomes. So while bottom-up estimating might seem like the best approach, it’s not always advisable to when you are short on time or resources, even though it might be the most accurate.
Cost Estimate Checklist: How To Create Cost Estimation Step-by-step
So you’ve gone through the pre-estimation checklist, you know what type of estimate you need to produce, and now you’re ready to create a cost estimation.
Cost Estimate Checklist Infographic
In this project estimate checklist, we’ve simplified the process of how to create a project cost estimation to ten simple steps. They’re the basics you need to master to develop a robust cost estimate for your project:
1. Define the idea
Get some clarity. Understand what you’re doing, why, and how. You need to quickly rework the early idea into a viable solution that matches with the client’s project budget, timeline and delivers on the strategic objectives so that it delivers results.
2. Identify the parts
Break it down. When you’re clear on the idea, identify the specific deliverables and map out the process that is required to deliver each one so you can accurately estimate the effort.
3. Do your research
Leave no stone unturned. Go back to your pre-estimate checklist and get acquainted with the client, team and project history so you’re clear on expectations, budgets, skills, experience and past performance.
4. Ask difficult questions
Ask how and why. To estimate properly, you need to be completely clear on every aspect of the project so you can ask your team how they can best deliver it, and then keep asking why – probing their estimates so you begin to uncover their assumptions.
5. Prepare for the unexpected
Plan for plan B. Projects rarely go exactly to plan so account for an appropriate amount of budget for risk, change and uncertainty into your estimate so that you can still deliver on budget.
6. Know your estimate limits
Don’t guess. Know your planning horizon and split the project into phases so that you only give estimates for the phases that you can confidently provide costs for – for the rest, only provide ranged ballpark estimates.
7. Account for hidden costs
Include everything. Be sure to include indirect project costs; for account and project management, for estimating the project, reporting, invoicing, 3rd party costs, travel and subsistence and closing the project.
8. Check it
Mistakes are expensive. Review the post-estimate checklist to ensure process, phases, tasks, rate cards, exchange rates, formulas, and 3rd party costs are all properly accounted for and double checked for accuracy.
9. Caveat your estimate
Don’t expose yourself. Never supply a cost estimate without including boilerplate assumptions that provide detail around deliverables, client, and communication expectations as well as ownership of the project’s final outputs.
10. Be smart
Wildly underselling or overselling a project creates headaches later in the project so try to be as honest and realistic as you can; it’ll make reporting more straightforward and build trust with your clients.
Not Sure Where to begin?
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Project Cost Estimators
Now that we’ve covered off how to estimate, what project cost estimation tools or project cost estimator can you use to help you estimate a project? In terms of pure play cost estimator, there really aren’t many options, so in our list we’ve included some project management software tools that include cost estimation tools and that helpfully link to time tracking and invoicing so that you can
Tools For Projects Cost Estimation
- Microsoft Excel – Probably the most widely used project cost estimator, Excel provides all the functionality you need to create and export an cost estimation. Additionally, you can find lots of project estimate templates for excel that are easy to repurpose.
- Google Sheets – Similar to Excel, just a bit more finicky when playing around with formulas, Google sheets is an excellent free project cost estimation tools tool alternative.
- Eastimate – A great estimating SaaS tool that’s free. Eastimate helps you create better project estimates and timelines together with your team.
- Simplestimate – If you’re new to estimating, this is a great free project cost estimator to use which has built in three point cost estimation and easy sharing functionality. This is a dedicated project cost estimator SaaS tool I’ve discovered.
- Web Development Project Estimator – A simple project cost estimator that was created so web designers and site developers could quickly and thoroughly estimate the time and materials required for a proposed web project.
- Wrike – If you’re looking for a complete project management software tool, including cost estimation functionality, Wrike is a great choice.
Project Estimate Template
If you’re on the hunt for a free project estimate template, then you’re in luck. We’ve created this free project budget template for a typical web design project for $100k. It matches the project plan that we created so you can use the two in tandem.
The files include a project cost estimation and project estimate template which you can repurpose for your own projects. If you’re looking for a free project estimate template or a project budget template excel, we’ve included those in this bundle, as well as a simple project estimate template for word.
Want To Read More On Project Estimation Techniques?
Need more project budgeting help or some project budget management advice? Check out these articles for more guidance on project estimation techniques.
- Paul Boag: How To Work Out What To Charge Clients: The Honest Version
- Sam Barnes: 4 Effective Strategies To Estimate Time For Your Design Projects
- Sam Barnes: Estimating Time For Web Projects More Accurately: Part 2
- Jeff Gardner: Quality-Price-Ratio in Web Design (Pricing Design Work)
- John Reeve: How to Accurately Estimate a Web Design Project
- Alyssa Gregory: How To Estimate Time For A Project
- Peter Mouland: Effective Estimating — Scoring (Story) Points For The Team
- Benjamin Jackson: Agile Billing Guarantees Your Income