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
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
How To Estimate Project Costs: A Step By Step Guide
Using the checklist above, here’s a step by step guide to help you estimate project costs for a typical scenario of a new project for an existing client. Follow these 10 simple steps to create a robust cost estimate.
1. Define The Idea
A common starting point for estimating is that you’ll find yourself not really knowing what you’re supposed to estimate at all. Maybe there’s a basic concept – for a site or create execution, or nugget of an idea, but it’s loose and not well defined.
Sometimes it’s because the brief is loose or non-existent, there hasn’t been time to develop the concept, or simply because no one’s yet taken the time to thrash out the detail.
But the client wants to know how much it’s going to cost before they commit to the project and so some how with almost no useful information, you’re supposed to create a cost estimate. So where should you start?
Get clarity on what you’re doing and why
Before trying to put anything down on paper – ask lots of questions of the person who briefed you to make sure you’ve got a complete picture of the project. There’s no point trying to define something that everyone knows is a non-starter or that’s so loosely defined that no one really knows that the ‘thing’ is, that the project’s all about.
Get clarity on what you’re doing, why, and how. You need to quickly rework the concept into a viable solution that matches with the client’s project budget, timeline and delivers on the strategic objectives so that it delivers results.
The key here is to be solutions focussed – no one likes a project manager that’s just a naysayer. Try and work out how you can adapt the concept to make it feasible, particularly thinking about the project budget and timeline. Rather than just trying to find reasons why the project won’t work, get creative and find solutions or alternative ways of delivering the project that could work.
Turn the unknowns into knowns
Here’s really where the fun begins. It’s important to turn all the ‘grey areas’ black and white, so that there are no unknowns. Keep asking yourself what needs to be delivered and how you could deliver it, making sure the final output still matches with the strategic objectives of the project.
And make sure you sense check that the process is really going to add to value to the final deliverables. Often we can be guilty of just doing work because it’s the way we always do it, rather than questioning the value it’s going to add.
It’s important for you to shape the concept into a clear list of deliverables that match the process, and that match the strategy. Your goal is to get be able to articulate exactly what the project is, how it works and the process of how you’re going to deliver it.
When the idea’s been defined, you should know what the concept is and understand how the various components that make up that idea, fit together. You should be able to articulate the basic user journey, and the exact touchpoints that form the conceptual ‘big idea’ that will need to be costed.
Understand what you’re delivering
Turn the concept into a list of key deliverables– what are the things that you’re working towards delivering at the end the project, and what are the work packages that you’ll provide them along the way. Again, just watch out you don’t lose the original strategic thought and creative execution by dumbing it down, or over-simplifying it too much. If you do, you can be sure you’ll swiftly incur the wrath of the creatives and the client!
Start documenting assumptions
Of course, there are always going to be things that you don’t know. But as you’re working through defining the process and outputs, make sure you document all the assumptions you’ve made particularly with the process and outputs. You need to have a very clear understanding of what the client’s paying for, and what they’re not.
At this stage, if you’re producing a top down estimate, or analogous estimate, you should have enough information to provide a rough ballpark estimate. If you’re trying to create a more robust estimate, you’ll need to keep going!
2. Identify The Parts
Assuming we’ve completed the first important step of defining the idea, the next step important for a more robust cost estimation, (such as parametric estimating, a three-point estimate or bottom-up estimation) is to dissect the process and work breakdown structure as well as the deliverables so that you can estimate them in detail, ideally in isolation from one another.
Break it up – don’t lump things together
It’s much better to isolate parts of the process and deliverables, and estimate them each separately. For example, suppose you’re creating a campaign that includes creating assets for social, for a website and for an online campaign – rather than lumping all the design together, break it up in to the design that’s required for each component. Split each part of a project into as many self contained items as you can, you can then cost each of them should individually.
The pro’s of breaking up an cost estimate
There are massive advantages of adopting this approach. By splitting the project up into individual components, you’ll get a much better understanding of how the project fits together to form the whole.
And when divided into smaller components, it also makes it much easier for your team to estimate how much effort will be required to produce it. And when it comes to tracking the project budget, it also enables you to track expenditure against specific project areas rather than having to lump it all together.
Finally, the biggest advantage is that when it comes to selling in the costs to the client, the client has a full picture of what they’re buying into and can easily do the inevitable pick and mix of project components without you having to go away and rework the costs when the realize they haven’t got budget to do everything.
The con’s of breaking up an cost estimate
The disadvantage of this approach is that it takes time, a lot of time. That’s why it’s only worth doing when you’re reasonably the confident the client has the budget and appetite for the project. So don’t do this for a ballpark estimate, if the client is still in the process of trying to work out if they have the budget to do a project. It makes sense to do this when the client thinks they’ve got budget and needs more detail.
3. Do Your Research
When it comes to putting actual numbers against a project, and before you get into the detail of estimating, make sure you do some research so that you fully understand the context, constraints and details of the sandbox that you’re playing in.
This is critical if you’re doing a ballpark estimate or analogous estimate – you need to get acquainted with the client, team and project history so you’re clear on expectations, budgets, skills, experience and past performance so that your estimates are realistic.
Get a handle on the project’s client
We’ve talked in the past about delivering successful projects and the importance of understanding a client’s ambitions, motivations and goals. When we do, as well as delivering on a project’s strategy, you can also help them get to where they need to go, create the results that they need to show and help them flourish and achieve their personal career ambitions.
You need to understand if they’re interested in winning awards, want to see their name in the industry press, or want to explore some bleeding-edge tech. It could be, for example, that the client is particularly ‘creatively’ minded, so you might need to allow for more rounds of creative amends.
When we understand the client context, we can tailor our approach and estimate to match their needs – and have a better chance of getting the cost estimate approved.
Know the client’s budget
We mentioned this already numerous times, but it’s so important, we’re going to cover it off again. As far as researching the client goes, it’s critical to find out what your client’s budget is. In fact, it should be one of the first questions you ask the client when starting a project.
This question can make clients nervous or even angry so many will refuse to tell you, with the rationale that if they disclose that information, you’d just tell them that’s what the work will cost.
But knowing the project budget enables you to tell a client what they can afford to do – enabling you to guide them towards an appropriate solution, and to stay well clear of the shiny objects that would be well outside of their budget.
Not everyone knows what their project budget is. And that’s ok. Even if a client says they have no budget, throw out some numbers and gauge their reaction. When a client says; ‘The sky’s the limit for the right idea,’ it’s probably because they don’t know how high the sky can be!
Ask them, ‘So if we come back with some $1m ideas, will that be cool?’ and see what they say. When they fall off their chair, try giving them some budget ranges (starting high and working down in increments) and see how they react.
Finding this out up front, can save you a lot of time and enable you to tailor a concept or idea to the client’s budget up front – rather than having the mess of trying to shave bits of a budget (and concept) off afterwards.
Know how much they paid last time (and how much it really cost)
Clients will always remember how much they paid for a similar project last time – so you should too. You can then use this as a guide for your costs as it will need to be comparable. However, if for whatever reason the project’s going to be considerably more than it was last time – maybe because it went over budget – you need to ensure you’ve got a reasonable, and compelling rationale to explain why that is. It’s important to establish a credible story before you try selling the increased costs into your client. If you’re unable to explain why it’s different, you’re going to have a hard time getting them to approve the costs.
Get an understanding of similar projects you’ve done before
Check out the data on similar historical projects to see how much time and materials was spent actually delivering it – this is analogous estimating. You need to ensure you look not only at whether or not the project previously came in on budget, but drill down to examine which phases of the project came in under, over and on budget.
Know your team’s strength and weaknesses
When estimating a project, you might not know the detail of who exactly is going to work on the project, but you might have a vague idea and should at least know your team’s overall competency and ability to deliver projects.
Unless you’re incredibly fortunate, you might find that different resources and members of your team work at astonishingly different speeds – so you need to account for that. Whatever your team looks like – make sure you estimate for them, rather than kidding yourself you live in a world where everything takes as long as it should!
4. Ask Difficult Questions
There comes a point after you’ve jumped through the hurdles of ballpark estimating and budget estimating when you start the hard job of deciding on final numbers; you need to start making decisions, how much is this project actually going to cost?
Taking all the information from the previous steps – a well defined idea, broken into parts with a nuanced understanding of the project’s background, you can start estimating the project.
Assuming you’re now estimating for the SoW, you’re going to need to apply a bit more rigour and be clear on every aspect of the project so you can ask your team to estimate each of the components. It involves some hard work. It requires you to talk to people from different departments through the project and help them help you to shape the project and with it the costs and scope.
What are you asking?
If you’re not clear what exactly you’re asking someone to estimate on, you’re not going to get very far. Make sure you are clear about which components you’re trying to cost, what’s going to included, and what’s outside the scope of the project. You need to have a really clear idea what you’re producing and what you want people to do so that when they give you estimates, you’re 100% sure you know what the deliverable or output is, for the estimate they’ve given you.
Help them help you
Estimating can sometimes be a challenge became people don’t like to commit to a cost estimate. To help people along the way, and to help them come up with a cost estimate, you should take the research you did on the client’s project budget, previous projects, and reconciliations, and put it into a spreadsheet so that when you’re asking someone how long something should take, you’ve already got a reference point for discussion. You’ll find we get much more accurate cost estimates this way as people aren’t having to try and calculate something in complete abstraction.
Have an idea of the estimate, and why
But before you go around and ask your team how long it’ll take them to do something, there’s one more thing you need to do. You don’t want to guess the level of effort required for your team but it’ll help if you can short-cut the process.
By pre-preparing yourself some rough numbers (that align with the client’s project budget) to share with your team and asking them to validate them you can speed up the estimating process. Going with a number and a rationale and asking for their feedback, you can begin to probe why they think it might take longer (or very rarely, shorter!) than you’d estimated.
Get to the bottom of the uncertainty and assumptions
Your goal in the discussions with your team about the cost estimate is to make as much of the uncertainty certain. You need to find out how they can best deliver, and then keep probing the level of effort they’ve estimated so you begin to uncover their assumptions. Ask questions like, ‘How would you do that?’, ‘Why would that take that long?’, ‘Are you including internal revisions in that estimate?’, ‘Are you basing that on a previous project you’ve done?’
You’ll find that as you ask questions, your understanding and their understanding of the project will begin to align and you’ll get a much more accurate sense of the level of effort required.
Ask the right (not your favourite) people
Remember when we said it’s helpful to know the team you’re working with? Ask the team you’re most likely to use, rather than the people you like best. You need to get an estimate from the horse’s mouth, if that’s the horse you’ve got. There’s no point getting an estimate from the best or quickest person at doing something if there’s no chance that you’re going to be able to use them.
Use three-point estimates
We’ve already talked about the benefits of three point estimating. When you’re preparing an estimate for a statement of work, this is the time to use this estimating technique. When we’re asking people to estimate, we should ask them not just how long it will take, but for the best case worst case and most likely scenarios (and find out what those best and worst case scenarios would entail), and then choose somewhere in the middle.
Before you finalize your numbers, keep in mind that people are generally over-optimistic and under-estimate their time, especially when you’re standing in front of them and they know you want them to give you a low estimate!
Remember too that people rarely get to work on a project full time insofar as they’ll have probably 20% of their time spent doing admin, attending other meetings, or checking Facebook. It’s important that you work out where that cost is going to be absorbed – will people end up putting it onto you project as acceptable collateral, or is there a different job number for that? Also remember that if resources aren’t going to be dedicated to a project and are going to be switching between jobs, it’s going to take longer as it’ll take them time to get back into the different projects.
Combine the estimate with your project plan
When it comes to pulling the actual estimate together, refer to your project plan so that you’re accounting for all the steps of the project – incorporating things like rounds of internal and QA, to ensure you’re covering off all the line items in your project plan.
It’s not only more accurate, but it can be much easier to explain to the client when we can show them how a certain number of hours is split up over a period of time. It can also help us to show people what they estimated, and enable them to confirm that we’ve understood them correctly.
5. Prepare For The Unexpected
We’ve looked at the importance of researching, and doing due diligence before creating your estimates, getting the team involved in helping to estimate. But how do you as a project manager, manage the reality that you’re not quite sure how the project is going to turn out – how do you manage risk in creating cost estimates?
To start, ask the client how they want to mage it. In short, there are two options – build it into each line item, or estimate for it separately.
The simple risk mitigation solution – add budget fat
The crude and simplistic way of trying to mitigate against risk in creating cost estimates is simply to ‘fatten’ up your estimates with extra hours and costs. Randomly adding on a bit a few hours here and there will help to inflate the overall cost and give you some cushioning.
If your client isn’t going to buy into the idea as contingency as a separate line item, you’ve got no choice but to add in the contingency to the project on each line item – it’s not as good doing it this way, as it carriers much greater risk to you, but it’s better than nothing at all. The key to doing it this way is to ensure that you add in the contingency consistently and uniformly across the project.
The danger – and when the ‘Gentleman’s agreement’ falls apart is when a client thinks that additional scope creep is acceptable because they already paid for it in kind. As much as possible, it’s much wiser to stay clear of anything that’s not totally transparent.
A better risk way to manage risk in cost estimates – a risk budget
So what’s the better solution for preparing for the unexpected? A more sophisticated way of managing and mitigating against the impact of risk is to estimate for it up front. You can do this by adding into your cost estimate a contingency of around 20% of the overall budget for change and risk.
This shouldn’t be lumped into the costs as fat, but should appear as a separate line item on the item as ‘contingency’ or similar. It’s important that this contingency budget is contained within the main cost estimate rather than simply being an optional add-on.
Tell your clients you want to be honest with them
We all know that a project rarely ends up how you thought it would at the start so account for an appropriate amount of budget for risk, change and uncertainty into your estimate so that you can still deliver on project budget. This approach makes change requests much more straight forward. It’s much better adding this in as a transparent risk and change budget that will be refunded if it’s not used, than adding fat in blindly.
It also helps set a precedent and educates your client that changes to scope equate to additional cost from the risk budget – it means you can say yes to your clients a lot more, with a small caveat that you’ll be using the additional budget for it. The alternative is a situation where you have to play bad cop and feel like you keep on having to say no to the client to preserve the additional margin/fat that you’ve loaded into the project budget, ‘just in case’ something even more extra-ordinary comes into play later on in the project.
Don’t use it as a slush fund
When there’s a requirement to use this budget, we shouldn’t just dip into it without telling the client, but supply the clients with specific estimates for specific change requests or to resolve specific issues. It’s important that the client knows when the contingency budget is being used and approves its use rather than it being treated as a kind of general slush fund. This way, if additional budget is required beyond the amount originally agreed, you won’t need to spend lots of time trying to explain how the budget is already used up.
6. Know Your Estimate Limits
It’s a classic scenario, you’re asked to cost a project you know nothing about and to make matters worse, there’s nothing to base the costing on. There’s no UX, no design, maybe just a sprinkling of strategy. It doesn’t matter how much you protest; the client needs to know a cost so they can secure a project budget. So here’s a rundown of what do.
Don’t pretend you can see beyond the planning horizon
For starters, however hard they push, don’t just give them a budget. Don’t estimate beyond your planning horizon – don’t cost, what you don’t know. Know your planning horizon (how far along the project you’ve got a solid plan for) 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.
Get budget to investigate, and phase it out
Creating cost estimates can be difficult in digital because we’re often using technologies that have never been used before, and the features can be are very bespoke. That’s ok. Toi manage these tricky estimates you just need to cost only what you know.
As soon as you start trying to guess or imagine, you’re more than likely to end up getting your fingers burnt. Your main objective should be to estimate what you do know, and then persuade the client that you need budget to dive into the uncertainty. You can split the project budget into phases – initially a scoping and project initiation phase, and following that, production, when your planning horizon has moved on, and you know what the project will be in more detail.
Switch to time and materials
If a client really is desperate to do a project and you’re not sure how much it will cost, another way to shift the risk is to change the engagement model so that you’re working on a time and materials basis, rather than a fixed price. The goal is to give the client options and help them feel like you’re not just being awkward.
Go to the ballpark
But if a client really needs a cost, and you really don’t know how much it will be, you’re only real option is to go back to producing a ballpark, analogous estimate making generous allowances, making sure it’s heavily caveated and with lots of well documented assumptions.
7. Account for hidden costs
Before you wrap up your cost estimation, make sure you’re including the hidden costs of a project. With any project, there’s the cost for producing the main ‘thing’ – but there are costs associated with delivering that thing that have to be accounted for, or your profitability gets obliterated. Here are some of the things to think about including.
Estimate for account and project management
Perhaps the single area most likely to go over budget in a project is account management (AM) and project management (PM) time. The difficulty in estimating for AM & PM time is that there is a natural tendency, inherent in the fact that they’re service roles, for them to go over budget. You want to deliver the best project you can for a client, which can mean going above and beyond the call of duty – and also beyond the initial estimate.
As a rough guide, try and ensure that the combined AM and PM time is no more than 25% of the overall cost of resources. Sometimes it can be more than this, and often, if it’s a very straightforward project, it can be less. Be realistic, and remember clients want to pay for work being done, not just people talking about it!
Know how dedicated you can be
To help with this estimating a project, it’s important you clarify with the client their expectations for the level of service they require with a service level agreement (SLA) so that this can be built into the estimate. This will help you calculate how much weekly documentation you’re going to produce, what weekly status calls you’ll attend, how you’ll manage billing, how you’ll respond to requests and how you’ll escalate issues. It’s important that the client pays for the level of service they expect to receive.
Remember the pre and post project costs
Don’t forget the time it takes to initiate a project and Include scoping time: think about how and where you’re going to include costs for the effort at the start of the project, pulling together the basic costs, timings, and SoW (Scope of Work) documentation. As much as possible, don’t just bury it in with our other timings, but get the client to pay for it as part of an initial scoping or discovery phase.
Furthermore, don’t fool yourself into thinking that as soon as the project is delivered that your job will be over – the client will want reporting and post project analysis too, so make sure you’ve covered yourself for that too.
Remember the costs everyone forgets about
Finally, don’t forget the 3rd party costs – what other stuff will you need to pay for to deliver the project which include equipment rental, hosting, subscriptions, translations, photography, fonts, licencing and much more. And if you’re working with clients in a different city, don’t forget about travel and subsistence and your travel time; who’s paying for the team’s time when they can’t work on other projects? Making sure you account for these costs is critical to ensuring you don’t ruin your profitability.
8. Check It
Checking it – well that’s obvious right? It’s obvious, but it’s one of the things that when you’re in a hurry, you can so easily forget to do. There are always a few things it’s vitally important to check before an cost estimate is presented to a client for approval.
Check the process
Make sure that the process that you outlined in the project plan aligns with your estimate. Often you’ll be working with the project plan in tandem with the estimate so do a final check to make sure it all aligns and is in sync – working towards efficiently delivering the final deliverables.
Check your ratecard
An easy mistake to make is to use the wrong rate card for a client so whilst the hours might be correct on an estimate, the total value for the cost estimate you’ve put together is completely wrong.
If you’re working at an agency with lots of different clients, it’s very likely that different clients will have different ratecards. As these are usually negotiated every year, they can very quickly be out of date.
But it’s not just the different client ratecards you need to watch out for. Even within the same client, you can find yourself having to deal with different rates. Check that there aren’t different rates for retained or non-retained work.
Make sure the rate you’re using is the correct one for the client, and the project. And where retainers are in place, make sure you’re clear about exactly what they cover so that you’re not double charging or undercharging.
Eradicate errors with exchange rates
When you’re having to cost estimate in one currency, and present to the client in another (for example estimating in $’s but presenting to a client in €’s) be sure that you’re confident that the exchange rate you’re using is up to date as exchange rate fluctuations can massively impact the cost of a job. It can be very costly if you find that you’re using a rate that is out of date because the money coming in for a job won’t match what you estimated.
Find funky formulas
It’s important that when you’re using spreadsheets with formulas that you make sure that everything is adding up as it should. It can be too easy to slip in an additional section into a cost estimate and then forget to change your totals formulas to include the new section. This becomes very costly if the cost gets approved by the client but it’s not actually including everything it should.
Now check it again
If your cost estimate contains some errors, or misses something, it’s very difficult to add it in again later. Trying to explain to a client that you used the wrong ratecard, that there some mistakes in your formulas, or that you used an old exchange rate will dent a client’s confidence in your ability as a project manager but can also put the entire project in jeopardy.
9. Caveat your estimate
We’re often asked to produce an estimate in a hurry and we’re in a rush to get it out of the door. The estimate is complete, and checked, so can you just put the estimate in front of the client and hope for the best?
With ever-contracting timelines, you’ll want to get an estimate signed off with as little fuss as possible – at the back of your mind you’ll know that every day that the project start is delayed, it’s cutting into your project timeline.
In the rush to produce a cost estimate it’s often tempting to present costs as they are without any accompanying statement of work or caveats outlining what the cost includes, and what it doesn’t. At the time, everyone’s just happy that a project budget has been signed off and the ever-elusive purchase order has come through. It feels good, everyone knows what’s being produced and it’s all good right? Wrong.
Being vague is not cool
This is perfect if you’re not entirely sure what you’re producing and the client isn’t sure what they’re getting! There’s a hope or belief that things will probably or at least hopefully, turn out all right. It’s almost as though there’s an assumption that there’s a gentleman’s agreement for each side to play fair.
At the beginning of a project, it’s rarely a problem, and sometimes you can go right the way through a project with no issues whatsoever. The danger of course, is when there are different ideas about what playing fair really means. Agencies don’t think that delivering a project should hit their bottom line – they need to make a profit to be successful. Similarly, for a client, if they’re paying for a project, then they’ll want it to be delivered to their expectations so that their business can flourish.
Know what’s included (and what’s not)
The challenge with vagueness comes when there is a difference of opinion. At the point that there’s any disagreement whether a client initiated ‘tweak’ is really an amend or change request things begin to quickly unravel. So including scope statements, and documenting outputs (ideally in a full statement of work) is essential. The truth is, if the costs don’t correspond any documented deliverables or scope of work, who really knows if something should be included or not?
Include some assumptions
Never, ever just produce a cost and hand it over to a client as is. Even if it’s urgent. In fact, especially if it’s urgent. Ideally you include with your cost estimate a statement of work that defines what the client is getting, and more importantly, what they’re not getting.
Without any detail around what the costs relate to in terms of process and deliverables, assumptions, exclusions and constraints the estimate by itself is dangerous.
At the very least, don’t supply a cost estimate without some accompanying project assumptions. In these generic project assumptions, make sure you include detail on at least the following:
- How many rounds of revisions are included + the impact of further revisions
- What an acceptable turnaround time is for sign-off + the implications if these aren’t met
- Who’s responsible for client approvals
- How changes to scope will be dealt with via change requests
- How the client will manage stakeholders internally
- What reporting will be provided, when
- How status reports will be used
- Who will supply what assets required for the project, by when
- Who owns what, after the project with regards to intellectual property rights
- How the client is being billed
- What taxes are included, and excluded
- What outside expenses (travel, lodging, shipping etc) are included/excluded
- What 3rd party expenses are included/excluded
- Payment terms
10. Be Smart
Going back to our original conundrum, how do you strike the balance of a good estimate – one that’s not too expensive and not too cheap? How do you tailor a cost estimate so the client says yes to it, but that’s high enough to enable you to deliver on budget?
Estimating low to win work never pays off
In order to secure business, agencies will often ask a client what their budget is for a project, and then agree to do it for that amount. Sometimes too clients will offer tiny budgets and describe it as some kind of a trial, which if successful, will open the floodgates for masses of future work. Often agencies take this on with the view that they’re willing to accept an initial ‘hit’ in order to secure the long term business.
Invariably, the project runs overbudget – this creates a massive amount of stress for the team and particularly the project manager as you’re the one responsible for delivering on budget. And it’s a tactic that rarely works to secure future work as when it comes to the next project the client can’t understand why your agency is so much more expensive than the previous project.
So the net result for undercharging is not only do you end up losing money on the first job, but you don’t end up doing any more work for the client at all. One scenario where this is understandable is when an agency has got cash flow challenges and just some work to pay the wages and bills; it’s just a short term fix. But loss leaders rarely turn into future profitable work, so try to avoid them.
Overestimating is easy
Conversely, overestimating is popular too – to either mitigate against risk, to maximise profit, or sometimes because you actually really don’t want to do the project! If you can get away with it and still get the client to sign off on the project budget, then great.
When working with a new client, a big project or one where there’s lots of unknowns, you could simply add on a lot of ‘fat’ and hope for the best or to hide costs in different parts of your budget if you think your client will be more likely to accommodate higher costs in particular areas of a project.
With the pressure to make your project profitable, and to mitigate against all the uncertainty and risk of a digital project, it’s easy decide to simply inflate the estimate to cover any risk.
Sometimes this works, and sometimes this is ok – because if a client feels like they’re still getting good value, then who’s to say they shouldn’t pay for it? And remember that the value your agency brings is proportional to the company – the larger they are, the more value they’re going to get so you can charge them more for it. Any business transaction is a value exchange so if the client is clear what that exchange is, then as long as the client is happy to pay, why shouldn’t they pay more?
Before you over-estimate…
So how much should you try to mark up, or top up your margins? And when you’re creating a cost estimate, how honest do you really have to be on the real costs?
Before you start inflating your estimates beware that if a client feels like your cost estimate is too expensive, you can potentially lose trust and damage the relationship.
If you then go away and revise the costs, not only will you be wasting a lot of time, but you’ll lose credibility – every time you produce a cost estimate, the client will think they can ask you to go and ‘sharpen your pencil’ and you’ll then come back with a lower cost.
And if you cost estimate too high there’s the potential that the client will start shopping your estimate around to other agencies to try and get the lowest bid. So you could lose the project or even the client. All the work you put into creating the estimate will be wasted because you got too greedy!
Keep that cost estimate simple, stupid
There’s a lot to be said for abandoning the tricks and games of inflating or reducing estimates and just keeping your estimates simple. Be upfront, honest, and tell the client how much it’s going to really cost. Then you can easily explain to your client why each line item on your cost estimate is the way they are. And by being honest with your hours, and therefore costs, you can.
If you start adding in fat or redistributing costs to different parts of the project (where they shouldn’t be) you can end up creating together a cost estimate that doesn’t make sense to anyone but yourself. Your estimate can end up so convoluted and confusing that you can’t really explain it to anyone, least of all your client.
Furthermore, keeping the cost estimation simple, it makes reporting much more straightforward. When there are no strange or inflated allocations of hours to parts of the project, you get the added benefit that you don’t have to fiddle around making manual adjustments to your reporting.
Keep it honest
For you to explain your cost estimate and why things cost as much as they do, it’s important your client understands your history of working together. If you’ve worked with a client before and the (inefficient) way that they worked with you meant that the project ran over – you need to tell them.
Be up front about what happened last time – explain that the ten rounds of amends they insisted on because they didn’t have consolidated feedback means you need to allow for the same amount this time around.
Be prepared to walk away
Sometimes projects just aren’t meant to be. As with any good negotiation, you’ve got to know the point at which you’ll walk away from the project because sometimes clients either don’t fully appreciate the value, or just aren’t willing to pay enough.
If the client doesn’t like the cost estimation, don’t just arbitrarily reduce the costs – your options are to either reduce the scope or walk away. Don’t fool yourself that you’ll be able to lure them in with a low cost for the project and then make up the difference with change requests. You’ll end up sacrificing the relationship as clients will find it difficult to understand why you didn’t estimate properly in the first place.
Know how much the project is worth, be clear on how much or little you can sell it for, and don’t settle for less.
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.
- 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 the only 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.
FREE Project Estimate Template
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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