Cost estimation is hard—creating a project budget that works for your agency and your clients is practically an art form.
How do you do it right? Start with this cost estimate guide, where you’ll learn:
- Cost estimation basics
- Which estimation tools to use
- Types of agency pricing models
- Types of estimates
- What an example project budget looks like
- What to do before you start estimating
- Estimation techniques
- Steps to create a project budget
You’ll also be able to download a project budget template for a website redesign. By the end of this post, you’ll know which type of estimate to use—and when—and the steps and tools to manage your project budget.
Project Budget And Estimation Basics
Whether you like it or not, money talks.
Getting project budgets right and controlling costs is essential to project success. Budgets are usually the overriding factor that trumps all else, and budgets are often the reason why we end up needing to resolve conflicts between agencies and clients.
There’s a lot of pressure, too. The cost estimation process can be stressful and scary; 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.
Managing project budgets successfully isn’t simple. But if you follow the steps for estimating properly, and combine it with a well-written statement of work, you can be confident that your project budget won’t let you down. Read on to find everything you need to start making your project budget work for you!
First, let’s cover the fundamentals. Find answers to common estimation questions below, as well as a list of useful tools for managing estimates and budgets. They won’t do the entire job for you, but project cost estimation tools can track and supply project information that feeds into your estimates and budgetary planning.
The Best Project Cost Estimators
There aren’t many pure play cost estimator tools, but here’s some project management software that includes tools for projects cost estimation, such as time- and budget-tracking functionality that make for more accurate project estimates.
- Microsoft Excel – Widely used project cost estimator with plenty of project estimate templates for Excel.
- Google Sheets – Free project cost estimation tools alternative to Excel.
- Price&Cost – SaaS estimating and cost management tool to manage project financials.
- BrainLeaf – Project scoping tool that helps to accurately estimate project costs.
- Eastimate – Free SaaS estimation tool to create estimates and timelines collaboratively.
- Simplestimate – Free project cost estimator SaaS tool with three point cost estimation and easy sharing.
- Web Development Project Estimator – Simple project cost estimator to estimate time and materials for web projects.
- Wrike – Complete project management software tool with cost estimation functionality.
- CMAP Software – Estimation software with a clean interface; produces estimates for complex projects.
Types Of Agency Pricing Models
Common agency pricing models include (1) time & materials estimates and (2) fixed price. This list is by no means all-inclusive, but when you’re estimating projects it helps to understand the type of pricing model your agency uses so that you can create estimates and budgets that fit with your model. Find a simple definition along with the pros and cons of each pricing model below.
Time And Materials (T&M)
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.
- 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.
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
A fixed price estimate is where the client agreed to pay a fixed price, regardless of the amount of effort applied to the project.
- 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.
- 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.
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. Another 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.
Which Agency Pricing Model Should I Use?
- Time and Materials estimates 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.
- Fixed price estimates are great to use when there’s little uncertainty or risk in the project: a price is agreed and then paid.
Types of Estimates
What are the types of estimates? There are many, but here are a few of the most common estimates that digital agencies use:
Use a 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.
Use a 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
Use a 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.
A Simple Project Budget Example
Let’s make a cake. A very expensive cake.
Below, you’ll find a budgetary estimate for making a cake. You could present a document like this to a client and see if they could secure $1000 to start the cake-making project. Then, after refining the cost estimate, you’d create a statement of work, get approval with a purchase order.
Then, you’d back your kick-ass cake. Admittedly, it’s a ridiculously expensive cake, but hey, you deserve it.
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.
Pre-Estimate Checklist: 5 Things To Know Before Creating A Cost Estimate
You’re on the phone to a client (as they’re going down the lift, of course, so you can’t hear them properly).
They want 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. Okay…? What…? I can’t hear you. Just send me the number in the next hour. Thanks so much bye.”
Alright. Before you start scrambling around to give any numbers, cover 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 strategic objectives, 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. Often a client will claim they don’t know their project budget, so when they say they don’t know, it means you’ll need to discuss a few options.
First, 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.
3. Have A Plan For The Project
When you’re estimating a project, it’s much easier to do if you’ve got at least a simple project plan. 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. If you dive straight into an estimate with no plan, you’ll quickly discover 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. Its purpose is 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. If you don’t have any idea of the level of effort you can afford, you get half way though your project plan and realize you’ve overcooked it.
4. Know Why You’re Estimating
Answer this question: What are you trying to achieve with your budget and the estimate you’re creating?
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 upfront 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. Knowing the full picture ensures 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 run-up 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.