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.
5 Project Budget Estimation Techniques
So what are the project estimation methods 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:
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 project tasks. 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 did 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.
Analogous estimates can also be derived from examples outside your—or your team’s—project experience (for example, here’s a survey with rough figures on mobile app development costs). Use caution—outside examples can be a good place to start if you’ve never done that type of project before, but you’ll still need to do a fair amount of due diligence as you break down the costs for your specific case.
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.
How To Create A Project Budget
Use our cost estimate checklist below to create a project budget in 1o steps. Here’s a cost estimation infographic that sums up the steps:
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 for the total budget.
3. Do your research
Leave no stone unturned. Go back to your pre-estimate checklist and get acquainted with the client, team members, 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. Your planned costs are the least of your worries—it’s the unexpected costs are the real deal-breaker. Projects rarely go exactly to plan so account for an appropriate amount of budget for risk, changes to the project schedule or scope, 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, labor materials, project expenses, 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 labor costs, 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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