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What is a Project Estimate? A Step-by-Step Guide

Esther van Opijnen
|
June 20, 2023
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Whether embarking on a small-scale initiative or a large, complex project, clearly understanding project estimation contributes to efficient resource allocation, budget management, and overall project delivery.

Project estimating is a great skill to have when you're a project manager. Most companies aren’t great at estimating the cost and resources of their projects. According to PMI's 2018 Pulse of the Profession report, 28% of all projects fail or take longer than expected because of inaccurate estimates.

This guide will equip you with the knowledge and tools to create accurate and reliable project estimates ready for client sign-off. You got this!

What is a project estimate? 

A project estimate features the anticipated cost, duration, and required resources for successfully completing a project. 

Creative agencies, for example, typically rely on estimates to inform clients how much a project will cost and later invoice them once the project has been finalized. While project estimates are not precise predictions, they provide a reasonable approximation based on the information and assumptions available at the time. 

Creating an estimate is both a factual and creative process. You can only know how long a project will take once the deliverables have been sent. However, good project estimating involves analyzing (historical) data and industry benchmarks, insights from stakeholders, and considering the unique characteristics and complexities of the project.

Why are estimates important in project management?

Before you get to the production stage of your project, you have to get approval for the project requirements and resources from your stakeholders. 

Illustration showing a report and chart on a laptop screen.

Picture this: you’ve just started your creative agency, and a new client asks your team for a new website. You create an estimate on a whim without crunching the numbers and thinking about the availability of the freelancers you work with or the profitability of your project.

Two weeks later, the client comes in to review the drafts, and they're not ready. While this example might be extreme, it’s not unlikely. Your clients likely want to receive an estimate of how much your project will cost. If this estimate is incorrect, your project will be in danger and you will end up not profiting from it. 

Estimates in project management are crucial for more reasons:

  • Budgeting: Estimates enable project managers to budget and plan activities, set milestones, and establish a realistic timeline for project completion.

  • Resource allocation: Accurate estimates help identify the required resources, including personnel, equipment, materials, and technology. This allows project managers to allocate resources effectively, ensuring that the right people and assets are available at the right time.

  • Risk management: By considering the various factors that can impact project outcomes, such as scope changes, resource limitations, and external dependencies, project managers can assess and mitigate risks effectively. 

  • Performance tracking: Estimates serve as a baseline against which actual project performance can be measured. By comparing actual progress, costs, and timelines with the estimated values, project managers can identify variances and take appropriate corrective actions. Estimates provide a benchmark for evaluating project success and enable organizations to refine their estimation processes based on lessons learned.

Also read: Crafting a Persuasive Project Proposal: Key Techniques and Tips

When should you send an estimate?

After discussing the expectations, it’s on you to give your (potential) client an idea of the costs. Send your estimate before the project commences and after the initial contact with your client.

Consider adding a detailed budget proposal along with your estimate. This document can help secure the financing faster and establish goals and timelines while ensuring everyone’s alignment and adding financial transparency.

Aligning project estimation with a project budget

Project budgets and estimates are interrelated aspects of project management but with some key distinctions. 

While estimates aim to provide an approximate projection of project costs, budgets represent the actual spending during project execution and serve as the basis for client invoices.

Ideally, the estimate and budget should align closely. The ultimate goal is to minimize the gap between estimates and budgets to best meet client expectations and financial objectives.

Regular monitoring and control of project expenses, along with proactive management of scope changes and unforeseen circumstances, contribute to aligning estimates and budgets.

While discrepancies between estimates and budgets are common, it is crucial to maintain open communication with clients throughout the project lifecycle. Keeping clients informed about budgetary developments and any necessary adjustments helps manage expectations and foster transparency.

Related: Invoicing Clients: 11 Proven Tactics to Help You Get Paid

Different project estimation techniques and approaches

A project cost estimate will never be completely accurate, but there are ways to come as close as possible. Here are 6 of the most common project estimation techniques you may want to learn more about: 

Illustration listing the 6 project estimation techniques and approaches discussed in this blog.

Three-point estimation 

Three values are considered for each task: the optimistic estimate (O), the most likely estimate (M), and the pessimistic estimate (P). These three estimates capture the range of possibilities for the task's duration or effort.

  • The optimistic estimate (O) represents the best-case scenario, assuming that everything goes smoothly without any unexpected issues or delays. 
  • The most likely estimate (M) represents a realistic estimate based on past experiences or expert judgment.
  • The pessimistic estimate (P) represents the worst-case scenario, accounting for potential obstacles, delays, or unforeseen challenges that may arise during the task.

One common approach is to use the three estimates to calculate the weighted average, where more weight is assigned to the most likely estimate. This average is often represented by the formula: E = (O + 4M + P) / 6.

Bottom-up estimation 

As its name suggests, this method starts from the bottom, considering each element in detail before arriving at the total project cost.

By breaking down the project into smaller, manageable components, bottom-up estimating offers an accurate and detailed estimation approach. Each task or activity is assessed individually, considering its specific requirements, duration, and associated costs. 

Top-down estimation 

This method emphasizes the big picture and strategic objectives, rather than getting into the granular details of individual departmental budgets.

In top-down budgeting, the management team establishes the company's overarching financial goals and objectives. They then allocate the available funds to different departments and projects based on these high-level objectives. The focus is on aligning financial resources with the organization's strategic priorities and ensuring that all teams work towards achieving the company's overall vision.

Analogous estimation 

Analogous or historical estimating is a technique that relies on previous experiences with similar projects to estimate the cost and duration of a new endeavor. By utilizing the framework and insights gained from past projects, project managers can develop estimates for new projects with comparable scopes.

One common approach in historical estimating is to reuse the budget framework of a previous project that shares similarities in scope with the new project. This method streamlines the estimation process, as it builds upon existing knowledge and eliminates the need to start from scratch.

Budget in Rodeo Drive

Rodeo Drive makes it easy to reuse budgets and saves you loads of time during the set-up process for a new project. Simply copy your budget framework from a previous project.

Parametric estimation 

In parametric estimation, you will need access to reliable data. First, you establish key variables or parameters that are expected to significantly impact the task or project's duration, effort, or cost. These parameters can include factors such as size, complexity, resources, or productivity rates. 

Once the parameters are determined, mathematical models or formulas are applied to calculate the estimates. These models are developed based on historical data, statistical analysis, or expert judgment. 

Parametric estimation allows for a more systematic approach to estimation. By considering the specific parameters and their relationship to the project outcomes, it provides a more objective and standardized estimation process. 

Expert judgment estimation 

In expert judgment estimation, the project manager consults with individuals who have deep knowledge and experience in the relevant field or industry.

These experts are professionals, consultants, or internal team members who have a proven track record in similar projects or possess knowledge related to the project's requirements.

The estimation team can gather expert judgment through various means, including interviews, surveys, workshops, or reviews of historical data and lessons learned from past projects.

How to estimate projects in 8 steps

Illustration outlining the 8 steps of project estimation as discussed in this blog.

Clients often have high expectations while seeking cost-effective solutions. By providing realistic cost estimates from the beginning, you can establish a transparent understanding with the client regarding the project's financial requirements. Here’s how you do it in 8 steps:

1. Confirm all project details with your client

To create an accurate project estimate, it is essential to have a comprehensive understanding of your project's requirements. 

Before you dive into the calculation, hold initial meetings with stakeholders and double-check every deliverable and goal. Make sure to check in with your team to ensure that the proposed project and deadline are reasonable.

2. Properly scope your project

The scope acts as the project boundaries, including your plan for what you will deliver. It's a crucial step because you must consider the client’s needs and wants.  

Once everyone is on the same page, it's important to put it down in writing in a scope statement. This document will outline all the different aspects, requirements, and assumptions of the project.

Illustration of project scope

Having the scope written down is a handy reference for the team throughout the project. It helps guide decision-making and serves as a benchmark for measuring success. If you sense any changes or adjustments coming up, you can always refer back to the signed-off document and realign the requirements accordingly.

Knowing your scope from the get-go helps you stay on track with the budget and avoid going overboard later on. Once you're done with this step, you can outline the resources you will need. 

3. Decide on resources

During this third step, it’s crucial to understand your team and how they do things. The focus lies on defining tasks and allocating them to team members who possess the appropriate skill set and have the time to execute the work.

To ensure that everyone is aligned and working towards a common goal, introduce a structured approach and establish key milestones to maintain a clear vision of the project's progress. 

Adding a project activity to Rodeo Drive's planner

Using a software tool like Rodeo Drive will make this stage a lot easier. For example, Rodeo Drive’s planning feature allows you to manage team capacity based on availability.

4. Build a project timeline

Your client probably wants the project done by tomorrow, but it is you, as a project manager, who decides what the timeline will look like. The project timeline sets the expectation for both your team and clients.

Illustration of a project timeline

To effectively manage tasks within a project, creating a project timeline is essential. This visual representation provides a clear overview of the deliverables and the corresponding activities that need to be completed. 

When constructing your project timeline, make sure to include the following information:

  1. All tasks: List out all the individual tasks that need to be accomplished throughout the project.
  2. Deadlines: Specify the target dates or deadlines for each task or milestone.
  3. Estimated duration: Provide an estimate of the time required to complete each task.
  4. Dependencies: Identify any dependencies between tasks, indicating which tasks need to be completed before others can start.
  5. Employees assigned to each task: Assign team members or employees to specific tasks to ensure accountability and clear responsibility.

5. Factor in all budget variables and project risk

The budget formulated during the project planning phase is essentially an estimation. It is impossible to be entirely certain about the exact duration it will take for your team to complete each task or the exact costs of other resources. It can be to your advantage to allocate a small contingency fund as a precautionary measure.

By setting aside this contingency budget, you create a buffer that can be used to address unforeseen challenges, unexpected delays, or additional expenses that come up during the project execution. It provides flexibility and helps mitigate risks associated with uncertainties in task durations.

These funds serve as a safety net when things don't go as anticipated. Instances that may necessitate utilizing the contingency fund include scope creep or changes, unanticipated rises in material costs, or timeline delays that require additional work hours from the team.

A project rarely goes according to plan. When it comes to managing a project effectively, you have to be on the lookout for potential project risks and come up with a plan to handle them.

By getting a good grip on these risks, you can take the right steps to either prevent them from happening or be ready to tackle them head-on if they do show up. Analyzing potential risks helps you see obstacles coming, allocate your resources smartly, and create backup plans.

Related: Don't Let These Project Management Pitfalls Derail Your Project [Tips and Strategies]

6. Calculate the required project budget

You might think this is the first step to a project estimate. We saved this one at the end for a reason. Your estimate needs to represent the required budget as closely as possible. 

Keep in mind that while a low project estimate may seem impressive at first, it's important to be aware that unexpected issues can crop up along the way, which may require additional funds. If there isn't enough money to cover these unforeseen circumstances, the team might have to adjust the project's scope and focus on what can be done based on the available resources.

Building a budget in Rodeo Drive

You can use your trusted calculator, but a project management software tool will help you set a solid budget and monitor the project finances. Rodeo Drive's budget feature empowers project managers to create budgets from scratch or leverage pre-designed templates. You can break down your project into phases with Rodeo Drive's budgeting module.

7. Outline the project estimate

Now that you have assembled the necessary details, it’s time to start drafting your project estimate. We understand that creating a project estimate from scratch can be daunting. Plus, if you wait too long to send out your estimate, the competition might snag the project off your plate.

To simplify the process and save you valuable time, we've included an example you can use as a starting point for your project estimates. This outline captures critical information and provides a structured framework for your project estimation process. Here’s what to include:

Illustration showing an estimate example.

Rodeo Drive simplifies the process for creative project managers by providing a feature that generates estimates with just a few clicks based on your project budget. By utilizing the data from the platform, you can easily generate these essential documents, saving you valuable time that would otherwise be spent on calculating and organizing them. With Rodeo Drive, you can reclaim those hours and focus more on executing your projects.

8. Validate and send

Review the estimate for accuracy and completeness or ask a team member or fellow project manager to double-check. 

Ensure that all tasks, resources, costs, and risks have been considered. Refine the estimates based on any additional information or insights gained during the review process, and hit send when you’re ready. 

Give your client some time to review your estimate but don’t be afraid to follow up after a few days.

Related: The project management checklist: 12 steps to follow

Align your project estimates and budgets with Rodeo Drive

Project management software tool enables you to turn your project budgets into client-ready estimates to speed up getting client approval on your budget.

Rodeo Drive is a user-friendly tool designed to streamline project management, estimating, and invoicing, allowing you to stay organized and work more efficiently. 

By using Rodeo Drive, you can handle multiple clients and increase your business's profitability.

With its intuitive design and powerful features, Rodeo Drive is an excellent choice for project managers who want a hassle-free solution. The platform offers a flat-fee pricing structure per user, or you can get started with Rodeo Drive's Free plan. 

Time tracking made easy 

The time tracking feature in Rodeo Drive allows your team to accurately track the hours they've worked for clients. You don't have to worry about manually updating the project budget because it automatically adjusts based on the time logged. This ensures that your project budget remains up-to-date and reflective of the actual hours worked.

Ending a live timer in Rodeo Drive

Accurate invoicing

Same with project estimates, there is no reason to create your invoices from scratch. Rodeo Drive uses the data from your logged hours and project finances to generate invoices, ready to send to your client.

Example invoice in Rodeo Drive

Access reports on your team’s progress, productivity, and profitability

Having analytics on project progress is vital for any team. Luckily, Rodeo Drive compiles reporting data based on your team's platform usage. In your "Reports" tab, you'll find insights into your employee productivity, time registration, and project financials. 

Rodeo Drive's time report

With Rodeo Drive, you can access these insights at any time. They'll automatically update as your team completes tasks and logs their time. 

Additional features

  • Contact management: Keep all your client and vendor information in one place.
  • Expenses & Purchase Orders: Track project expenses efficiently with your POs.
  • Multilanguage: You can easily switch languages in Rodeo Drive by selecting Dutch or English under ‘Preferred language.’
  • Our integration with QuickBooks (US) and Xero (UK) helps you with bookkeeping and billing.

Ready to get started? Schedule your demo today or sign up for free today.