Tips To Create Effective Cost Estimates
Did you know estimating the cost of a project is just as important as creating an error-free invoice? It must be flawless because the cost estimate is your first official submission to a prospective client. They are affected by many factors highlighted below.
- Scope of the project
- Type of project
- Capability of human resources
- Risk factors
Read on to uncover the four tactics that make creating cost estimates easy for managers and business owners alike.
Once you get the estimation phase right, you will be able to make accurate financial forecasts in addition to maintaining positive cash flow.
1. Scale And Prioritize Time And Money
The first step for creating a fail-proof cost estimate is by setting your priorities. According to experts, time takes precedence. While you can request more money, time can’t be prolonged. Once you understand that time is money, estimating the cost boils down to setting efficient deadlines.
Without properly managing the time frame, you won’t know how much time the project will take. For example, without knowing the total time you need to stitch a skirt, you can’t estimate the total money you need to request from the client. On the other hand, accurate time management will help you keep project costs under control.
2. Build-In The Risk Factor
In order to make an accurate estimation of costs, you need to clearly understand the risks that can challenge the successful completion of the project. The following explains how to do so.
Worst Case Scenario
This is the situation that arises where the highest costs are factored in. For example, if the costs of ink for a project is $50 out of the total invoice of $45, you are losing money.
Most Likely Scenario
This the case where you accept a middle-ground, or half of the highest costs. For example, if the highest cost for ink is $50, you factor in $25. Hence, you don’t lose all the money.
Best Case Scenario
When you can keep all the costs at the lowest possible value, your ROI and sales projections will be highest. For example, if the cost of printing is $0 out of the total for a project of $45, you receive all the funds as profit. However, the ideal scenario isn’t necessarily the most likely outcome.
3. Clarity And A Detailed Breakdown
When you’re calculating the cost of a project, it is crucial that everyone on your team is on the same page. For example, when a team member gives you an estimate for completing Project A in 10 hours, you need to ensure that your own expectation is not less than 10 hours.
Unless both your assumptions match, the cost of the project will grow. When your team doesn’t know about your estimates, they might assume 20 hours instead of 10 and up doubling your costs.
To prevent this, you can start by using a platform such as online invoicing software to share your estimates directly with the team. Ensure that you’ve clearly specified the big and small costs associated with the project.
Once other team members have login credentials for your software solution, they will be able to understand the estimates clearly or even collaborate with you to produce more accurate figures.
4. Don't Forget These Factors
Oftentimes, project managers ignore some of the common activities which must be factored into the project estimates. Here are some of the frequent activities that affect a project:
Did you know a mid-tier employee spends up to 35% of billable time in meetings? Meetings inflate project costs by taking up extra time. If you spent seven hours out of a 20-hour project in meetings, additional time and costs will likely be incurred.
Phone and video calls can break the cost estimations. If an employee spends over 30 minutes every day on a call, for a total span of 30 days, the project will take an additional 15 hours to complete.
Edits can increase the total time and cost of the project. For example, if every project of 20 hours goes through an editing process of 5 hours, you will pay for 25 hours instead of 20 hours.
When it comes to project costs, an estimate is always sent before generating the invoice. It is important to prioritize the time taken to complete the project without excluding common activities.
Also divide the risk factors into worst-case, most-likely, and best-case scenarios to obtain a clear idea of the maximum and minimum costs for any project. Finally, discuss project estimates clearly with employees to understand time commitments. Taken together, you can generate more accurate estimates that leave every party more satisfied.