How to make an estimate

There are a few different estimation techniques that you can use as a business owner.

The technique you choose depends on which technique is most suitable for your business, the potential job and the situation you are in.

It is a good idea to know all the different types of cost estimation techniques. That way you can pick and choose which technique you using depending on the situation.

Estimating can be hard enough as it is with the minimal information you’re often given by clients. However, it’s worth learning how to estimate properly because doing it badly, could cause you to misjudge your budget and timeline.

On top of all that, having good business and estimating processes will help your business both financially and to better manage client relationships.

Below you’ll find five of the most common estimation techniques.

Top-Down Estimation

This technique begins with setting a budget for the project. From there, the budget is divided between the different stages or tasks of the project. Once you know approximately what tasks need to be completed and how much they will cost, you can adjust your budget as needed.

This technique tends to be used early on in the project to get a quick overview of whether the client is providing a large enough budget to cover any costs involved and leave you with a profit. You would most likely use a second technique later on in the process to give a more precise estimate.

Pros:

  • Quick
  • Easy way to asses a budget
  • Good for single-person businesses and small teams without many resources

Cons:

  • Not very accurate
  • Based on guesses
  • Doesn’t account for any project or budget changes that might happen

Bottom-Up Estimation

This estimation technique is similar to the top-down technique, except you flip the process. In the bottom-up technique, you are still calculating in stages and tasks but you look first at the tasks and then assess the budget.

Each part of the project is assessed and estimated individually. These amounts are then added together to work out the total project estimate.

For this technique to work, you will need most if not all of the project details from the client. As a result, this technique tends to be done late in the estimation process when the scope and elements of the project are a bit clearer.

Pros:

  • Most accurate technique
  • Detailed
  • Costs and timelines can be checked against the estimate during the project
  • Helps you manage projects in progress and complete said projects on time and within the budget

Cons:

  • Takes time
  • Lots of resources needed
  • Requires lots of information about every stage and task
  • Costs might be overestimated

Analogous Estimation

Analogous estimation is where you base a new estimate off an old one. You would use a similar project to assess the costs involved with a new one.

This type of estimate uses ballpark estimating, similar to the top down approach.

The biggest disadvantage of this type of estimation is that it will only work if you have done a similar project in the past which more often than not, you haven’t.

Pros:

  • Quick and simple
  • Not much information is needed
  • Good for getting a rough number

Cons:

  • Not overly accurate
  • A project might be similar but never the same
  • Old project information needs to be accurate

Parametric estimation

Parametric estimation is another ballpark estimate technique but is slightly more accurate than top-down and analogous estimation.

Like analogous estimation, it uses a previous project to assess a new project’s costs. However, in this method, it uses a variable from the first project and adjusts the costs in relation to the variable and the new project’s scale. 

Pros:

  • Most accurate ballparking technique
  • Accounts for variable costs

Cons:

  • Still quite inaccurate
  • There might not be an adjustable variable.

Three Point Estimation

Moving away from ballparking techniques, three point estimation takes three different scenarios (best, worst and most likely). You then decide on a predicted cost for each scenario and you find the average of the three scenarios.

In it’s simplest form, the equation looks like this

(best + worst + most likely) / 3 = estimate

You can also adjust the likelihood of each scenario if the chances of a certain scenario are higher. This equation could look something like:

(best + worst + most likely(2)) / 3 = estimate

Pros:

  • More accurate than ballpark estimates
  • Factors in unexpected situations
  • Reduces risk

Cons: 

  • Takes more time
  • Can be complicated to learn and perfect

When deciding which technique, consider a few factors.

How much time do you have to make the estimate? How much do you think the price could vary from your initial estimate? Is the job worth the effort of making a detailed estimate?

Once you know the answers to the above question, you can pick the technique that best suits you and your business.

If you need to make an estimate for your business, you can do so using Bookipi Invoice.

You can make as many estimates as you want for free!

Kick start your entrepreneurial career with Bookipi.

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