What is a cost estimate? The importance of accurate estimating for your service business

Producing accurate cost estimate is one of the most critical aspects of job management and key to successfully executing projects. Not only are estimates essential to winning new business, but they also determine your project budget, your job schedule, and how you manage your resources. However, businesses often underestimate what’s required to complete a job and experience the pains associated with cost overruns, including eroded profit margins, overworked staff, and missed deadlines. In this blog post, we provide an overview of cost estimates for service businesses and explain why accurate estimates are essential to improving business results.

What is a cost estimate?

A cost estimate is the service provider’s approximation of what the job is likely to cost. The purpose of cost estimator company is to predict the quantity, cost, and price of the resources required to complete a job within the project scope. In addition, cost estimates are used to bid on new business from prospective clients and inform your job and budget planning process. Cost estimation is done by breaking the project’s scope down into manageable parts and using all information available (previous experience, similar jobs, expertise in the industry) to arrive at a total expected cost.

Using software (such as a job management system) to manage and track your projects enables you to automatically collect data as you complete work, which you can use to estimate future jobs accurately. For example, tracking team member time with time tracking software gives you precise information about how long employees take to complete specific tasks, so you’re able to estimate those tasks in the following job more reliably. Estimating is done at the beginning of new projects to arrive at an original cost estimate. Still, it should be frequently reviewed and updated as new information becomes available or conditions change.

What’s the difference between an estimate and a quote?

Often, the terms’ estimate’ and ‘quote’ are used interchangeably within an organization, as they both serve a similar function and require a similar job costing process to complete; however, they have one key difference which is essential to outline: A quote (or a price quote/quotation) outlines the exact price that the client will pay for the job being offered. Upon acceptance, the service provider is contractually obligated to complete the work at the specified price based on the terms outlined in the quote (unless the scope of the work changes and a new quote is presented and agreed upon.)

An estimate, on the other hand, is not contractually binding. Clients understand that the prices outlined are subject to change as the project progresses to reflect a greater level of detail about required resources, scope, or timelines.

When should I use an estimate vs. a quote?

Whether you use an estimate or a quote will depend on your industry and the types of jobs you’re offering. But, generally speaking, estimates are instrumental when:

Alternatively, quotes might be preferred between you and your clients if:

Even though you are not contractually obligated to deliver services at a price outlined in your estimate, it’s essential to ensure that your estimates are as accurate as possible.

Why are accurate estimates so important?

A recent study of transport infrastructure projects cited by the Project Management Institute found that actual costs were, on average, 28% higher than estimated costs. Due to lack of visibility into job performance data on previous projects, eagerness to win a client bid, or internal pressures to get a project approved, it’s commonplace for businesses to underestimate the amount of time and resources required to complete a project.

Seeing that cost estimates provide the foundation for planning the job’s schedule and budget, the accuracy of an estimate can determine if the project can meet its objectives. Some of the benefits associated with producing accurate cost estimates include:

What should be included in an estimate?

An estimate is much more than a simple list of project costs. Instead, commercial building cost estimator detail every component of work required to bring the project to life by outlining the assumptions that underlie each cost, inclusions and exclusions, and associated risks. What you decide to include on the estimates you provide to clients will depend on your unique business, but generally, estimates for service businesses should include the following:

Cost breakdown

Your estimate should include a breakdown of all costs involved in the project. There are two main categories to classify costs:

Cost elements included in estimates will vary from business to business, but the most common costs to consider for service businesses include:

When presenting an estimate to a client, ensure you account for your service markup.

Additional project information

Your estimate should also include all relevant information about the project that provides context for the costs listed and the project deliverables. In addition, consider including the following when preparing your estimate:

Estimating software provides a quick and easy way to create detailed estimates so you can respond to queries efficiently and provide prospects with the correct information from the outset.

Accurate estimates start with accurate data.

The key to creating accurate estimates is leveraging previous job data and learning from past projects. Throughout a job, it’s essential to be diligent about tracking all team members’ time and costs and job progress to measure job performance and team productivity. With a better understanding of how your team is performing compared to how you’re estimating, you’ll be able to identify issues, prevent underestimation, and create more accurate cost estimates for future jobs. With Workflow ax all-in-one job management software, you can track and manage every aspect of your project and use that data to create and send more accurate estimates or quotes.

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