Note: This is an excerpt from our ebook, “The 5 Steps to More Profitable Projects.” Learn more by downloading the full ebook for more insights.
Today, clients expect greater transparency in the services process, wanting to know who is working on their project, how long it will take, and why it costs as much as it does. At the same time, it’s becoming more difficult for services businesses to maintain a healthy project margin. Creating an accurate estimate up front will help balance both sides by setting client expectations and preventing surprise costs from compromising profit margins.
Having an accurate, reusable estimation model plays a pivotal role.
What Makes an Accurate Estimation Model?
The estimation process should not simply result in one high-level cost estimate and overview of deliverables. It should provide details on the types of work involved in the project lifecycle and the specific skills needed to complete each of them. An estimation model that does this can help resource managers understand who will need to be assigned to various tasks and what compensation rates will inform the project budget.
The estimation model should break the project down into multiple phases, which will act as containers that you track time against throughout the project lifecycle. Having differentiated phases will help clients understand the many aspects that lead to the overall estimated cost. These phases can quickly reveal what is costing your business more or less when comparing actuals to estimates.
The estimation model you have created can be replicated to track actuals on projects. However, keep in mind that each project will be executed slightly differently depending on client size, location, client history, and more, which will impact your project lifecycle.
The Importance of Estimation Models
Accurate estimates are the foundation of strong margins, profitability, and happy customers. Even with a time and materials contract, a company will still need to accurately estimate budgets. Having a thorough and precise estimate means that clients can understand the “why” behind project execution and cost, preventing them from questioning it when the time comes for payment.
Your estimation model and process is your secret sauce. With the right estimates, your project lifecycle will be based on informed decisions that are focused on both executing a project well and keeping a healthy margin from the very start. Estimation tools, methodologies, and assumptions that inform how an estimate is determined must be continuously reviewed and improved. Industries change, employee rates increase, and client expectations shift as time goes on. Your estimation model should change with them.
Monitoring Scope Creep
Scope creep is one of the easiest ways for project margins to be eroded. Effective scope management is possible through the use of a project management tool that can identify scope changes and facilitate corrective measures. Along with a strong project management solution, the following four steps can help manage scope creep before it begins and respond accordingly if it occurs.
- Communicate and Set Expectations Up Front: Have a clearly defined statement of work (SOW) created before any tasks begin, which will help set client expectations. The SOW should have an agreed-upon plan of action that includes timelines, deliverables, responsibilities, and milestones.
- Maintain Requirements and Status Reports: Projects and related tasks should have well-documented timelines, assigned resources, budgets, and deliverables. A project requirements document should also include a section where your team reviews task statuses and compares them against the SOW.
- Create a Change Management Process: Your business should have a process for change management in place and stick to it on each project. When a client requests additional tasks and deliverables be added to an ongoing project, the established change management process can begin.
- Set Parameters for Revisions: Excessive revisions can eat away at margins due to the unexpected amount of time and resources required to meet shifting client expectations. Prevent these cascading costs by setting parameters and a cap for the number of revisions upfront. These should be defined in the contract.
The Estimation Process Review
After a project comes to a close, your company should compare your project estimates vs. actuals. Remember that while estimates should be accurate, having agility and flexibility in estimation models and tools is critical. Upfront budget estimates are always needed, no matter how you calculate margins for your company.
Transparency on estimates (even for fixed fee projects) is crucial for maintaining relationships with customers. Letting a customer know why you’re charging them as you are and then completing a project accordingly creates a sense of honesty and reliability. This can make a significant difference in negotiation dynamics, efficiency, and trust.
How to Make Your Projects More Profitable
Learn how to eliminate the many unnecessary costs cutting into your margins and increase the profitability of each project through our new ebook, “The 5 Steps to More Profitable Projects.” With these easy-to-implement steps, your company will be on the way to greater success in little time.