Estimates are issued to clients by small businesses to help win new work. There are a few different estimation techniques that you can use as a business owner.
The technique you choose depends on your specific business’ needs, the potential job and the situation you are in.
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 estimation processes helps your business financially. You can also better manage client relationships.
Below you’ll find five of the most common estimation techniques.
1. Top-down estimates
The top-down estimation 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.
Top-down estimation tends to be used early on in the project. You can 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 can then use a second technique later on in the process to give a more precise estimate.
Pros of top-down estimates:
- Easy way to asses a budget
- Good for single-person businesses and small teams without many resources
Cons of top-down estimates:
- Not very accurate
- Based on guesses
- Doesn’t account for any project or budget changes that might happen
2. Bottom-up estimates
The bottom-up 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 bottom-up estimates to work, you will need most if not all of the project details from the client. As a result, bottom-up estimations are usually done later in the estimation process when the scope and elements of the project are a bit clearer.
Pros of bottom-up estimates:
- Most accurate technique
- 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 of bottom-up estimates:
- Takes time
- Lots of resources needed
- Requires lots of information about every stage and task
- Costs might be overestimated
3. Analogous estimates
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.
The analogous estimate technique uses ballpark estimating, similar to the top down approach. However, the biggest disadvantage of analogous estimates is that it will only work if you have done a similar project in the past which is especially hard if you’re a start-up business.
Pros of analogous estimates:
- Quick and simple
- Not much information is needed
- Good for getting a rough number
Cons of analogous estimates:
- Not overly accurate
- A project might be similar but never the same
- Old project information needs to be accurate
4. Parametric estimates
Parametric estimation is another ballpark estimate technique but is slightly more accurate than top-down and analogous estimation.
Like analogous estimation, parametric estimates use previous projects to assess a new project’s costs. However, the parametric estimate method uses a variable from the first project. Then, it adjusts the costs in relation to the variable and the new project’s scale.
Pros of parametric estimates:
- Most accurate ballparking technique
- Accounts for variable costs
Cons of parametric estimates:
- Still quite inaccurate
- There might not be an adjustable variable.
5. Three point estimates
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 of three point estimates:
- More accurate than ballpark estimates
- Factors in unexpected situations
- Reduces risk
Cons of three point estimates:
- Takes more time
- Can be complicated to learn and perfect
How to decide on an estimate technique
It’s worth considering several factors before making an estimate for your small business including the below:
- 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.