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Estimating a project before it’s begun is difficult, but, it’s also necessary for communicating expectations to the client and delivering a successful project in the end. Whether you are billing time and materials, flat fee, or monthly subscription, creating an accurate estimate beforehand will lay the groundwork for the project’s timeline, budget, and profitability.
Fortunately, time tracking makes estimating a less painful experience. We learned this truth the hard way when we underestimated a big project and ended up losing money by the time it was delivered. In response we created a methodology centered around time tracking that we call Estimate, Track, and Learn. Not only did our estimating improve — every project we completed from then on was profitable.
Before we dive into how it works, here a few relevant things to know about estimating projects with three popular types of contracts.
Time & Materials
Working under a time and materials contract simply means that the project will be billed hourly. It’s not as important to get an exact estimate, but it does need to be in the ballpark. We recommend the estimate have a margin of plus or minus 10%. This allows the client to allocate enough budget and gives you plenty of wiggle room to fine tune the scope as the project progresses.
Flat Fee
A flat fee contract is one in which the project is billed at an agreed upon amount. It’s important to write up a detailed scope of work before the project begins, however, it’s even more important to get the estimate right. Because every hour you go over the estimate is an hour you’ll never be paid.
Monthly Subscription
Gaining more popularity in recent years is the monthly subscription contract. Clients pay a monthly fee in exchange for an agreed upon amount of work or number of hours each month. This billing arrangement works well if your client has ongoing needs, or if the project is formulaic in nature. Monthly subscriptions are desireable for clients because they are predictable. However, it’s important to start out with an accurate estimate of work or you could get stuck with a monthly fee that doesn’t pay enough for the work you do.
How to Create Accurate Estimates Using Time Tracking
Regardless of which type of contract your company uses, time tracking is the best tool for creating more accurate estimates. We’ve used our Estimate, Track and Learn methodology on over 300 projects to hone our estimating skills to the point we could estimate a project within a 5% margin of error. Here’s how it works:
Step 1: Estimate
Yes, the first step to creating more accurate estimates is to simply create one. It won’t be accurate, but that’s ok. It will be a benchmark to improve upon going forward. Break the project scope down into smaller components and estimate how much time each one will require. Then tally up the estimates and calculate the project timeline and budget. The total is your estimate.
Step 2: Track
Choose a time tracking tool that can track time against the different components created in the Estimate step. For example, you might have broken down your estimate into phases or tasks. We’ll be doing some comparisons in the next step, and it will be necessary to break down your actual time in the same way you broke down the estimate. Track every hour spent on the project regardless of whether or not that time is billable. We want a complete picture.
Step 3: Learn
The final step is to learn from the data by comparing the original estimate to the actual time spent. The goal here is to find out which components of the project were under or overestimated. Having an abundance of well-organized time tracking data is the key to properly deducing where the original project estimate was off. Once you’ve analyzed the data it will become clear how to improve the next estimate.
Rinse, Repeat
Before estimating your next project, review and apply what you learned from the last one. The Estimate, Track, and Learn methodology is an iterative process. Your estimates will become more and more accurate with each project and eventually estimating a project will become second nature.
