Businesses often underestimate the amount of work required to complete a job. They also experience the problems associated with overruns and lost deadlines.
This blog post will provide an overview on cost estimates for service companies and explain why accurate estimates are important for improving business results using product costing software.
A cost estimateThis is the estimate of the cost of the job by the service provider.To estimate the cost of a project, you need to break it down into manageable pieces and use all information (previous experience, industry expertise, etc.) to determine the 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 accurately estimate future jobs. Time tracking software can be used to track employee time so that you can accurately estimate the time it takes to complete a task.
The initial cost estimate is made at the start of a project. However, it should be reviewed frequently and updated as new information becomes available.
AGet a quoteOr aprice quote/quotationThe price the client will pay to complete the job is specified in the quote. The service provider is legally bound to finish the job at the quoted price upon acceptance (unless the scope or work is changed and a new quote is provided and agreed upon).
However, an estimate is not binding. The prices quoted are subject to revision as the project progresses.
It depends on the industry you work in and the type of job you are offering. Estimates are especially useful when:
- Sometimes the work is still not fully defined. This can happen during the initial stages of scoping the project, when a potential client calls, or during a preliminary site visit.
- This job is new for your company and you don’t have any previous experience.
Although you are not legally bound to deliver services at the estimated price, it is important that your estimates be as exact as possible.
The Project Management Institute cited a recent study that found actual costs for transport infrastructure projects was 28% higher than the estimated costs. Businesses often underestimate the time and resources required to complete projects due to lack of information on job performance, need to win clients’ bids, or internal pressures.
Cost estimates are the basis for planning the job’s budget and schedule.
A cost estimate is more than just a list of project costs. Cost estimates include every element of the work required to make the project come to life. They also outline the assumptions, exclusions and risks that are involved in each cost.
The details of what you include in the estimates that you give to clients will depend upon your business. However, estimates for service companies should generally include the following:
While estimates may include cost elements that vary from one business to another, the most important costs for service businesses are:
- Labor:Both in terms of time and salary, the cost of human resources who are involved in a project is what you call the “cost of human resources.”
- Materials & equipment:Cost of purchasing and maintaining all materials and equipment needed for a project
- FacilitiesAny work space not owned by the company is charged at a cost.
- Vendors & sub-contractors:Cost of hiring contractors to do the work
- SoftwareSoftware programs’ costs
- Hardware:The price of physical computer software
Make sure you include your service markup when you present an estimate to a client.
Include all information relevant to the project in your estimate. This will provide context for the listed costs and project deliverables. When preparing your estimate, consider the following:
- Job description:A clear description of the work to be done
- Schedule for work breakdownDetailed information about the work to be done and when.
- Information about your company:Your business details (including letterhead and company branding)
- Customer information:The details of the customer, the address/location where the work will take place, and a reference number, if applicable.
- Cost disclaimer:Clients should know that they will be receiving an estimate and not a quote. An estimate should contain a disclaimer that prices are subject to change.
- Date and expiry:Your estimate’s validity period (setting a time limit protects your business against rising costs and fees)
- Taxes applicable:The estimate should include all applicable taxes
- Conditions and terms:All terms and conditions of business applicable to your company. This includes normal payment terms, deposits, penalties for nonpayment, and penalties
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