For every organization that offers custom services, there’s a business leader wondering if they are charging enough money. This is a multi-faceted question. It often begins with making sure enough detail has been put into the project specifications and, ultimately, relies heavily on experience.
But, how can you tell?
Estimation is a common organizational pain point, especially where creative services or innovation are involved. Expecting a client to accurately communicate 100% of their needs up front is as unrealistic as expecting project team members to anticipate every hiccup.
While senior-level estimators rely on years of experience to ensure that estimates are comprehensive, is the comprehensive estimate always the best approach? Shouldn’t the new estimate be at least partially informed by how the team recently performed and what they have learned? Who on the team is responsible for studying the trends and comparing estimated to actual costs? Aside from top-tier organizations with robust, expensive internal software systems, business leaders are often left wondering and guessing at how to adapt their costs over time.
Admittedly, team leaders with the ability to manually compare estimated to actual project costs are usually too busy with new projects to run the analysis. Teams need to view and compare their cost in as few clicks as possible. They need to be able to learn about discrepancies and necessary change orders as early as possible. They need to be able to communicate to the customer what is happening and why, or their team will take the hit financially
Planning for Uncertainty
Custom services are never 100% predictable. One question worth asking yourself or your team is: How much certainty can we plan for?
If the project specifications include a lot of uncertainty in the way of vague details, include the design and planning time necessary to complete the spec after kickoff. If your team is used to planning in hours, include a factor of total hours to account for communication and future discoveries.
The uncertainty factor, often referred to as “cost padding” or “contingency”, is one way of communicating as a team about the additional unplanned time that will be needed to successfully complete the project.
Ascend allows your team to factor in contingency for each of your cost types, like labor, materials, and contracted services. It also allows you to override your default contingency for part of an estimate, as opposed to the entire proposal.
The Top Line Factor
Rather than padding your margin for uncertainty, start factoring it into the cost estimates. This process sets your team up for success in budgeting and provides your team with a process for communicating about future discoveries. Keeping target margins clean enables business leaders to plan more effectively from project management to human resources
If your team isn’t currently factoring in uncertainty on custom service bids and you have noticed a trend towards going over on project budgets, keep an eye out for trends. If possible, run financial comparisons to see how far over you have been going on average, controlling for different types of projects.
Adapting a Solution
If the reports aren’t available, try adding a small factor to your anticipated labor costs, like 10%-15% as a starting point. Monitor project budgets over the course of this experiment and determine whether this increases the accuracy of the overall project budgeting effort.
Adjust the contingency factor as you see fit. Talk about it as a team. This factor can be adapted to facilitate ballpark estimation and may vary depending on project size.
Want to see how we do it?
Schedule a demo and our team will walk you through all of our best practices for planning for uncertainty on your next custom service quote.