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What’s the true cost of poor project estimation?

Poor project estimation can erode or destroy your project profitability, but it can also cost you clients. I’ll show you how with the following true story.

Many years ago, I, together with the other residents in my apartment block, needed the services of a lawyer. We spoke to a few firms and got them all to quote for the work. We didn’t choose the cheapest quote but the one that gave us the most confidence that they would give us good value for money. Let’s say the fee quoted was $10,000.

When the work was completed, the final bill came in 50% higher than the quote at $15,000 with no prior warning that the costs had exceeded the estimate and no explanation as to the difference. Not surprisingly, I queried the invoice and asked for an explanation as to why it was so much higher than the original quote. The response that I received was that the quote was in an estimate and we were made aware of the fact that the actual fee could differ from the quotation. The lawyer went on to explain that he had written off a further $5,000 of fees because he had actually done $20,000 of work for which he had “only” charged us $15,000. I had the feeling that he thought we should be grateful for his generosity.

The point of this post is not to complain that we were overcharged by a firm of lawyers but that all too many professional services companies struggle with poor estimating. They don’t quote work properly which can severely undermine their profitability, credibility, and possibly lose clients.

In the example above you have a company that had to write off 25% of the hours worked on a project and still was in the difficult position of billing the client 50% above the quoted price. How likely do you think it is that we’ll use this firm of lawyers again?

This should have also raised some difficult questions from the accounting team such as:

Why was the quote so wrong? Was it a scope issue or bad planning?
What tracking was being done for actual costs against the fee budget?
Why were there no warnings that the quoted fee was being exceeded?
Who approved the write-offs? Etc.

Most importantly, I wonder if there was a job closure review when the assignment was completed so that the lessons learned were incorporated into the next quotation done.

Does your agency struggle with poor project estimation?

There are still a surprisingly high number of companies that struggle with poor project estimation. They have a hard time getting to get job/quote P&L’s for each piece of work that they produce so they have no idea as to whether a piece of work was profitable or not.

Do these issues sound familiar in your business? Do you want to improve the accuracy of your estimating process and the efficiency of your billing?

If so then please contact us for a no-obligation appraisal of your processes.