Articles

Getting the Numbers Right

Estimating Pitfalls
by Creative Business

Pricing and estimating are inextricably linked. All the benefits of valuing your firm's activities properly will be lost if the process of estimating the effort involved in individual projects is incorrect. Listed below are the ten mistakes that both new freelances and experienced shop principals most commonly make.

Pitfall #1: Too much guessing. How deep is the ocean?... how blue is the sky?... how long is forever? These questions are as difficult to answer as the one often asked by clients: how much will my (brochure/annual report/ad/Web site) cost? In all cases, the answer is the same: it all depends. Specifically, it depends on the problems or opportunities to be addressed, the timing for doing so, the medium to be used and its specifications, and the client's desires, taste, style, sophistication, and budget. Without knowing all this, in detail, it is impossible to produce a valid estimate. Although this may seem elementary, preparing estimates on insufficient information remains the biggest single project pricing problem.

Pitfall #2: Fear of making some assumptions. Because most clients are not communications professionals, they often don't know or can't articulate what they need. They look to us for help in defining it. When you sense this is the case, it may be wise to prepare something they can react to, either positively or negatively. First, get a feeling for their budget. ("Is the $0,000 to $0,000 range I indicated what you anticipated?") Then, spend a few (no more) hours coming up with three hypothetical approaches to the problem as best you understand it. Ideally, an economical (good), moderate (better), and quality (best) solution. Find previously-produced examples of each type of approach, or do some very rough sketches so the client can visualize what you have in mind. Prepare a single-page "ballpark" estimate for each example. Then explain the positioning/cost/quality trade offs of each approach. Note that this should probably not include preparing concepts (new ideas). This crosses the line into spec work, which is considerably more risky.

Pitfall #3: Confusing quotes and estimates. A quote is a fixed price based on fixed conditions; an estimate is an approximate price, based on flexible conditions. This is not legal hair-splitting. Clients asking for a quote may be expecting just that—a price that's locked-in up front. There are certain situations where providing quotes may be appropriate, such as routine and highly-predictable assignments. But by and large, the strong likelihood of changes occurring between cost estimating and final delivery makes it better not to provide them. Quotes should be limited in most cases to individuals who are gamblers willing to take the risk of winning big, or losing big. Moreover, unless you are actually providing a "quote," avoid using the word. Most clients will be satisfied with an estimate (the right word to use) presented either as a proposal or letter of agreement, especially if they're assured that the price will not change unless they are notified first that job conditions have changed.

Pitfall #4: Not segmenting the tasks. The bigger a project, the harder it is to estimate—unless you think of it as several interconnected tasks. Even with small projects, the more discrete steps you can identify, the easier it is to figure how much time each will take and the less likely you are to overlook any steps.

Pitfall #5: No padding, no checkpoint. No matter how long you've been doing them, and how finely you break down all the tasks, assignments nearly always take more time then anticipated. If you're new to estimating, they end up taking lots more time. One reason is the optimism most of us have about our own (and our clients') efficiency. Another is our desire to hold prices down to be more competitive. Whatever, be aware of this universal tendency. One cure for underestimating is to add a little padding to discount the "optimism factor." If you're inexperienced, increase estimated time by up to 20%; even if experienced, increase it by at least 10%. Granted, this may affect your competitiveness. But don't forget this point either: it's not smart to prepare a "competitive" price estimate if you end up making little or no money on the job. Another underestimating cure is building in one or more check points for fine-tuning the estimate as the job progresses. The most logical place is after the concept/first draft is approved. If you inform the client at this time that you'll be able to beat the estimate, you'll look like a hero. Even if you must inform him or her that changes have made the estimate no longer valid, it is still better to face the situation sooner rather than later. He or she will have a better understanding of why, which allows a more rational discussion of the situation.

Pitfall #6: Sloppy or inaccurate time keeping. Even under ideal circumstances, estimating project time is largely a trial-and-error, learn-from-past-mistakes process. Thus, the most accurate estimates usually come from individuals and shops with the best reporting procedures and most complete time sheets to draw upon. Every hour spent on every job should be logged, and all records archived. Even if you occasionally decide not to charge a client for all your time (e.g., the extra effort to create a "portfolio" piece, or the extra hours spent working out a computer glitch), it is still important to have complete time records. The accuracy of future estimates depends on the accuracy of records compiled today.

Pitfall #7: Sloppy or inaccurate expense accounting. Estimating project-related miscellaneous expenses is not as problematical as time estimating, but experience and accurate records are still very beneficial. Anticipated expenses should be included in estimates as a separate item. Except for unusually significant ones, it is probably not appropriate to break them down at this time, although it may be preferable to do so when invoicing. (Example: "We estimate miscellaneous expenses—delivery charges, reference materials, etc.—will be approximately $000.") Additional services such as writing, design, or programming help, service bureau charges, photography and illustration, and printing or production should also be treated as separate items in the estimate. When doing so, be sure to include (but not necessarily identify) your markup.

Pitfall #8: Too many rates. It used to be that every shop, and most freelances, had several different billing rates depending on the task performed. Today, when most work is done by one person at a single workstation, the norm is one rate per individual. It makes bookkeeping easier, and it is less confusing to the client.

Pitfall #9: Different rules in different situations. It is usually best to estimate all jobs on the same hourly-rate(s)-multiplied-by-anticipated-time basis, regardless of how busy you are, or who the client is. This keeps the estimating process relatively simple. It also makes the estimate easier to defend, eliminates any potentially embarrassing inconsistencies from job-to-job, year-to-year, and client-to-client, and avoids any impression that you may be charging "whatever the traffic will bear." If the job actually turns out to be different than the one you estimated, a typical situation, estimating consistency makes it easier for you to come up with a new estimate, and also makes it easier for the client to accept. If necessary to lower costs to be more competitive, do so by reducing the estimated hours the job will take, not your hourly fee(s).

Pitfall #10: Gilding the lily. As much as we'd all like to do "perfect" work for our clients, we should recognize that it's an impossible objective to achieve. Moreover, the closer we get to perfection, the more time and expense are involved in attempting to achieve it, and the more illusive it becomes. Thus, to estimate a job based on perfection is to set a trap that will snare us every single time. As an example, let's say that giving a client a creative solution that's 90% of perfection (your definition) will take 90 hours. To go from 90% to 95% won't take a proportionate 5 more hours, it'll probably take 10. To go from 95% to 97% of perfection will probably take an additional 20 hours! And so forth. Does this mean that you shouldn't give your clients 100% of your very best efforts? Not at all! It simply recognizes that at some point the quest for perfection will outpace either the client's budget, or your profit.

This article has been provided by Creative Business, and is excerpted from the publication "Pricing and Billing Standards For Single & Multi-Person Creative Service Firms." The entire 12-page booklet can be downloaded from www.creativebusiness.com/books.lasso