Cost Estimate vs Budget: How They Affect Your Pricing and Bottom Line
Quoting jobs properly can be the difference between a thriving business and a struggling one. To do that, you need a solid pricing strategy first.
Profit margins, markup calculations, cost budgeting, and accurate cost estimating are all important to that pricing strategy. But many small business owners confuse cost estimating with cost budgeting—and they’re not the same thing.
Understanding the difference between a cost estimate vs budget will help you plan your pricing better and provide more accurate job quotes that keep your business profitable.
Cost estimate vs budget
What is a cost estimate?
A cost estimate is the approximate total cost it will take to complete a project. It also outlines the cost of each expense that job will have.
Your cost estimate should include all direct costs like:
- Materials (like wood, fertilizer, or parts)
- Tools and equipment (either specific to a job or an amortized cost)
- Labor (like independent contractor fees or employee wages)
- Fuel (gas or oil costs for transportation or to run machines)
It should also include indirect costs, like overhead costs and operating costs. These costs aren’t directly related to a specific job, but you need them to run your business during the project.
Indirect costs can include:
- Office rent and utilities
- Liability insurance
- Accounting and payroll services
- Business software
READ MORE: 11 pricing strategies for service businesses: which ones work?
What is a cost budget?
A cost budget is a more final number: it’s the amount you set to spend on a job after you’ve estimated all your job costs.
While a cost estimate is a forecast of your costs, a cost budget is a spending limit. As a result, your cost budget will be higher than your cost estimate.
Before setting your cost budget, make sure your estimate is accurate based on current market values and conditions. Basically, you need a cost estimate before you can set your cost budget for a project.
For your cost budget to be accurate, you’ll need to stay on top of fluctuating costs. These could be any changes in material costs or expected price increases or decreases from your suppliers.
If prices go up and you don’t account for that, you risk losing revenue and profit.
Managing costs and expenses
Throughout the job, you should do your best to manage costs so you stay within (or under) budget. This will help you ensure that you meet the profit margin you’re aiming for.
Your cost budget can go up or down depending on the project, so it’s important to keep track of expenses. Some common reasons for cost budget changes include:
- The client changes the scope of the job (they want more or less work)
- The initial budget wasn’t realistic based on unexpected costs or circumstances
- Material costs increase due to unforeseen market changes
If the job will take several days or weeks to complete, assign a budget to each phase of the job to keep spending on track. These phases could be divided into days, weeks, or specific areas of labor involved in the job.
With detailed cost budgets that divide your spending limit into smaller chunks, it’s more manageable to plan how you’ll split your resources and prevent overspending.
READ MORE: Are you charging the right amount for your services?
Examples of a cost estimate and cost budget
Here’s an example of what a cost estimate sheet and cost budget might look like for a landscaping company:
Example of cost estimate for a landscaping job
|Design and planning||25||HR||$50||$1,250|
|Garden installation||14||SQ FT||$12||$168|
|Masonry and stonework||22||SQ FT||$60||$1,320|
|Irrigation system installation||28||SQ FT||$60||$1,680|
|Water fountain installation||4||SQ FT||$54||$216|
|Total Cost Estimate||$5,812.40|
The cost estimate for this landscaping job is the total of all approximate costs combined: $5,812.40.
Example of cost estimate for a landscaping job
Let’s use the landscaper’s cost estimate of $5,812.40.
To make room for budget variance (any unplanned change in the actual job cost), they’ve set a cost budget of $6,200. Here’s what their cost budget might look like:
Total Cost Budget: $6,200
- Week 1: 2,100
- Week 2: 2,400
- Week 3: 1,700
When to do a cost estimate vs budget
The best time to do a cost estimate and cost budget for a job is after you’ve figured out the project scope, but before you give your client a quote.
To have an accurate cost estimate and cost budget, you should:
- Know what materials you’ll need and how much of each
- Identify location-specific factors that could affect costs, like the condition of the client’s property or type of terrain
- Have a solid idea of the client’s timeline (since a rushed timeline could increase labor costs)
- Know all of your costs individually, from materials and labor to overhead
Make your cost estimate before your cost budget. It should be a complete list of all possible job expenses. After you research, confirm, and total up costs from your cost estimate, make your cost budget.
While the cost estimate gives you an approximate cost, your cost budget should show you the amount of money you plan to allocate to the project in the end.
You may go over or under budget due to changes in client demands or project conditions, but your cost budget should keep you on track to avoid overspending.
READ MORE: How to create a small business budget (with free template)
How to use a cost budget in job quotes
After you know what your costs will be for a given job, it’s time to figure out how to translate them into a quote.
On top of your cost budget, you need to add in your markup to profit from a job. This total amount (budget plus markup) is what you can use to quote a client.
Start by calculating your material, labor, and overhead costs individually. These make up your cost estimate. Double-check your numbers and add them up to get your cost budget.
Then, factor in the profit margin you’re aiming for to figure out what your markup should be.
For example, let’s say your total labor, material, and overhead expenses add up to $2500, and you need a profit margin of 40%.
To meet that profit margin, you would need to have a markup of about 67%. That means that you would need to charge the client $4,166 for the job, giving you a profit of $1,666.
Pro tip: Calculate your margins more easily Jobber’s free profit margin calculator tool. Just enter your costs and desired profit margin, and we’ll tell you what you need to charge for a job to meet your profit goals.
Best practices for accurate job quotes
Having a solid understanding of your costs helps you make more profit on your projects. If you don’t know all your individual costs, you can easily lose money on a job by providing an inaccurate quote.
Here are some tips you can use to make your quotes more accurate:
- Don’t make assumptions about material, labor, or overhead costs for a job. If you’re not sure, do the math before sending the quote off to your client.
- Complete accurate cost estimates and cost budgets before quoting.
- Do walkthroughs of properties and job sites before quoting. This will help you better understand the job site conditions and potential unexpected costs that could come up.
Include each line item cost in your quote with your markup (materials, labor, etc.) to ensure you don’t miss anything—and to help you see your own cost breakdown. This also gives your client a better idea of what they’re paying for.
DOWNLOAD: Get our free estimate template for your next job
If you add a cost estimate into your quote without putting in the work, you risk having to change the original price quote or ask for more money down the line. Both make you look unprofessional and unreliable in the client’s eyes.
To avoid this, follow this clear and straightforward process and get an accurate quote:
- Determine an accurate project scope
- Estimate costs
- Set a cost budget
- Calculate your markup based on a set profit margin
- Create a detailed quote that includes individual costs
- Send your quote to the client
- Send a quote follow-up email to remind the client
- Win the job!
- Collect to make sure you get your accounts receivable in
Originally published March 2020. Last updated on October 28th, 2021.