Imagine you have to explain to your new colleague how to create a quote for a client. The temptation is to make some quick calculations or rely on past experience, but pricing a project accurately is like making a recipe: every ingredient has its weight, and a pinch more or less can make the difference between a tasty project and one that leaves a bitter aftertaste.
Disclaimer: in these articles, we share our approach and perspective. In finance, there’s no “right way” because, as often happens, the answer is “it depends.” There are certainly other ways to estimate a budget, but here we’re sharing what works best for us.
A practical approach to estimating project costs is to start with the levels of seniority of the team involved. Dividing the team into categories such as junior, senior, and manager allows for a flexible and scalable structure.
We’ve found that breaking down the team by seniority levels brings a nice balance between specificity and flexibility. Each level has an actual cost, including salary and company contributions, and an average sale price, set based on expertise and market value. This estimate, neither too generic nor too detailed, adapts well to different situations without too many calculations.
Why use levels and not individuals? Sure, you could estimate costs based on one person, but this approach risks creating confusion. When preparing a quote, there’s no guarantee that a specific person will be available. Using seniority levels removes uncertainty, sparing the project manager from handling unpredictable variables. More stability, fewer surprises.
Besides internal costs, every project may include external expenses tied to suppliers or third-party services needed to complete the work. For each supplier or external service, we add an estimated cost—the actual expense we expect to incur to complete the project. In some cases, we might even apply a markup to these external costs, ensuring they contribute to the project’s margin. Including this line item keeps the budget realistic and sustainable, avoiding surprises on both financial and strategic fronts.
Now that we’ve handled direct costs—workdays, suppliers, markup—let’s move to company-wide general costs (G&A). G&A includes expenses like rent, software licenses, and other essentials. But these general costs aren’t included directly in individual projects, and here’s why.
Bias and flexibility in G&A allocation
Let’s take an example: annual G&A costs are €12,000, and we expect to complete 10 projects. We could say that each project should cover 10% of these costs. Simple, right? But… there’s a catch.
The contribution margin indicates how much each project contributes to covering G&A and generating profit. Calculating this margin without including G&A in individual projects gives us a clearer view of what each project truly brings to the company.
If the margin is enough to cover G&A, we can proceed with that level of margin; otherwise, we can adjust on new projects, tweaking margins as needed.
This process might seem complicated, but that’s where technology comes in. On wethod, everything is automated. The platform handles seniority levels, variable costs, and margins without manually inserting G&A into individual projects.
Want to learn more? Request a wethod demo and discover how to simplify budgeting, leaving the calculator in the drawer.
