Image of Using Cost Estimates and Cost Budgets in Pricing

Properly quoting jobs can make the difference between a thriving business and a struggling one. Many things go into your pricing strategy. Profit margins, markup calculations, budgeting for costs, and setting accurate cost estimates are all included.

In fact, cost estimates and cost budgets both play important roles in your pricing strategy. They can have a major impact on your bottom line too.

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Cost estimate vs cost budget

Cost estimates and cost budgets may sound similar––and they are. However, they have some key differences that can affect how accurate your quotes are when pricing a job.

What is a cost estimate?

A cost estimate is an approximate total cost for what it will take to complete a project. It should include all direct costs like:

  • Materials (like wood, fertilizer, or parts)
  • Tools and equipment (either specific for 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)

Your cost estimate may also include indirect costs. These are costs that aren’t directly related to a specific job, but are required to run your business.

For example, overhead costs like bills, computer software, or rent for an office building.

READ MORE: Should you offer free estimates? Find out here

What is a cost budget?

A cost budget is the budget for a job. It’s a limit that you project and set to spend on a job after you have estimated costs.

Before setting your cost budget, you should ensure that your estimate is accurate based on current market values and conditions.

While a cost estimate is what tells you how much a job should cost, a cost budget is the total amount that you can spend on it.

Basically, a cost estimate is what you use to set your cost budget for a project.

For your cost budget to be accurate, you’ll need to stay on top of fluctuating costs. For example, you will need to be aware of any changes in material costs or expected increases or decreases from your suppliers.

If prices go up and you don’t account for that, you risk losing profit.

Throughout the job, you should do your best to manage costs in order to stay within (or under) budget. This will help you ensure that you meet the profit margin you’re aiming for.

Cost budgets 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

Cost estimate vs cost budget

Although they sound similar, cost estimates and cost budgets aren’t quite the same thing.

Cost estimates are the separate approximate costs for each expense a job will have. A cost budget is the total amount that you expect to use to cover your costs for an entire project.

For example, your cost estimates could look like this:

  • Materials: $500
  • Labor: $1000
  • Overhead: $100

While your cost budget would be the total of your costs combined (in this case, $1600)

When to do a cost estimate and cost budget

The best time to do a cost estimate and cost budget for a job is after you have determined 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 will need and how much
  • Determine location-specific factors that could affect costs (the condition of a property or type of terrain)
  • Have a solid idea of the client’s timeline (an accelerated timeline could increase labor costs)
  • Know all of your costs individually (from materials and labor to overhead)

Your cost estimate should be completed before your cost budget. It should be a list of different job expenses.

Your cost budget should be done after you research and confirm costs from your cost estimates and total them up. It should be less of an approximate cost, and display what you expect to spend.

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 accurately incorporate 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 (your 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 you have total labor, material, and overhead expenses of $2500 and you need a profit margin of 40%.

In order for you 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: You can do this without the hassle using Jobber’s free pricing and cost budget calculator tool.

Simply enter your costs and desired profit margin and we’ll tell you what you need to charge for a job in order to meet your goals and margins.

Best practices for accurate job quotes

Having a solid understanding of your costs helps you be profitable. 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 provide more accurate quotes:

  • 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 set a more accurate base to do your calculations off of.

Include each line item cost in your quote with your markup (materials, labor, etc.) to ensure you don’t miss anything and can see your own cost breakdown. This also helps your client understand your cost breakdown.

If you throw a random 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.

Follow a clear and straightforward process to avoid this:

  1. Determine an accurate project scope
  2. Estimate costs
  3. Set a budget
  4. Calculate your markup based on a set profit margin
  5. Create a detailed quote that includes individual costs
  6. Send your quote to the client
  7. Follow-up after sending the quote
  8. Win the job!
  9. Collect to make sure you get your accounts receivable in

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