Estimates vs. Quotations: Which Are Best?

I made a video about Estimates vs. Quotations: Which Are Best? It’s posted on my YouTube channel. You can watch it or read the transcript below.

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Transcript

In this video, I’m going to explain the difference between estimates and quotations and describe some situations where one or the other may be more appropriate. This is an overview for beginning contractors, but even if you think you know it all, you might learn something from this. Customers who plan to hire contractors might find value in this too.

Getting to the point… By definition an estimate is an approximate calculation or a range between numbers. Some other names for an estimate include ballpark, guesstimate, or rough order of magnitude. A quotation is an exact number based on a definite scope of work. Some other names for a quote are fixed price, lump sum, or a flat rate. 

Whatever you call them, make sure to clarify the distinction between approximate and exact. I think most construction professionals understand the difference. Sometimes I meet customers who do not. It’s worth explaining to avoid confusion. 

In general, a pricing process starts with rough estimation and ends with an exact price. 

In most cases, I prefer to quote an exact price for a scope of work. This way, the expectations are made clear in advance and conflicts are prevented. I’ve found that most customers also prefer this arrangement. In those cases, I also prefer the price to be based on the customer’s perceived value for their situation. I did another video about that topic that you should watch.

 Other ways to figure out pricing can be on a basis of time and materials or market rates. In some cases, I use those. I explained a bit about those in my perceived value pricing video. And I’ll give some more examples now. 

It’s usually easier to start a project with a rough estimate, especially if the scope of work is not clearly defined. There can be big problems with that method, though. Some contractors don’t communicate clearly so they’re bound to disappoint their customers and they might not get paid in full for all of their work. Some customers don’t trust contractors, especially when the pricing details are not specific and guaranteed. In those cases, this can be a nightmare for the contractor and the customer. 

In some cases, it might be best to start a project on an estimated time and materials basis like that and the exact total price might not be figured out until the final bill. For example, I used to work for a custom design-build company that did almost all of their projects this way. And this worked well for a certain type of customer because it allowed their projects to start without forcing those customers to make all of their decisions first. Plus we provided detailed updates, frequent billing, and transparent records. It wasn’t a loose or sloppy operation. This was systematic and agile. 

Sometimes a hybrid approach to estimating and quoting prices is best. For example, let’s say repairing water damage and rot. You probably won’t be able to see the full extent of the damage until you do some selective demolition to open the affected area. A way to approach this is to start with a demolition and discovery contract, to determine the exact scope of work. You can start with a rough estimate on a basis of time and materials to remove an area of say damaged wallboard and insulation. That way you can find damage, which may be hidden in the structure. Then when the unknowns become known, you can proceed to estimate or quote the repair work to completion. 

Another hybrid way is to quote an exact price for a scope of work, then if changes come up, the contractor can charge for those extras on a time and materials basis. This works well if the contractor issues change orders promptly and makes sure that the customer agrees, those changes are extra.

Those are just some of the common situations in which estimates or quotations may be appropriate, not the only ways of doing things. You should use your experience and judgment to figure out your own ways. 

However you do it, make sure to put it in writing in advance, preferably in a contract with signatures from both parties. You can find sample contracts on the internet, or you can copy other company’s contracts, but it’s better to work with a lawyer to draft contract templates that cover specific legal issues in your jurisdiction for your ways of working.

For my remodeling slash handyman business, I paid a local construction lawyer a few hundred dollars for a construction template, which is custom designed for my most common type of work on small projects, valued under a $10,000. In some cases when the total value is less than say $1,000 I edit some unnecessary parts out of that contract because those details are not critical when the risk is low. Once in a while, I do a bigger project over $10,000 and in those cases, I usually consult with my construction lawyer about those specifics. This is money well spent to cover my assets. 

As mentioned, I did a relevant video about perceived value pricing. Don’t miss that important lesson. I will also do more videos with other valuable lessons about the business of contracting.

For now I’ll give you a spreadsheet that can help you to calculate your costs for your project estimates and quotes. You can download it for free from my blog. That blog post also lists some of the reference material that I’ve learned from. Check the description below for a link. 

Let me know in the comments if you have any questions or suggestions. If you feel like I’ve provided value in this video, please click the like button. Thanks for watching. Out.