Estimates vs. Budgets

Estimates_vs_BudgetsHere’s a customer-contractor situation that, although it doesn’t happen too frequently, is extremely dicey when it does.

Your customer wants a non-contract service from you, but the project isn’t in their budget.

To pay for your project they need an amount from you so they can find a place to allocate that unplanned spend.

You provide an estimate to be billed on actual per-unit-pricing because you know the scope of this particular service varies hugely. Not because you’re a poor estimator or a sloppy provider, but because customers always get excited and want more, or your customers’ end-users want more.

Either way, your scope typically increases substantially from the original estimate and that’s why you provide pricing based on a per hour or item basis.

But here’s the rub. Your customer took your estimate as an absolute, and communicated it upstairs for approval. Without your knowledge your estimate is now a fixed fee.

Sure enough, you get started with your non-contract service and your customer gets excited and scope expands.

You believe it’s all covered because you priced it on a unit cost and your customer is happily increasing scope.

Unfortunately, once the work is done and your bill arrives, your customer changes from ectastic with your results to letting you in on their little failing. Your estimate became their not to exceed budget.

Customers do that sometimes. Either because they feel they can’t get their pet projects funded, or don’t want to upset their bosses with a larger, more conservative number in the first place.

To keep it under the radar your customer presents the financial picture in it’s most humble light. They figure they can sort it out after the fact. And of course that means you’ll help them figure it out.

What to do?

At this point in time almost every solution will be uncomfortable, for you and/or your customer.

The following are some possible ways out, but they’re not for everyone. If any of these make you feel uncomfortable, by all means skip them.

Bill overage onto 2nd smaller invoice

Spreading actual amounts above the estimate onto a second smaller project your customer can get through on a different Purchase Order (PO). Customers usually have other projects and some will have a little left over space on another PO.

Of course you only take this approach with your direct customer’s full knowledge and approval.

Carry overage onto 2nd project

Hold off billing for the overage on this project and include it on the next project. Ask your customer to guarantee the next project and get a start date. However, if projects are competitively bid it’ll be tough to cover overage costs this way.

And again, you only take this approach with your direct customer’s full knowledge and approval.

Eat the overage & not bill

You can take the loss and not recapture your billing. It’s the least palatable for you but may be required depending on your customer relationship. Also, the size of the overage will also dictate whether you can live with this option.

If you go this route, make sure your customer knows what you’re doing. Hopefully it’ll be worth the brownie points.

Hold fast & bill full amount

This may be the least palatable for your customer. But if you submit your bill with your written proposal that clearly states billed per actual unit then you’re telling the customer “you made the mistake, you sort it out”.

This option depends on your customer relationship and the overage amount in question. Also, even after approval, your payment may take a while to get paid if your customer is no longer willing to shepherd it through their A/P process.

Educate & communicate with a hammer before doing the work

The best solution is always to avoid the problem in the first place. When asked to provide a pricing, consider your customer may likely consider that a budget amount. Since you can’t reasonably provide a fixed amount, you’ll need to educate the customer to why you’re pricing the work on a unit basis, to bill on actual incurred:

Try:

  • Communicating the variables beyond your control
  • In person or on the phone, explicity cover the per unit pricing & how those variables impact total spend
  • Always confirming everything in a written proposal/estimate
  • Adding text to your proposal/pricing confirmation in bold & caps THIS IS AN ESTIMATE, NOT A FIXED PRICE, BILLING ON ACTUAL INCURRED

No Guarantees

Customers sometimes are wild, unfathomable beings. As contractors we can only do our best. In this budget vs. estimate situation, being proactive and a good communicator is your best defense.

~~~~~~~~~
Chris Arlen
President, Revenue-IQ

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