Types of estimates are crucial to consider when it comes to financial planning. First of all, an estimate is a calculated measure of the expenses that a project will need. The project is planned for the period over which it will take place. Business ventures can only move forward with financial estimates being made. They provide the much-needed foundation for knowing the practicality of a project, resource allocation, and risk management. Businesses need to plan a budget before embarking on a program to avoid losing a ton of money. Some ways are through cost overruns, fund shortages, or weak ROI (return on investment). 

There are several examples of bad financial planning leading to businesses declaring bankruptcy. A very notable one is the case of Jet Airways. Jet Airways was one of India’s most prominent airlines from the mid-1990s until 2019. Its collapse is due to several reasons, most resulting from a lack of proper financial management. The organization could not keep up with the changing market, debt levels, and high operation costs. These are all aspects of making estimates and financial planning that need to be monitored to ensure something this drastic never occurs to a business. Although Jet Airways is in recovery now after being acquired by another enterprise, its rise and fall will serve as a case of improper financial planning for years to come. 

In this article, we will go over three types of estimates: preliminary estimate, approximate estimate, and detailed estimate. Here, we will learn about the impact each type has on project planning. Later, comparisons will be made between preliminary and detailed estimates and approximate and detailed estimates. This is to provide an understanding of when best to use these estimates.

Also Read: Difference between Expense and Expenditure 

Types of Estimates

The types of estimates can also be used to make early decisions in the initial stages. Let’s have a look at them:

Preliminary Estimate 

The preliminary estimate is a vague idea about the total budget of an upcoming project. It is guessed way in advance of the project and based on little information. One of the most useful things about this type of estimate is that it can be used to judge the feasibility of the project. Stakeholders need to assess whether they should go ahead with a plan or not. Feasibility can be evaluated through a project baseline. A project baseline is an initial framework used to check a venture’s progress through comparison. It can be used to predict the viability as well as the budget. According to a PwC India report published on the study of Indian start-ups. It stated that preliminary funding grew by 12% in CY22 compared to CY21 despite the global recession. This highlights the importance of effective preliminary estimates which raised investors’ confidence in projects. Baselines are also helpful in determining the venture’s duration.

Prior decisions end up saving the business a lot of time. In project planning, time is as crucial as money. Preliminary estimates also make the team better prepared in a crisis by allowing the staff to spot upcoming problems. It could potentially save the business a lot of money if solutions are developed well beforehand. Lastly, they help ensure that projects run parallel with the organization’s overall objective and prevent deviations from it. 

How, then, does a preliminary estimate get created? There are various aspects to examine. For instance, one of the first things to be considered is the scope of the project. The scope includes an analysis of the goals, results, and the duration. Another one is data from previous projects of the same/similar type. This can provide the much-needed awareness about what sort of results to expect once the program has commenced. It will most likely be helpful to come up with a budget as well. The process of using data for this purpose is sometimes called ‘analogous estimating.’

Moreover, planning for materials and costs can also be done mathematically if there is a correlation between the data and the resources. This is a subset of preliminary estimates known as ‘parametric estimating.’ Relying on industry experts’ opinions and experience to form a plan is another way to make an initial estimate. 

It goes without saying that the method used depends on what the project entails. Preliminary estimates are commonly used in product development, construction, and start-ups, to name a few. They are generally easy to upgrade when the plans change, which is a regular occurrence in project planning.  

Approximate Estimate 

Approximate estimates are very similar to preliminary estimates in that they are also used to give a rough idea about an upcoming project. They are also used for the same purposes mentioned, such as assessing viability, costs, adjustments, approvals, etc. The methods used to make these types of estimates are also broadly similar.

They differ mainly in that they are brought up in the next stage of the planning process after preliminary estimates have already been made. Approximate estimates are based on more historical data and are usually more specific. Therefore, the mathematical models and case studies used to plan them will likely be more refined and accurate. However, they still cannot be considered complete by any means. Their primary purpose is to polish the initial plan when more information becomes available. Most, if not all, businesses involved in project planning will use approximate estimates during the process. For example, in the infrastructure industry, approximate estimates benefitted construction projects in India by significantly reducing cost overruns and project completion times. This was reported in a study of around 500 construction projects, by NICMR Pune.

Detailed Estimate 

As the name suggests, this type of estimate is highly precise and reliable. Though detailed estimates are used for the same general purposes as preliminary and approximate estimates, they are used in the later stages of the plan. For this reason, they have a more in-depth understanding of the project’s costs, resources, and completion time. By the time that detailed estimating starts, the project will have undergone some completion, so this type of estimate can use the data from the project so far to move forward. It is said that around 80-90% of project planning involves detailed estimates at this stage.

Detailed estimates involve a comprehensive breakdown of where the budget is being spent – on labor, materials, equipment, and third-party costs, if applicable. These types of estimates will also take into account less apparent expenses as well such as overheads, contingencies, insurance, and travel. There may also be additional fees to obtain licenses and regulations to ensure environmental standards are being upheld. 

Detailed estimates are not overly different from preliminary and approximate estimates in methods. The procedure may be similar in most cases, except for the information being handled. For instance, detailed estimates also use the project scope and constraints, just to a much more complex degree. The historical data used in a detailed estimate will also be much more thorough. ‘Bottom-up estimating’ is a type of detailed estimate that is common in project planning. This method divides the overall plan into smaller parts, allowing for a thorough analysis of each part. Bottom-up estimating ultimately takes more time, but it is worth it for the highly refined results. 

Also Read: What is Petty Cash Book and its Types 

Differentiating Between Different Types of Estimates 

The significant differences between the three types of estimates discussed here have been more or less covered already. For the sake of clarity, however, let’s review them in more detail. From what we know so far, preliminary estimates, and approximate estimates already contain a lot of overlap, so a comparison between these two types of estimates is not necessary. It will be much more educational to go over the comparisons between each of them with detailed estimates.

Preliminary Estimate vs Detailed Estimate

The most apparent difference between preliminary estimates and detailed estimates is that the former is done at the very beginning of the planning phase. In contrast, detailed estimates are reserved for the middle stages. This is because preliminary estimates consist of basic, incomplete information that would not be appropriate for later planning stages. Preliminary estimates are usually carried out to guess the budget and feasibility of the scheme. Meanwhile, detailed estimates are taken to show a detailed forecast of the project’s budget, resources, and other factors. These types of estimates are backed by more complete data and more refined analysis.

The numerical figures predicted with preliminary estimates are bound to vary by approximately 25% (in some cases up to 75%). Due to the limited information available when making preliminary estimates, the results are more vague. This is why they cannot be relied on to provide anything more than a rough sketch of the program that will guide the team through the initial phases. On the other hand, variations of only around 10% are expected with detailed estimates. There is more information to draw from when making these types of estimates, so the results they provide are much more accurate. Once a program is well underway and needs some tweaks to meet the main objective, detailed estimates prove to be highly dependable.

Another difference between the preliminary estimate and detailed estimate is in the case of field experts’ analysis. With preliminary estimates, this analysis is recommended but not essential; in fact, if this phase does involve the advice of experts, the team probably won’t look to more than a few for their help (depending on the size of the project). With detailed estimates, however, expert analysis would be vital for speeding up the process and giving more resolution to the plan gathered so far. At this stage, having several experts analyze different angles and provide second opinions would be helpful. 

Approximate Estimate vs Detailed Estimate

Approximate estimates occupy the time period between preliminary and detailed estimates. Though not as rough as an initial estimate, it is not expected to have the level of detail seen with a detailed estimate either. One main difference between an approximate estimate and a detailed estimate is the way these types of estimates are presented on paper. Approximate estimates are moderately detailed and may include slightly complex diagrams and statistical models depending on the size and type of the project.

They may also include around 10 – 15 types of expense aspects to consider (labor, materials, insurance, etc). Contrarily, a detailed estimate will consist of precise numbers and drawings based closely on the results gathered so far. Detailed estimates are sometimes presented to stakeholders and supervisors within the company, so they need to be as thorough as possible. They will also involve more than 30 categories of expenses, potential risks, and other aspects affecting project completion. Moreover, detailed estimates benefit well from bottom-up estimating. It is more convenient to tackle smaller parts of the project if the end goal is to get accurate results. Bottom-up estimating consumes a lot of time, so employing it as a part of approximate estimation won’t make sense. 

Both these types of estimates can be used to secure funding. It is more common to use detailed estimates to do precise budget planning. In addition, detailed estimates would be more successful in securing funds in cases of cost overruns or as part of a contingency plan. This is another considerable difference between approximate estimates and detailed estimates.

Preliminary vs. Approximate vs. Detailed: Key Differences

The main differences between these types of estimates are summarized in the table below: 

Also Read: What is Capital Budgeting? 

How to Lessen Risks When Making Estimates

A project is subject to many risks in all of its phases, from initial planning to completion. The three types of estimates we’ve discussed can be used to reduce risk as much as possible during a project. Here are some ways this can be achieved:

• Check on the progress of the project regularly. This is the best way to ensure everything is on the right track. It is also helpful to foresee any risks that might arise, and plan solutions for them beforehand
• Keep updating estimates as the situation changes. When a project is underway, it is very common for results to be different from expectations. Hence, it is essential to keep reviewing the plan, regardless of its stage, to ensure the end goal can be met
• Use as many types of estimates as possible. This is especially true for types of detailed estimates, such as bottom-up, expert analysis, parametric, etc
• Make sure any data gathered is accurate and complete. Particularly in the later stages of planning and execution, the results must turn out as accurate as possible. For this, reliable data sets are needed 
• Bring in stakeholders to provide their perspectives. Their involvement will encourage team members to stick to the plan as much as possible. They can also review the estimates and point out any shortcomings, which can then be fixed

It is the responsibility of those executing the project to make sure the overall aims are met. These 5 steps outlined above are a good way of making sure this happens. 

Conclusion

The role of estimates in the world of project and financial planning is a crucial one. Without making proper estimates, it would be challenging for a project to be carried out from start to finish. Estimates ensure that the end goals are fulfilled and appropriate measures are taken to stick to the budget. The most significant difference separating the three types of estimates is the level of detail involved in making them. Preliminary estimates give a vague idea about the overall budget of a project. Approximate estimates are provided in the phase following the preliminary estimate, and more detailed but still not exhaustive. Detailed estimates are a thorough overview of the plan and focus on many aspects, giving resolute information about eachProjects are risky ventures that can incur many risks along the way. It is recommended that some measures be taken to prevent them at all stages of the program. These include but are not limited to regular monitoring, making contingency plans, maintaining stakeholder involvement, etc. Appropriately making use of these types of estimates is vital for the successful completion of a business project. So always make sure to understand them well and be prepared before starting a venture. 

FAQs

What is the main purpose of a preliminary estimate?

To provide a general idea of the budget, materials, and time required for an upcoming project. It allows stakeholders to analyze the feasibility of the project and get approvals on decisions like early-stage funding. 

Can preliminary estimates be used for project budgeting?

Certainly! They are very useful for getting the initial idea of what the overall budget of a project can be expected to be. They should not be used to assess the budget in later stages, however, as they are based on limited data and so are inaccurate. 

Are approximate estimates more accurate than detailed estimates?

Simply put, no. Approximate estimates are made based on much less resolved information than detailed estimates. Detailed estimates are made in the later stages of the project, where past data can be used to gain more accurate estimates. 

What are the factors affecting the accuracy of an estimate?

The main ones are limitations of available data, stakeholder involvement, timely predictions of risks, among others. 

How often should estimates be updated throughout a project?

Updation should occur regularly. Especially when the project details change, duration or budget changes, or when new information becomes available. 

When should a detailed estimate be made?

Ideally when the project has left its initial and middle planning phases. This is when the minor details start to take shape, and better information on the scope becomes available. Briefly, detailed estimates are better saved for the later stages of the project.