Two words that make a designer's ears bleed: "Over budget."
Estimating is the scariest activity that designers manage for themselves or their studios. We are experts at making intuitive design decisions based on qualitative information—but in the rational world of dollars and cents, that same intuition doesn't always make for a better profit margin. We learn (and forget) this, over and over again. I've heard countless designers say to me, "I haven't done this kind of work before. I don't know what to charge. So I just made a guesstimate, and if I go over budget, I'll just eat the difference."
Sadly, "the difference" is not edible. While designers may hate estimating, it's a business skill that you'll need to develop—that is, if you'd like to make some money.
For professional estimating advice, I emailed Fiona Robertson-Remley, a fantastic project management guru I'd worked with at Worktank Brand Storytellers on a wide range of interactive and traditional marketing programs. This is what she had to share on the subject.
First and foremost, create a high-level plan. "You need to map out the steps and milestones of the job," Fiona says. "Lay out the roadmap of how you are going through the project." For a solo designer or even a larger team, this can emerge from a quick whiteboard session that helps map out the overall arc of the project, key deliverables through a set number of client reviews, and what resources will be necessary to complete those deliverables. At that point, be sure to also begin a list of assumptions—you may need to include those in the estimate to put a lid on scope creep.
Take a stab at how many hours you think the project will take. "Then take a step back and review. Then pad by about 20%, especially in the areas where clients are involved. Designers notoriously under-estimate their hours." This is hard for some designers to swallow, but it's the truth. We're often quite optimistic about how quickly we can reach a design solution, when actually we need the space to meander (while being paid). Consider setting up a spreadsheet in Excel where you can estimate hours—and having your 20% buffer hardcoded into the formula that creates the total.
Never, never, never give discounts. "Avoid the tempatation to reduce your rate. I see freelancers do this ALL the time. if you need to cut the cost, cut a deliverable—not your rate, and not your time." This requires tough negotiating tactics, but this is the only way to maintain your profit margin.
Bill for thinking time, not just computer time. "Make sure you… allow a little time for off-the-wall-thinking." Creating the time and space for dreaming in the midst of cranking out a big design deliverable can have a beneficial effect. And you should be paid for it.
Never under-estimate yourself. If you're in an all-out bidding war, you should stick to your guns and be willing to walk away from what seems like a great opportunity, but you won't make much money actually fulfilling. "In general, agencies/freelancers always under-estimate. Add an [low] bid to that, and you are deep trouble, my friend!"
Don't be afraid to pick up the phone and get insight from a colleague. "Talk to a Project Manager or someone who has done this [frequently] to get their perspective." They may save you with a crucial piece of information you wouldn't have obtained by any other method.
Do your timesheet! And refer back to it after the project is over. "Track, track, track your hours religiously. You will need to keep data on what things cost—so next time you have to estimate, you have something to refer to." A useful metric when evaluating your timesheet is burndown—how much of the project was completed, based on time used by each person (or each role you fulfilled) over the life of the project. If you're burning the majority of your hours on production as opposed to concept generation, it gives you a good indication of what skills you may need to improve, or what hours you may need to pad on a future estimate.
For a much deeper dive into this subject, especially with regard to how much you should pad your estimates with regard to a client's initial ask, see Andy Rutledge's "Calculating Hours—The Client Factors" on Design View.
Cameron Foote's The Business Side of Creativity has a nice section about estimating and how to work with clients through the negotiation process.