Estimating is tricky for project managers because the customer wants the project to be done quickly and cheaply. You want your team to be committed to the numbers because they are realistic and fair. On top of that, everyone is concerned with the risk that exists on any project. So the best estimating technique should give you accurate numbers and some assessment of the risk in the tasks and the project as a whole. The best approach is to quantify the estimate and the risk of not hitting it. We use the 3-point estimating technique, which comes from the NASA space program, to do this.
This process lets you estimate work and duration with the team and listen to the risks they see on their assignments. It also lets you give project sponsors the opportunity to decide what level of risk they want to accept on the project. Then you can quantify the additional costs that would be incurred to reduce the risks to a lower level.
The 3-point estimating process, which is also known as PERT (Project Evaluation and Review Technique), is a three-step process where you work closely with the team members. First, you discuss the team member’s task and the risks. This includes the good risks that could cause this task to take less work and the bad risks that could cause it to take more work. Second, you note these risks in a work package and discuss the approach to the task with the team member. Third, the team member makes three estimates: an optimistic estimate, a pessimistic estimate and a best guess estimate. You apply the formulas* (at the end of this article) to those three estimates to come up with the actual data that you will use in the project schedule.
Common Estimating & Risk Issues
There are two mindsets that often plague the estimating process:
- Executives believe that projects have no risk
- Team members think that padding their estimates will protect them from blame.
Both of these mindsets are false and they get in the way of accurate estimating. The 3-point estimating technique deals with both these mindsets. Three-point estimating is a straightforward process for developing estimates using a little bit of statistics. Three-point estimating gives you a tool to quantitatively communicate about the risk of a task’s estimate. It lets you stop pretending that task #135 is going to finish in precisely 15 days or that the project will absolutely finish by August 30. It also lets you address the issue that most projects are launched with less than a 35% chance of finishing by their promised due date. Because no one talks about that issue, executives think the completion date is 100% guaranteed. They believe it’s only time missed when someone goofs off.
As an example, the best project managers tell sponsors that a project has a 65% chance of finishing by August 30. These PMs also explain what they can do to increase those odds to 75% or 90% and what it will cost. Those same PMs manage the assignments of their project team members with an understanding that there is risk on each assignment. They use 3-point estimating techniques to get accurate numbers and reflect the risk.
3-Point Estimating Process
The 3-point estimating process starts with a discussion with the team member about the risk inherent in their task assignment. You discuss the bad risks that will make their task take more work and more time. You also discuss the good risks that will cause it to take less work and time. Why should you do this step? Because you need an estimating process that addresses the team member’s legitimate concern that bad things will happen on their assignment and they’ll be blamed for not meeting the completion date.
Let’s talk a little bit about risk. When you ask me how long it will take to read this newsletter, I might estimate five minutes. Am I guaranteeing you that no matter what happens you’ll be able to read the whole thing in five minutes? No, what I mean is that 5 minutes is my best guess. That means there is a 50% chance it will take you less than five minutes and a 50% chance it will take you more than five minutes.
But if you are my project manager and you ask me for a task estimate, I would be a little hesitant to give you an estimate in which there was a 50% chance of an overrun. What I would rather give you is an estimate where I’m 90% confident that I can finish in that much time or less. As the project manager, you would probably regard that estimate as padded. As the team member, I feel more comfortable with a 90% estimate. Unfortunately, there is no consistency in the amount of padding your team members do.
You want your team members to leave the estimating process knowing that you considered the fact that things can go wrong on a task assignment. Using the three estimates enables you to do that. It’s better than
having a team member give you a single estimate and play the padding game about how certain that estimate is. The three estimates tell you the variability in the task.
3-Point Estimating: Best Guess, Optimistic and Pessimistic Estimates
With agreement on the risks in the task assignment, you go on to ask for their estimates of work and duration (time). As the name implies, 3-point estimating requires three estimates for each task. That sounds like it will take a lot of work but it takes a matter of minutes. You and the team member develop an optimistic estimate, a pessimistic estimate and a best guess estimate for each task. In developing those three estimates, we get more accurate estimates from team members and assess the task’s degree of risk and the range of durations.
Your team member estimates that a task has a best guess estimate of 80 hours of work. That means that 50% of the time it will take more work and 50% of the time it will take less work.
Next, the optimistic work estimate is that it will take less work than the best guess. It is not a “perfect world” estimate but you want an estimate that’s based on the good risks you identified coming to pass. The optimistic estimate is low enough that the team member thinks they can get the task done for less than the optimistic estimate 20% of the time. The task will require more work than the optimistic estimate 80% of the time.
The pessimistic estimate is that it will take more work than the best guess. It is not a “disaster” estimate but you want an estimate that’s based on the bad risks you identified coming to pass. The pessimistic estimate is high enough that the team member thinks they can get the task done for less than the pessimistic estimate 80% of the time. The task will require more work than the pessimistic estimate 20% of the time.
Now let’s dip our toe into the statistics and look at two tasks, Alpha and Beta, and the calculated work estimates you would use at three different levels of confidence.
We take the three estimates and use the following simple formulas*to calculate the task’s work estimate for a certain level of confidence of finishing within the estimate.
Mean=(4*BG)+OE+PE/6. The mean is 4 times the best guess + the optimistic guess + the pessimistic guess divided by 6.
SD=(PE-OE)/6. The standard deviation is the pessimistic guess minus the optimistic guess divided by 6.
Probability level = work= Mean +(z-score for probability)*SD
For task Alpha we can be 80% confident with an 82.2 hour estimate. But task Beta, with optimistic and pessimistic estimates that are further from the best guess than Alpha, will require an 88.7 hour estimate to reach the 80% confidence level.
Using 3-Point Estimating
All of the better project management software packages, such as Microsoft Project®, enable you to use 3-point estimates and create a variety of reports that communicate the project’s risks. You can take estimates like those above and calculate the odds of finishing the entire project within various durations. That information is a solid basis for a discussion with the sponsor about the tradeoffs between cost, scope, duration, risk and resources.
To learn these 3-point estimating techniques and the entire estimating process, consider our private, online courses where you work individually with your instructor. They are available by phone, video conference or e-mail whenever you have a question or need help on an assignment. We can also deliver a customized training program at your site for up to 25 people. Call us at 303-596-0000.