Order of Magnitude Estimates: How to Calculate & Present Them

Dick Billows, PMP
Dick Billows, PMP
CEO 4pm.com
Dick’s Books on Amazon

Order of Magnitude (OOM) Estimates are rough guesses made at the very beginning of the project. At this time not much is known about the project and everything can change as planning progresses. Order of magnitude estimates use historical project data with analogous mathematics. The numbers are calculated for the whole project, not for individual tasks or major deliverables.  They are usually expressed as a range, like “$150,000 – $200,00 cost and 125 – 160 days of duration.”  Executives dislike those ranges and immediately use only the lower (most optimistic) numbers.  But project managers should stick with the ranges in all their order of magnitude estimates because the range communicates the project’s uncertainty. Then they narrow the ranges as planning progresses and uncertainty declines.

Order of Magnitude Estimates: When To Use Them

Project managers use order of magnitude (OOM) estimates at the beginning of a project to give executives some data. During the initiation phase, executives need information about how much the project will cost and how long it will take. They use this data to decide if the project should go forward. They may also need to decide to integrate this project with other projects the organization is considering. This data is vital for decision-making purposes and cost-benefit decisions. Unfortunately, this is the time when the project manager knows the least about what the project will entail. He/she doesn’t know what deliverables have to be produced, or how much work those deliverables will require. They also have no idea how many team members will be available to do the work. So the project manager is in no position to provide precise estimates.

Order of magnitude estimatesThe absence of data, however, does not prevent executives from demanding precise figures on a new project’s time and cost. If we look at the initial estimating situation from their perspective, we can understand why. They must approve and become accountable for the expenditure of many hours of work and other organizational resources, including cash. From their perspective, it’s reasonable to require data about the new project’s business benefit and the amount of resources it will consume.

Unfortunately, many project managers fall victim to the executives’ pressure and give estimates that aren’t based on facts. Executives may say things like, “Use your project management experience to tell us how long this will take and what it will cost.  If you’re worth your salt as a project manager you ought to be able to tell us the duration and budget you’ll need.” This inevitably leads to blaming the project manager for finishing late and over budget.

Project management experience does not give you the ability to pull accurate initial estimates out of the sky. The one exception might be when you’re repeating the same project, like building new fast food stores in the same city. But when you don’t have data from similar completed projects, there is no way you can provide accurate data during the initiation phase.

Order of Magnitude Estimates: Better Than Commitments You Can’t Keep

Order of magnitude (OOM) estimates are the best tool for a project manager during the initiation phase.  With OOM estimates, the project manager is not providing a precise budget and completion date. He/she will be able to do that later on. Now the project manager provides data along with information about the degree of uncertainty of the estimates. Order of magnitude estimates take the form of a project manager saying, “I’m 80% certain that the cost will be between $50,000 and $100,000. I’m 70% certain that we can be finished between 100 and 150 days.”

We know that numbers like this will drive executives crazy. But accurate estimates are not possible. The best we can do at this point is give them an estimate that reflects the lack of information.  We do not give estimates with no factual basis. The only time we have 100% certainty of the cost or duration estimate is on the last day of the project. Project managers need to explain that the certainty of the estimates will improve as we proceed through detailed planning and execution. The estimates get more accurate as we learn more about the deliverables we have to produce, the amount of work it will take to produce them and the size of the project team available to do the work. Our estimates at initiation may have a range of -25 to +75%. As we begin detailed project planning that range narrows and when the plan is approved, we may have a range of uncertainty that is plus or – 15%. As execution of the project proceeds, the range of the estimates narrows all the way through closeout.

Order of Magnitude Estimates: How To Calculate Them

We’re going to express the order of magnitude estimates as a range to reflect the uncertainty. We usually use analogous estimating techniques to provide the raw data and then alter this historical data in two ways. First, we’ll adjust the historical data to reflect the differences between the current project we’re estimating and the completed project. We might gather people with known expertise and ask them to assess the differences in complexity, intensity and difficulty of the current project versus the historic one. They might come up with a 15% adjustment factor. This means the current project is 15% more difficult and will require that much additional time.

The second adjustment we would make is to apply our uncertainty percentages. As an example the -25% to +75% range we discussed above. So the numbers for the new DEF project versus the ABC historical project look like this:

Hours of Work

From the archives: ABC project actually took 10,400 hours of work

Adjustment factor: DEF project is +15% harder than ABC project

Estimate: DEF project requires 11,960 hours of work

Adjustment to reflect uncertainty:  -25 to +75 for DEF project

OOM: 8,970 to 20,930 hours of work range for DEF project

The project manager would present this information by saying something like this. “We’ve assembled our best experts and used actual data from the ABC project done two years ago. We asked our experts to look at the hours ABC took and reach consensus on the differences between the new DEF project and the ABC project. They concluded that the DEF project is 15% more difficult and would require that many more hours. Then I applied the uncertainty factors to reflect how little we know about the DEF project this early in the effort. The combination of those two data sources gives us the range of hours that you see above.”

When the executives complain about the lack of precision the project manager can say, “This is the best available information we have as of today. As we learn more during the planning effort, I will be able to provide you with increasingly precise numbers. But we will always be dealing with some uncertainty.”

When pressed by the executives for better data, the project manager can say, “I understand you want credible numbers. But at the present time I know so little about this project that trying to be more precise would be deceitful.” Which is the best Estimation Technique?

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Author: Dick Billows, PMP

Dick has more than 25 years of project and program management experience throughout the US and overseas. Dick was a partner in the 4th largest professional firm and a VP in a Fortune 200 company. He trained and developed 100's of project managers using his methodology. Dick is the author of 14 books, over 300 articles and director/producer of 90 short project management training videos. He and a team of 25 project managers work with client companies & students across the US and in Europe, South America, Asia and the Middle East. They have assisted over 300 organizations in improving their project performance. Books by Dick Billows, PMP are on Amazon.com