In our white papers and courses we teach a variety of estimation techniques for use in project management. There are many people managing projects who do their estimation “on a wing and a prayer.” In other words, they make their best guess without any supporting data. None of the best practice estimation techniques is perfect. But at least they let you show the client, the project sponsor or your boss where the duration and cost estimates come from.
Our articles cover a wide range of estimation techniques including
analogous, parametric, order of magnitude, bottom-up and three-point estimating. Once you have learned these techniques, you must decide which one to use on your next project. Each of theses techniques requires specific data and specific mathematical and statistical procedures. Let’s go through each of them. Keep in mind that you can use different estimation techniques on different sections of your project.
Analogous Estimation Using Comparables
Analogous estimation has many advantages. It is based on historical data from previous projects your organization has done. The best organizations make money on their projects and meet their client’s expectations. And they keep historical data so they can use analogous estimation on future projects. Here’s an example. I was a partner with the fourth largest professional firm in the world. One day I got a phone call from a new client who wanted an information system developed for his multi-state business. The business was a sod farm that grew grass which landscapers installed for new homes and offices. The only thing I knew about sod was that you planted the green side facing up. Fortunately, our worldwide organization had an enormous archive of project plans, schedules and budgets for every project we’d done for the last several decades. Despite my ignorance of the industry, I searched the archives and found five comparable information systems projects the firm had done for sod farms.
After a few hours of study, I was able to have an intelligent conversation with the client. Several weeks later, I produced a proposal with cost and duration estimates that were based on the five comparable projects we had done. There is no excuse for any organization not to have project archives. As long as the PMs are doing a professional job of managing the planned and actual project work, the data for analogous estimation exists They just need to save it at the end of every project. If your organization has no archives, you need to start it now. Your estimates on similar projects will be better and more accurate in just a few months.
Parametric Estimation from Published Rates
Certain types of projects have published rates for specific tasks that project managers can purchase. As an example, there are a number of companies in the construction industry who publish massive volumes on how many hours of work it takes to paint a 10 x 12 foot wall with one coat of latex paint. These rates are widely used by smaller residential and commercial construction companies and subcontractors. Smaller companies can use these tables to calculate estimates based on the average data regarding how long specific tasks take. By factoring in local hourly rates, they can estimate the cost of painting a 10 x 12 foot wall. People have tried to develop rates for information systems programming. However, they’re not as widely accepted as the construction industry rates.
Order of Magnitude Estimation to Reflect Risks
The most difficult estimate the project manager has to produce comes at the very beginning of the project during the initiation phase. Executives want to know how much this new project will cost and how long it will take. However, the project manager may not have an approved scope statement. They may not even have much information about the project when they’re first asked these questions. But if the project manager makes a wild guess about cost and duration at this point, the executives will carve it in stone. They’ll hold the project manager accountable no matter how many hedges the PM gives. This is when and why the project manager should use order of magnitude estimation. Here is what they should say: “I’m 90% certain that the project can be completed between 50 and 95 days. I’m also 90% certain that the project will cost between $75,000 and $100,000.”
Executives don’t like order of magnitude estimation because they want two numbers; the cost and duration. They don’t want probabilities or ranges. At this point in time, however, the project manager knows very little about what the project will entail. So giving executives anything more specific than ranges and percentages is suicidal. Some executives are surprised when they receive order of magnitude estimates. They unrealistically assume the project manager could consult a reference book somewhere and come up with specific numbers for their project.
The best that a project manager can do at this point in the project is to explain that the level of certainty will improve as planning proceeds That kind of statement usually doesn’t do much good with executives but it’s the truth.
Bottom-up Estimation by the Project Team Members
Bottom-up estimation is done when the sponsor and project manager’s planning process has produced a work breakdown structure and assigned a project team. Letting team members make the estimates sounds very good. Also, it is a good idea to use the expertise of your team members in creating estimates. Enthusiasm in bottom-up estimating is usually high because team members enjoy being part of the process. Unfortunately, bottom-up estimating often leads to team members padding their estimates. They want to protect themselves from being blamed if the project is late and/or over-budget. Unfortunately, morale-building is lost and team members feel betrayed if the project manager slashes their bottom-up estimates to reduce the cost and duration to meet the project sponsor’s goals.
3-Point Estimation with Project Team Member Input
3-point estimation was developed by NASA for the space program. It’s a good choice when a project manager has unique, “never done before” project tasks. In situations like those NASA faced on the moon landing, the other estimation methods wouldn’t work because there was no data from previous projects. In those circumstances, the project manager asks the team members for multiple estimates for each task. This allows them to consider the impact of good breaks and bad breaks. Because the team members have a chance to assess the impact of good and bad breaks on their work, they aren’t as likely to pad their estimates. 3-point estimates also give the project manager statistical data on the probability of different durations and costs. Some sponsors are able to make good use of that data. Others think it is horse hockey.
There are lots of estimation choices and skilled project managers may make use of several techniques to develop the best estimation data for their projects.