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Accurate project estimation is one of the most challenging aspects of a project. Project estimation becomes increasingly difficult as the project’s complexity and uncertainty increases. However, project estimates can be accurate.
The powerful project estimation techniques that are explained in this article will quickly improve the accuracy of project estimates, even if you have no project estimation experience.
Before you begin project estimation, there needs to be an understanding of the scope of the project. If you don’t know what the project is trying to achieve, then there is little chance of being able to accurate estimate the effort required.
The more detailed the scope of the project, the more detailed and accurate the project estimate will be. The size, complexity and stage of the project will impact greatly on the level of accuracy required, the amount of cost and time the business can commit to project estimation and the level of understanding and clarity of the scope of the project.
It is therefore important to align the project estimation requirements to the required accuracy and stage of the project.
When estimating a project it is important to understand what stage the project is in as this will determine the level of project estimation accuracy required. For example, if the project is in the initiation stage, the project estimate may have an accuracy of ±50%.
This means that if the project estimate is $2,000,000 with an estimating accuracy of ±50%, the business needs to allow for $1,000,000 at the lower end of the estimate and $3,000,000 as the upper limit of the project estimate.
Project estimation is a process and it is likely that the estimate will undergo several iterations and development. As the project scope is understood and refined, the project estimation accuracy should also improve.
A project estimate in the planning phase may reduce form ±50% to ±30%. Prior to executing the project and providing sufficient project planning was conducted, the project estimate may be as accurate as ±10%.
It can be extremely challenging to estimate a project, as a project by definition is unique in nature, often a new product, service or business change. But there are several techniques available that can greatly improve the project estimation process and accuracy which include:
Project estimation requires a level of expert judgement, not only in the project itself but more importantly expert judgement of the business environment in which the project is being delivered.
It is typically the role of the project manager to provide this expert judgement in order to decide what business risks need to be managed and which project estimating technique is likely to achieve the best results. Some areas of consideration are:
Analogous estimates are a great technique for early project estimation providing there is sufficient historical data for which assumptions of similarity in size and complexity can be derived.
For example, the project may be to implement a CRM system into an 80 person national company. Knowledge of past projects of similar complexity have taken 5 months to complete for a 40 person company.
With this information you might infer that the complexity is similar but the scale of the project is double and an Analogous project estimation would suggest this could take 10 months.
As with most project estimation techniques, each have their own advantages and limitations, some key considerations for Analogous project estimating are:
Parametric project estimation is similar to analogous estimating but provides an increased level of accuracy due to the statistical nature of the estimating technique. This estimating technique is often based on average known rates, such as square meterage for construction or software lines of code for software projects etc.
For example if a typical residential house usually costs around $1,000 per square meter, a 400 square meter house can be estimated to cost around $400,000.
Estimating a software project that is expected to have around 20,000 lines of code and the cost per line of code is $3. We can estimate that the project is likely to cost $60,000.
This project estimation technique is highly dependent on the quality of the data source and the knowledge of the project specifics, some key considerations are:
Bottom-up project estimation breaks down and estimates each component of a project. Each key portion or work package is split and broken down to greater levels of detail. The individual costs of each work package is then totalled to form the full bottom-up project estimate.
The bottom-up estimate takes the longest amount of time to prepare, but providing sufficient component detail is calculated this project estimation technique can provide the highest level of accuracy. Some considerations are:
The three-point estimate is one of my favourite project estimation techniques because it can not only greatly increase the project estimates, but it’s approach also makes it easier for other experts to provide input.
The three-point estimate, also known as the PERT technique, provides a range of project estimates and calculates the weighted average of that range. In order to use the PERT project estimation technique, we provide 3 data points, the “best case”, “most likely case” and the “worst case”:
This technique works great for several reasons.
I will generally ask experts to first provide their worst case estimate and then the best case estimate. Once these 2 points are agreed, It is easier for them to determine the most likely case knowing their upper and lower estimates.
Once these 3 points of data are captured, the formula (O+4L+P)/6 can be applied to calculate the weighted average estimate.
If we go back to our lines of code estimate above a three-point PERT estimate might look something like this:
We can see that buy using the PERT technique in our project estimation we now have a weighted average software lines of code, which should be more accurate than our initial estimate of 20,000 lines of code.
Depending on the level of certainty, the weightings of the average can be adjusted to suit.
Download the PERT estimating template
If there is a specific element of the project (or all of the project) to be outsourced and procuring an external vendor to deliver the project on your behalf, a simple and effective way in determining project estimates is to have these external suppliers conduct it on your behalf.
This will likely be through a competitive bidding process, where multiple vendors will provide a proposal including a fixed price and required time frames for completion.
Once all of the vendor bids have been returned, an evaluation can be made on each bid in order to determine the range of costs associated with each solution, taking into account any quality assumptions and documented exclusions.
Key aspects to remember in vendor bid analysis project estimation are:
Finally, once the project estimation has been completed and the project has a defined budget, it is important to provide for the level of “uncertainty”.
As with any estimate, it is just that, an estimate. It should not be expected to be 100% accurate and only required to be as accurate as the rough order of magnitude that was used, i.e. ±15% for the known components.
An estimate will inevitably include some element of uncertainty and due to the uniqueness of a project, will carry certain risks. The project estimation process should account for this uncertainty.
Uncertainty is often managed with a “contingency” budget, contingency is used where there is 20% of uncertainty surrounding the scope, a reasonable estimate may be to allow 20% contingency for the grey areas.
No single project estimation technique will suit all projects and for best results I suggest using and combining all or many of these estimating techniques to provide increased accuracy to your project estimates.
I like to take it one step further and use a three-point (PERT) estimate for all project estimation techniques, applying a PERT weighted average for everything! This is another key reason the three-point is my favourite project estimation technique.
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I'm "Chris O". I've managed hundreds of millions of dollars worth of projects since the inception of my career. I love helping others figure out the intricacies of project management on any scale. Come find me on twitter or google+
Chris, you are so right. If we don’t strive to be as professional and accurate in our estimating then things will quickly fall a part. We are also setting the project up to a false start, with incorrect expectations as to what can be achieved with what funding…
Nice article. the estimation process is very important especially to win or lose bids. thanks again
Mufid, Thanks for your feedback, sound estimation is very important under a competitive bid process. I have covered some tender winning tips that you might be interested on other blogs on this site.
I liked the three point weighted average technique at least for projects in initial stages. Get the inputs from 2 experts and then average it out. thanks. Seshagiri
Seshagirl, yes the technique works really well. The more experts you can get to provide input on the 3 point estimates, the more accurate the weighted average will be.
These are tools an techniques described in the PMBOK Guide no ?
Centrino, Some of these are described in PmBoK yes. PMBoK is the Project Management Body Of Knowledge and the widest used tool for project management.
I would like to download your Free Three-Point Estimate Template but I can not look how to do, can you help me, please?
Best regards, Poul-Erik Nielsen Denmark
Hi Poul, To gain access to the project estimating technique, then visit the blog article and click on the Google +1 and a download link should appear.
Hi Chris,
Shouldn’t the formula in the 3 point estimation technique be like this – (O+4L+P)/6 ?
If we go with O+4L+P/6, in your example we will not get 24167 as the Weighted Average Estimate.
Hi Manu,
You are 100% correct, the correct formula is (O+4L+P)/6 – I have updated the post for accuracy. Thanks for the feedback.
Yet another great posting Chris…many thanks.
Can’t seem to access the estimating template above though.
Cheers RickC
Hi Rick, I have emailed you the template.
Could you please send the template to me also?
Nice article, i will try to 3 point estimation technique in my project. However I am not able to see/download template. Did you removed template?
Thanks Raghu, it should still be there, you just need to put your email address in.
Can the 3 point estimating process be used for infrastructure upgrade related projects or is it suited for just software/ application development projects? Is this a good technique to come up with a good level1 or level2 estimate early in the project? What is the key to being successful at this? Thanks.
Hi Rick,
Absolutely it can – the 3 point estimate is a much more accurate way to estimate for project costs and time. It is suitable for both level 1 and level 2 estimates, just the level of detail changes.
Keys to success are averaging out estimates from a number of independent experienced people and benchmark your estimate against similar projects or tasks.
Be sure to grab my estimating guide and template from this page.
This is very helpful post for me while studying software project management subject in engineering Thank You….
The explanation in detail is very useful for aspiring PM’s and people alike. Thank you for the article.
Thanks a lot for such a detailed explanation. I never focused on “Three Point Analysis” before. I am sure I will be using the same in my next project management. Thanks a lot again.
Great article, “Three Point Analysis” looks very interesting technique. I was not able to download the template.
Can you share the Template with me?
I liked the article so much … good work :)
Thanks Sherif :)
Very good article with lot of intresting information
Hi, nice article. but no templates yet
i just finish reading and will like to lean more. am sadick
I can understand the intellectual appeal of a 3-point estimate — however, as a practical matter a PM who gets such an estimate and is faced with planning with dependencies is generally going to take the worst of the three estimates rather than planning around a weighted “most likely”. I think the greater value of the 3-point estimate may be in inherently identifying areas of risk to the project. If I get an estimate of 12-14-23 man-days for a piece of work, that alone tells me there’s some significant risks involved that I need to factor in explicitly into other areas of my plan.
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[…] This often leads to projects being under funded from a project management cost perspective and ultimately disbanded halfway during the project. Here is a guide for general project estimating. […]
[…] When trying to estimate project budget, I find it useful to ask a few experts in the area for the Best Case, Worst Case and Most Likely Case estimates, I then put all these in a spreadsheet and user the following formula to produce a weighted average (BC+MLC*4+WC)/6 where BC= Best Case, MLC= Most Likely Case and WC= Worst Case. A detailed estimating guide can be found here for further information. […]
[…] This article first appeared on our Striking Project Management Blog […]
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