Project Estimating Techniques – Any Project will have constraints, and it is the responsibility of the project manager to manage those constraints effectively for successful project execution. In order to manage project constraints effectively and efficiently, project needs should be properly estimated. The various techniques employed in Project Estimating are Analogous estimating, Bottom-up estimating, Parametric estimating, and Three-point estimating.
3 Major Parts to Project Estimation
- Effort estimation
- Cost estimation
- Resource estimation
Types of Project Estimates
- Rough Order of Magnitude or ROM Estimates or Ball Park Estimates – Accuracy of estimates is between -25% and +75%.
- Budget Estimates – The accuracy of estimates is between -10% and +25%.
- Definitive Estimates – The accuracy of estimates is between -5% and +10%.
Projest Estimating Techniques
There are various Project Estimation Techniques such as Analogous estimating or Top-Down Estimating, Parametric estimating, Three-Point Estimating, Bottom-Up Estimating, Delphi Technique, Expert Judgment, Vendor Bid Analysis, Reserve Analysis, and Simulation.
In this article, we shall see the four commonly used Project estimation techniques in detail and their comparison –
- Analogous Estimating or Top-Down Estimating,
- Bottom-up Estimating,
- Parametric Estimating,
- Three-Point Estimating.
Analogous Estimating or Top-Down Estimating
The dictionary meaning of “Analogous” is “similar or comparable“. This meaning says it all. In simple words, with Analogous Estimating we estimate X, based on the estimates of Y, provided both X and Y are similar or comparable.
Analogous Estimating is also called Top-Down Estimating.
PMBOK defines Analogous estimating as “a technique for estimating duration or cost of an activity or a project using historical data from a similar activity or a project.”
Here, the point, using Historical data is the key.
Analogous estimating uses parameters from previous similar projects such as duration, budget, weight, size, complexity etc as a basis for estimating the same parameter or measure of the project in question.
Example: Estimate the amount of duration and cost for building a bridge over a river.
In Analogous estimating we check the Organizational Process Assets (OPA) for any comparable projects that were executed in the past. Suppose we found that a bridge was built on the same river at some other place. Now use your expert judgment and find the approximate duration and cost for building the bridge in question.
So the key point to remember is, In Analogous estimating, you first look for a similar project in the past, get its data, and use your expert judgment to find the approximate duration or cost for your project.
The accuracy of the analogous estimation depends on the degree of similarity between your current project and the project you are comparing it with.
Analogous estimating – Important Points to Remember
- It Can be used to estimate both Duration and cost.
- It makes use of historical data of a similar project to estimate the current project.
- It is the fastest technique to calculate estimates, however, less accurate.
- It is also called Top-Down Estimating.
- This estimating is done when you don’t have detailed information about the project in question.
- This estimating is Less Accurate, Less Time consuming, and Less Costly.
- This Estimating can be done for the entire project or only for part of a project.
- This estimating method can be used along with other estimating methods.
“Bottom-up Estimating” – as the name suggests, this is estimating from Bottom to top. All the components of Work Break Down Structure (WBS) are estimated starting from bottom to the top.
The cost or duration of individual work packages or activities is estimated in detail. When an activity cannot be estimated with a reasonable degree of confidence, then the work within that activity is decomposed further to form more detailed activities. This process continues until you can estimate your activities with reasonable confidence. These detailed estimates at the lower levels are summarized or “rolled up” to higher levels.
Bottom-up estimating involves the entire project team in the estimation process, consequently, this estimating technique develops better team commitment compared to other estimating techniques. As the team is involved in estimating, there is a possibility of padded estimates, thus the Bottom-up estimates are typically more compared to other estimates.
The accuracy of bottom-up estimates is high and is more compared to Analogous or parametric estimates. Accuracy of bottom-up estimates is typically influenced by the size or other attributes of the individual activity or work package.
PMBOK Definition: Bottom-up estimating is a method of estimating project duration or cost by aggregating the estimates of the lower-level components of the WBS. When an activity cannot be estimated with a reasonable degree of confidence, the work within the activity is decomposed into more detail. The resource needs are estimated. These estimates are then aggregated into a total quantity for each of the activity’s resources.
Bottom-up Estimating – Important Points to remember
- It can be used to estimate both Duration and Cost.
- It can be used to estimate resources for activities.
- Bottom-up estimates are more accurate.
- Bottom-up estimating requires the maximum amount of time to estimate compared to all other estimating techniques.
This technique is somewhat similar to Analogous estimating as it also uses the historical data in the process of estimating. However, there are differences between Analogous Estimating and Parametric Estimating.
Unlike Analogous estimating, Parametric Estimating uses Project parameters along with historical data to calculate the cost or duration estimates. For example, If it takes $1000 and 10 days to build a 5-foot wall. How many days it will take to build a 10-foot wall of the same length? How much will it cost? Well !! you multiply the previous cost and time by two (size of the new wall is twice) to get the cost and time for the 10-foot wall i.e… $2000 and 20 days.
Parametric Estimating uses a statistical relationship between historical data and other variables to calculate an estimate for activity parameters such as cost, duration. In simple words, Parametric estimating looks at the relationships between variables on an activity to calculate time and cost estimates.
The accuracy of parametric estimates is less but better than Analogous estimates. However, higher levels of accuracy can be achieved depending upon the sophistication and the underlying data built into the model.
How to do Parametric Estimating?
- Regression Analysis (Scatter Diagram) : In this, track two variables to see if they are related, and create a mathematical formula to make future estimates.
- Learning Curve: this can be explained with a simple example. Eg: painting 100th room takes less time than what the 1st room took due to improved efficiency.
Parametric Estimating – Important Points to Remember
- It can be used to estimate Cost, Duration, and resources.
- It uses historical data and project parameters to calculate the required estimates.
- The accuracy of Parametric estimates is better than Analogous estimates.
- Parametric estimating can be applied to a total project or to parts of a project.
- It can be used in conjunction with other estimating methods.
Before going into Three-Point estimating, we shall first see what One-Point Estimating or Single-point estimating is. In Single-Point Estimating an estimator submits one estimate per activity. But there are problems with this estimating. It is less accurate as the individual activity estimates could be uncertain.
The accuracy of a single point estimate can be improved by considering the estimation uncertainty and risk. This is where the concept of Three-Point Estimating comes in. It is calculating three different estimates, to factor in risk and estimation uncertainty, and finding their average to get the most optimal estimate.
PMBOK defines Three-Point Estimating as “A technique used to estimate cost or duration by applying an average or weighted average of optimistic, pessimistic, and most likely estimates when there is uncertainty with the individual activity estimates.”.
Three-Point Estimating can be used to estimate both duration and cost.
The Three-Point estimate of duration is called Expected Duration.
The Three-Point estimate of cost is called Expected Cost.
Optimistic (O) – estimate based on the best-case scenario for the activity.
Pessimistic (P) – estimate based on the worst-case scenario for the activity.
Most Likely (M) – It is the most realistic estimate based on the resources likely to be assigned, dependencies on other participants, possible problems that may arise, etc.
The final Three-Point estimate is calculated by calculating the average of the above 3 estimates. Now, the average can be a simple average or a Weighted average.
The Estimate that uses Simple average is called the Triangular Distribution, on the other hand
The Estimate that uses Weighted is called the Beta Distribution.
The formula for Simple Average or Triangular Distribution is
E = ( P + O + M )/3
The formula for Weighted Average or Beta Distribution is
E = ( P + O +4 M )/6
The concept of the three-point estimating originated from the Program Evaluation and Review Technique (PERT), which uses 3 estimates to define an approximate time duration for an activity. PERT uses a weighted average.
Three-Point Estimating – Important Points to remember
- It can be used to estimate both Duration and Cost, but not used to estimate resources.
- It is more accurate than Analogous and Parametric estimating
- It allows more consideration for risk, uncertainty of estimating, bias etc in the estimation process.
- It is used when there is insufficient historical data or when using more judgmental data.
Project Estimating Techniques Comparison