Chapter 8 Review

The Art and Science of Accurate Estimating


Project are unique and the more unique they are, the harder to accurately estimate. A new team with members unknown to the PM, new technologies on which the project is dependent, and incorrect timing predictions can all  impact the accuracy of an estimate. However there are some "classic" mistake we should take care to avoid:

• Don't make "ballpark" estimates when you're put on the spot. Instead refocus on the complexity of the estimating process and the desire to provide accurate information. If pressed, write down exactly what is being requested and start listing the questions that need to be answered before an accurate estimate can be produced.
• Don't confuse a bid with an estimate. A bid estimates the schedule and budget of a subcontractor with a tidy profit margin built in.
• Don't pad the estimate. Adding time and money to the estimate solely for the purpose of bringing the project in early and under budget unnecessarily ties up company resources and (if discovered) undermines the PM's reputation.

Estimating also have several "Golden Rules" that apply to all projects. These include:

• Have the right people make the estimates. Have people with experience with the work that is being estimated create the estimate. The people who will actually perform the work should also be involved in estimating it because people who have had a voice in estimating their own work are more motivated to achieve. Make sure the estimator understand the goals and techniques of estimating. PMs working independently never create accurate, useful estimation processes.
• Base the estimate on experience. Past performance data is critical to accurate estimation. Compariing actual performance to estimates is essential to refining the estimating model.
• Negotiate the equilibrium (cost-schedule-quality), not the estimate itself. As the estimate should be derived from the product specifications it is a more defensible stance to negotiate the equilibrium.
• It takes time and money to develop accurate estimates.

Estimates have three levels of accuracy that are used at different decision points in a project.

1. Idea evaluation or "ballpark estimate": can be off by as much as 90%, but are useful for initial sizing; the accuracy relies on the estimator's knowledge; the purpose is to determine whether it would be useful to invest in a more accurate estimate.
2. Project selection or order of magnitude (or "ROM" for Rough Order of Magnitude): has a wide variance but is based on extrapolations from other projects; similar to a ballpark estimate but includes a few hours of effort comparing the proposed project to past projects; acceptance of an ROM estimate may initiate a project (the PM will then be assigned and tasked with defining and planning the project and in so doing creating a more detailed estimate).
3. Detailed estimates (bottom-up estimates): include all schedule and resource information and a forecast of a project budget and cash flow; this estimate will be used to measure the project's success and is based on product specifications.

Phased estimating requires cost and schedule commitments for only one phase of the project at a time. The method recognizes that it is impractical to demand a complete estimate at the beginning of the product life cycle, instead breaking down the project into phases which are considered separately as projects. Phase gate development includes decision points at the conclusion of each subproject to determine whether the project will continue to the next phase given the additional information derived from the concluding phase.

Apportioning (or top-down estimating) assigns a total project estimate then assigns a percentage of that total to each of the phases and tasks of the project. Although this is rarely as accurate as bottom-up estimating, it can be useful in determining what projects to pursue. Making useful estimates in this way relies on:

• Historical projects that are very similar to the current project since the apportioning formula is derived from historical data.
• Accurate overall estimates since the pieces are a percentage of a designated total.

Parametric estimates use a basic unit of work to act as a multiplier to size the entire project. It is always based on historical data and requires the estimator to have a solid parametric formula. Parametric models can be used at either the project or task level; greater accuracy is achieved by first estimating low-level tasks using parametric models then combining these work packages to build a project or phase estimate; the variables in the parametric formula almost always require detailed product specifications.

Bottom-up estimating requires the most effort, but is also the most accurate. Detailed tasks are estimated and then "rolled up" to create a project or phase estimate. The accuracy of the entire model is dependent on the accuracy of the work package estimates. Bottom-up estimating works only to build the detailed phase estimates.

The detailed cost estimate becomes the standard for keeping costs in line, and forecasting cash flow enables the project's funding to be planned and available when needed. It is important to consider the following categories of costs when developing a detailed estimate:

1. Internal labor cost (people employed by the company)
2. Burdened labor rate (average cost of an employee including wages, benefits and overhead)
3. Internal equipment cost (special equipment that is not routinely available)
4. Expendable equipment (with consideration that it could be used on multiple project and may only be partially used up on this project)
5. External labor and equipment costs
6. Materials costs (these are estimated primarily from product specifications)