1. Introduction
In the chart below are the tools & techniques used in process 7.2 Estimating Costs. I am discussing the tools & techniques listed in red in the post today; the ones listed in gray are not covered in the post.
7.2 ESTIMATE COSTS | ||
TOOLS & TECHNIQUES | ||
1. | Expert Judgment | Expert judgment can be used by using historical information to give duration estimates from similar projects. It can also used to reconcile different estimating methods. |
2. | Analogous Estimating | Uses a measure from a previous similar project to estimate the duration or cost of the current project in a top-down approach. |
3. | Parametric Estimating | Uses an algorithm to estimate the duration or cost of the current project based on historical data from previous similar projects. |
4. | Bottom-Up Estimating | Estimates costs of individual work packages, and these estimates are then totaled or “rolled up” to higher levels. |
5. | Three-Point Estimating | Accuracy of estimates may be improved by considering risk in order to create three estimates: the most-likely (cM), optimistic (cO), and pessimistic (cP) cost estimate. These three estimates are combined in either the triangular or beta distribution. |
6. | Reserve Analysis | Duration estimates can use “contingency reserves” for risks in the risk register that the “known-unknowns” of the project. |
7. | Cost of Quality (COQ) | Assumptions about the cost of quality may affect the cost estimates. |
8. | Project Management Software | Automated tools used to create cost estimates. |
9. | Vendor Bid Analysis | Responsive bids from qualified vendors should be analyzed to create cost estimates. |
10. | Group Decision-Making Techniques | Team-based approaches can be useful for improving duration estimates. |
Estimates made by individual experts use the technique of expert judgment (tool #1), and opposed to this are group decision-making techniques (tool #10), which create estimates in a brainstorming fashion by a group. This post will contrast the four estimating techniques of analogous (tool #2), parametric (tool #3), bottom-up estimating (tool #4) , and three-point estimating (tool #5). The remaining reserve analysis technique (tool #6) is particularly useful in conjunction with three-point estimating.
2. Analogous, parametric, bottom-up, and three-point estimating
The reason why I am creating this post is because the PMBOK® Guide definitions of analogous and parametric estimating both use the words “parameters” and I thought, well, there’s a potential source of confusion right there. So I am going to compare these definitions below to help the reader distinguish between them.
Estimating Technique |
Explanation | Kind of projects used for | |
1. | Analogous | Uses actual duration of previous, similar projects as basis for estimate of duration of current project. | Previous activities are similar in fact. |
2. | Parametric | Uses statistical relationship between historical data and other variables. | Previous activities are similar in appearance. |
3. | Bottom-up | Uses greatest level of detail to estimate cost of individual work packages. | Can be used for projects that are new. |
4. | Three-point | Improves single-point estimates by using three estimates: most likely, optimistic, and pessimistic. | Can be used for projects that are new. |
Analogous and parametric estimates are examples of top-down estimates, the first being on the basis of the entire project and the second being on the basis of some sort of unit measure (dollars per square foot, hours per line of code, etc.). They both use historical data, with parametric estimates taking longer, but being more accurate than, analogous estimates.
Bottom-up estimates take more time to complete, but they also are more accurate than either analogous or parametric estimates. Three-point estimates are example of bottom-up estimates, which are obtained from analyzing individual work packages, that are refined through risk analysis. The single-point estimates are enhanced using risk analysis by figuring out how much each estimate would take in a best-case (optimistic) and worst-case basis (pessimistic).
They are even more accurate than bottom-up estimates, because they take into account the various risk factors which may effect the cost of the project. It is entirely possible that you could use all four techniques in different stages of planning, the analogous and then parametric estimates to get a preliminary estimate, and then the bottom-up estimate to get a more refined estimate, with the final estimate coming from the three-point estimates.
3. Three-point estimates
The three-point estimate relies on three different estimates:
Estimate | Explanation | ||
1. | cO | Optimistic | Based on realistic analysis of the resources likely to be assigned, their availability, and their productivity. |
2. | cM | Most Likely | Based on analysis of the best-case scenario. |
3. | cP | Pessimistic | Based on analysis of the worst-case scenario |
However, they can be combined into the three-point estimate in two different ways:
Estimation distribution type | Expected Duration (cE) | |
1. | Triangular distribution | (cO + cM + cP)/3 |
2. | Beta distribution (PERT technique) | (cO + 4cM + cP)/6 |
The triangular distribution is simply the average or mean of the three separate estimates. The beta distribution, based on PERT (Program Evaluation and Review Technique), assumes a great deal of confidence that the most likely estimate cM is accurate. This allows the distribution to give 4 times more weight to cM than to either cO or cP. The way to remember the denominator of this formula is to realize that there are the equivalent of six terms rather than three in the numerator, if you consider the 4cM to be the equivalent of four terms, cM + cM + cM + cM.
After a brief interlude this weekend, I will continue next week with a summary of the last planning process, 7.3 Determine Budget, which puts together all of the other planning processes in the Cost Management knowledge area to form the project budget.
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