2.1 The Concept of Estimation in Projects
Project estimating directly links to activities and sections in the PMBOK Guide and other Practice Guides. Project estimates are classified into categories based on how well the scope is defined at the time of estimation, on the types of estimation techniques used, and on the general accuracy of estimates. Regarding the general accuracy – accuracy can be viewed on a range continuum where the range decreases over time as in Exhibit 2.1
Gray and Erik Larson (2021) identified seven factors that impact estimate accuracy as follows:
Characteristics of Estimation
In general estimates should have several characteristics including some of the basic elements that contributes to the creation of estimates for portfolios, programs and projects.
Roles and Responsibilities in Project Estimating
Within organizations, several key roles are involved in project estimating. It is important that each individual fulfilling a project role is aware of his or her responsibilities in project estimating. Review the key roles, description and responsibilities in the Practice Standards for Estimating on Table 2-1. Key roles include:
- Project Sponsor
- Project Manager
- Program and /or portfolio managers
- Estimators and Subject matter experts (SME)
- Project team members
- Analysts
- Senior management
- Customers of estimate
Development Approaches and Life Cycles
Every project must pass through a series of phases from its start to its completion. The type of project deliverables determines how it can be developed. The type of deliverables and the development approach influence the number and cadence for project deliverables. The deliverable approach and the desired delivery cadences determine the project life cycle and it phases. PMI identifies three development approaches – predictive, hybrid and adaptive. The choice of each approach is influenced by the following:
- Degree of innovation
- Requirements certainty
- Scope stability
- Ease of change
- Delivery options
- Risk
- Safety requirements
- Regulations
The type and number of project phases in a project life cycle depends upon many variables including delivery cadence (whether a single delivery, multiple deliveries or periodic deliveries) and developmental approaches. The phases in a typical project life cycle for creating a project may include:
Waterfall (Predictive Life Cycle)
Agile (Adaptive Life Cycle)
Stages in the Project Estimating Life Cycle
Projects are unique and therefore each business will have a slightly different approach to how to do project estimating. In some organizations it could be the Project Management Office (PMO) setting the methodology or the Finance Department setting out how estimates for budgeting are to be calculated. According to the Practice Standards for Estimating, there are four stages in the project estimating life cycle:
Step 1: Prepare to estimate
The purpose of this step is to establish an estimating plan. This requires the identification documentation about estimation approaches, company’s policies and processes, PMO Standards, estimation techniques, estimation team etc.
Before a project estimate can be created it is important to plan how you will obtain all relevant information to understand the context of what is being estimated as information becomes available. Some of these relevant information includes project documentation, experts, estimating techniques, constraints and assumptions, additional influences and historical project information.
Step 2: Create the estimates
This step estimates are created using information, documentations, techniques identified in prepare to estimate step.
Team collaboration is extremely important to get all the input and support from critical stakeholders. Appropriate resources, budget and time will need to be identified and the application of techniques, so different opinions make a difference to the estimates.
Step 3: Manage the estimating
This step requires the team to manage the estimates created for example the budget or schedule for the project. It is important to maintained and managed as the project progresses – revising them appropriately as the team do the work to ensure they accurately reflect the initial estimates. Comparing estimated figures against actual figures to determine any differences (variances) is on going as the project progresses.
Step 4: Improve estimating
This step requires the application of continuous improvement principles to the estimates in the project. Calibrating models, tweaking techniques and making changes as a result of new information and what has been learned on the project are activities performed at this stage. Providing feedback to PMO or Finance department to improve templates, models and processes for future improvements are good practices.
The project estimation life cycle and the various phases of a project shows an overlap the – progressive elaboration which involves the continuous improvement and detailing of the project’s estimates as more accurate and precise information becomes available.
Example: Cost estimation approach applied to a typical project with a specific life cycle
The following cost estimation approach can be applied to a typical project with a specific life cycle.
- Start- up (Prepare, Create and Manage Estimates)
- The primary goal of the project team is to define the project in its broadest terms. For project cost estimating, the team will identify resources that will be required to produce the estimates, then begin preparing the estimate and identify any known constraints, such as funding or resources. The requirements of the business case will lead to the development of the project charter and project initiation document. These documents will include the information necessary to begin the creation of the project cost estimate, including business needs and a stakeholder registrar that will identify who will be responsible for the management of the budget and who will be approving the budget.
- Often during the initiation phase, the project team will create a rough order magnitude budget to determine if the project is achievable and if it should move forward. This estimate serves as a quantitative assessment of the likely costs for the project. As the project moves forward, the estimate will become more definitive in nature.
- Plan (Continue to Prepare, Create and Refine, Manage Estimates)
- The project team will consider the cost estimation techniques and approach they will use to create and maintain the budget. Often this is heavily reliant on environmental factors such as market conditions and exchange rates, and organizational process assets such as policies, templates, and lessons learned.
- Once a project management team has assessed these factors, they will continue the progressive elaboration of the cost estimate using one or more estimation techniques – analogous estimation, parametric estimation, bottom-up estimation etc. The process of elaboration will continue and will result in the establishment of a project cost baseline that can be used to gauge a project’s success. It is important to clearly document the basis of the cost estimation by clearly stating any assumptions, known constraints, identified risks, the estimate range, and the level of accuracy of the estimate in the project plan to ensure stakeholders understand that the project estimates may change if the factors documented change. The project manager should update the assumptions log and risk register regularly to ensure that cost estimate information is accurately captured and effectively communicated.
- Development (Create and Refine, Manage, Improve Estimates)
- During the development phase of the project, the project manager will oversee multiple phases of the cost estimation process. It is during this phase that required resources will be procured. This will result in more specific cost estimates from vendors, which will allow the project manager to continue the progressive elaboration of the budget.
- As work is completed, the project manager will update the project forecast with the actual expenditures. This will allow the project manager to better manage stakeholder expectations and facilitate transparent communication about the project costs. As resources are used, they can be compared to the original assumptions made during the planning phase of the estimation process.
- Test and Deploy (Manage and Improve Estimates)
- During the test and deploy phase of the project team and project manager will continue the management and improvement of project cost estimates. Key performance indicators (KPIs) will be used to measure the success of the project. These KPIs can include a measurement of project objectives, effort, and cost tracking, and project performance.
- Managing and monitoring change request is an important activity to prevent unauthorized changes from moving forward. Monitoring cost variances to the approved cost baseline can assist the project manager in isolating the cause of variances. This is typically done by performing an Earned Value Analysis, which compares the data from the planned value, the earned value, and cost actuals.
- Cost estimates will be reviewed using lessons learned through the life of the project, and by updating methods and forms used for the cost estimation process.
- Close
- When the entire project is completed, lessons learned will be completed and an evaluation will be conducted. The project charter and business case will be reviewed to determine if the deliverables achieved the intended benefits and value.