Basic estimation techniques

Revision as of 20:41, 4 March 2019

When managing a project, a manager has to achieve specific objects within time, resources and money. This can often be challenging, as there is a lot of uncertainty in doing so. "How can the amount of time for each activity be calculated"? "How many resources are needed to complete every task"? "And how much will the project cost in the end"? This article deals with answering all these questions and focuses on how to come up with educated guesses to these uncertainties.

In the first section, a definition of what an estimation is will be given. A variety of standard tools used in the estimation process will then be presented. Some of these tools and techniques are more complex than others and will therefore require a more detailed explanation. For every presented technique, advantages and disadvantages, as well as examples on how to apply these, will be given in order to give the reader an understanding of how the methods work and what they can be used for.

Lastly, a general guideline on how to approach the estimating process will be provided. Challenges and limitations of using the techniques will also be discussed, as these can variate in accuracy depending on the type of the projects and the project phase in which they are applied. The involved risks when estimating will also briefly be covered here.

Definition and Techniques for Estimating

Figure 1: Model of estimation process, inspired by the one found in "Guide to the Project Management Body of Knowledge (PMBOK® Guide) (6th Edition)"

The process of estimating is a common practice within Project Management of predicting a specific value that is not known with a relative accuracy. An estimation can serve different purposes, for example give an indication of the duration for a specific activity, or the amount of resources that must be assigned to a task in order to be completed in time. Figure 1 shows a model for the estimation process.^[1]

Estimations are based on different inputs. These can be components from the project management plan as the scope baseline or the schedule plan; project documents as list of activities, assumptions log, resource requirements, register for learned lessons; enterprise environmental factors as market conditions, organizational culture, resource availability; and organizational process assets as policies, scheduling methods and historical data from similar projects. The result of the estimation process, the output, are the calculated estimate and the detailed documentation that supports the approximation. Furthermore, as a result of carrying out the estimation process, some project documents may also be updated.

There exist different estimation techniques. It is important to mention that these are not only limited to the planning phase, but can be used throughout the whole project. This chapter will describe some of the most used techniques in managing projects and give examples of their application. The techniques can be used for estimating costs, efforts, durations, etc.

Expert Judgment

This technique is quite simple and consists in obtaining the judgment of a group or a person with specialized education, knowledge, skill, experience, or training, in the subject that has to be estimated. The expertise can either be provided in the corporation, or externally, for example by turning to a professional consulting agency. During the process, it is a good idea to provide documents, data and other relevant information that can help the involved parts with estimating accurately. An example of carrying this method out, could be having a group of experts to estimate how much the cost for a specific construction material will fluctuate in the next five years. The group will have an open discussion and will eventually at the end agree on what they believe to be the most valid prediction. The problem with doing so, is that there could be a tendency to be persuaded by the majority opinion or the members with the greatest authority on the matter.^[2]

A well-known method to overcome these issues, is the Delphi method. According to Helmer (1967), the purpose of this method is to obtain the most reliable consensus of opinion from a panel of selected experts, by questioning them individually around a central subject in a series of rounds, without having the experts confronting each other directly. After every iteration, a host presents the given answers to the group anonymously, thus encouraging the experts to revise their judgement, based on factors other have brought up and that they maybe did not have in consideration during the previuos iteration. At the end of the process the answers are expected to converge towards a more reliable and unbiased estimate for the object of interest.^[2]

Analogous Estimating

Figure 2: Analogous estimating model, made by Green, C. (2006) in "Estimating as an art—what it takes to make good art." ^[3]

An analogous estimation is based on parameters from projects with broad similarities with the one taken in consideration. This is a particularly useful technique in the early stages of a project, where there is little amount of information available and the board wants for example an estimate of when the project will be completed and how much it will cost in the end. The technique’s main focus is on the overall activities, as it becomes more difficult to give predictions of specific activities, based on information from other projects. The involvement of specific human resources that have been on similar kind of projects is crucial here, as they can give insight on the experiences and challenges they faced, helping thus the project manager in developing valid estimations. Expert judgement will also be helpful when making analogous estimating in order to establish reusability of the information from similar projects.^[3]

The method is very simple and generally costs less in terms of time and effort, compared to many other estimation techniques within project management, although it doesn’t work with creative and innovative projects, as these are quite unique.^[4]

Parametric Estimating

Figure 2: Parametric estimating model, made by Green, C. (2006) in "Estimating as an art—what it takes to make good art." ^[3]

Parametric estimating uses mathematical models that are based on historical data and project characteristics (e.g., duration constraints for a specific activity) to calculate an estimate for specific activity parameters, such as cost, effort, duration, etc. Statistical analyses are usually also performed in order to calibrate the historical data in the mathematical model. Besides, benchmark data from the industry can be utilized to set specific objectives and standards for the model, challenging the project team to improve the work on a type of activity.

The technique's accuracy relies on the quality of the data. So when using parametric estimating ensure all your data are up to date. Below an application example of this estimation method.

Imagine you have a project where one of your clients wants you to develop a new software within the next 48 hours. The software consists of three parts, respectively A, B and C. Based on internal historical data from similar projects you have worked on before, you can assume that the A section requires 100 hours, the B section 50 hours and the C section requires 30 hours. The A section can be done independently from the other two sections, but B have to be completed before C. You want to estimate how many programmers you will need to deliver the software in time. The programmers can work on a section simultaneously and are available 8 hours pr. day each.

The model will consist of the following system of constraints:

• Constraint A: 100 / (8*x) ≤ 48

• Constraint B+C: (50+30) / (8*y) ≤ 48

where x is the number of programmers working on A, and y the programmers working on B and then C. The solutions for the system are:

• x = 3,84 ≈ 4

• y = 4,80 ≈ 5

meaning you will need a total of 9 (4+5) programmers on your team.

Three-point Estimating

Also known as PERT (Program Evaluation and Review Technique), this method is usually used when going for a more "bullet-proof" estimate, by considering uncertainties and risks. The principle is very simple. Let’s say we want to estimate the duration for a specific schedule. We have tree scenario outcomes:

• Most likely (M): based on what is the most probable duration seen from a statistical point of view
• Pessimistic (P): based on the worst-case scenario for the activity
• Optimistic (O): based on the best-case scenario for the activity

The inputs for the different scenarios are provided by the output deriving from other single-point estimation techniques, for example the parametric estimating. When combining the different scenarios, a more accurate estimate can be expected. This expected value (E) represents the average time the activity would require if it were repeated on a number of occasions over an extended period of time.^[5] The expected duration (E) can be calculated as a weighted average (PERT Mean):

Figure 2: Bottom-up example in Microsoft Projectsl taken from Ten Six consultancy's homepage (2015).^[6]

E = (P + 4*M + O) / 6

Let's see this with a concrete example. The development of an engineering software is estimated to take 8 months. If it goes wrong it will take 4 months extra, but if every thing goes smoothly it will only take 6 months.

E = (12 + 4*8 + 6) / 6 = (12 + 32 + 6) / 6 = 50 / 6 = 8,33

The expected time to develop the software is 8,33 months. As you can see, the most likely scenario has a weight of 4, and the other two scenarios are weighted with 1. This way of wheiging the parameters is an approximation of a beta distribution, which usually is the one that appeals to projects in general.^[4] The method is tipically used when there is insufficient historical data on the estimation subject.^[1] The disadvantage of using it though, is that instead of one, the project manager has to make three estimations, which require more work and time than other single-point techniques.

Bottom-Up and Top-Down Estimating

A well-known technique used when estimating projects, is the bottom-up approach. If an activity’s duration or cost cannot be estimated with a reasonable degree of confidence, it can then be broken down to its different components. The individual estimates for these are then rolled up to calculate the overall estimate.^[1] This techniques provides a high level of accuracy, but requires time and money, as an activity can be splitted up in many subactivities that have to be estimated. Besides, the extent of the approximation's accuracy is proportional to the provided level of details. It's therefore not recommended to use this method in the early stages of a project, where not so many informations are available.

Are more agile approach is the top-down method, which is based on the information currently available. The overall activity is estimated roughly, for example by using an analogous estimation for the task. As the project evolves, new information is then gathered and the previous estimate can then be refined. This method allows the project team to forecast and react quickly in a continuosly changing environment.^[7]

General Guideline

There are four key stages to the project estimating lifecycle:

• Prepare to estimate: This stage of the lifecycle is the creation of the estimating approach, which includes the identification of activities, determining the techniques to be used for estimating, identifying the estimating team, preparing estimating inputs, and documenting any constraints to the estimates such as funding limits, resource constraints, or required dates.

• Create estimates: In this stage, activity resources, activity durations, and costs are estimated. There are several models and techniques for determining the estimates. Note: Contingency reserve refers to the amount of funds or time needed above the estimate to reduce the risk of overruns, but this is not within the scope of the current standard.

• Manage estimates: Managing of the estimates occurs after the original estimate is completed and has been validated with the project team members. After the project work has started, this stage of project estimation includes the activities used to manage the estimate, including changing controls, calibrating the full cost, and comparing actual costs to the baseline estimate.

• Improve estimating process: As projects progress, lessons learned are applied to the estimating lifecycle, including calibrating the models based on actual values, and maintaining checklists of components to include in future estimates. Improvements can be applied at both project and organization levels.

Critique on Using Estimates

• One conundrum in estimating, especially for public-sector projects, is that bidders sometimes make overly optimistic estimates in order to win the business.^[8] --> just in case
  • Estimation should be for normal conditions
  • Risks and special situations should be added later
• Optimism Bias
• Is it good to have estimates so early in the process, what happens if something changes?
• Estimates that are there to give an idea, becomes the targets or the constraints.
• Limited in reliability --> sensitivity analysis on accuracy

References

1. ↑ ^{1.0 1.1 1.2} Project Management Institute, Inc. Guide to the Project Management Body of Knowledge (PMBOK® Guide) (6th Edition)
2. ↑ ^{2.0 2.1} Helmer, O. (1967). Analysis of the future: The Delphi method. The RAND Coroporation, Santa Monica, California.
3. ↑ ^{3.0 3.1 3.2} Green, C. (2006). Estimating as an art—what it takes to make good art. Paper presented at PMI® Global Congress 2006—EMEA, Madrid, Spain. Newtown Square, PA: Project Management Institute.
4. ↑ ^{4.0 4.1} Kanabar, V. & Warburton, R. D. H. (2011). Leveraging the new practice standard for project estimating. Paper presented at PMI® Global Congress 2011—North America, Dallas, TX. Newtown Square, PA: Project Management Institute.
5. ↑ https://en.wikipedia.org/wiki/Program_evaluation_and_review_technique
6. ↑ https://tensix.com/2015/08/comparison-of-top-down-and-bottom-up-estimates-in-microsoft-project/
7. ↑ Sliger, M. (2012). Agile estimation techniques. Paper presented at PMI® Global Congress 2012—North America, Vancouver, British Columbia, Canada. Newtown Square, PA: Project Management Institute.
8. ↑ https://www.pmi.org/learning/featured-topics/project-estimating