Estimation Techniques

Abstract

Estimations are a crucial part of project management, providing critical information to help project managers plan, execute, and control projects effectively. Project estimations help to identify the scope and requirements of a project, allocate resources, set realistic timelines, and develop budgets. They provide a roadmap for the project team to follow, helping to ensure that the project is completed on time, within budget and to the required level of quality.

Accurate estimations are essential for effective project management, allowing project managers to identify potential risks and challenges early on and to develop strategies to mitigate them. They also enable stakeholders to make informed decisions about whether to proceed with a project, how to allocate resources, and how to manage any potential risks or challenges that may arise.

Effective estimation requires a combination of experience, skill, and data analysis. Project managers must be able to assess the requirements of a project, understand the capabilities of the team, and factor in potential risks and uncertainties. They must also be able to use historical data and industry benchmarks to make informed estimates and track progress against these estimates throughout the project lifecycle.

In short, estimations are a critical component of successful project management, providing the foundation for planning, executing, and controlling projects effectively. Accurate estimations help to ensure that projects are completed on time, within budget, and to the required level of quality, helping organizations to achieve their goals and objectives.

The objective of this article is to create an understanding for the reader of what top-down and ground-up estimations are, what different techniques there exists and when and how they should be applied.

The Big Idea

The big idea behind top-down and bottom-up estimations is that they are two different approaches to estimating the size, scope, and cost or time of a project or initiative.

Top-down estimation involves starting with an overall estimate for the project and then breaking it down into smaller components. This approach is often used when there is limited information available about the project or when there is a need for a quick, high-level estimate. Top-down estimation can be useful for setting initial goals and identifying potential risks, but it may not provide a detailed understanding of the project's requirements and may not be accurate enough for budgeting and planning purposes.

Ground-up estimations, on the other hand, involves breaking down the project into smaller, more manageable components and estimating the time, effort, and resources required for each of these components. Ground-up estimations are therefore often performed when the work breakdown structure has been performed. This approach is often used when there is more detailed information available about the project and when a more accurate estimate is needed. Ground-up estimation can be time-consuming, but it can provide a more accurate understanding of the project's requirements and can be useful for budgeting and planning purposes.

Both approaches have their advantages and disadvantages, and the choice of which to use will depend on the specific needs of the project and the available information. In some cases, a combination of top-down and bottom-up estimation may be used to provide a more comprehensive estimate.

Top-down estimations

Top-down estimating is a project management technique that involves estimating the total cost or duration of a project without using detailed information or analysis. It starts with evaluating a projects budget, duration or scope as a whole and then separating it into smaller components. It is often used by company leadership and project managers. Used techniques often include expert judgment, analogous estimating and historical data from similar projects to make an educated guess of the overall cost or duration of the project. The estimate is based on the information available at the start of the project, hence the tasks in the work breakdown structure are not clearly defined yet. In top-down estimations, the first step is for the project manager to identify the major deliverables or expenses that are required to complete the project. Then, using their experience, expert judgement or historical data, they estimate the total cost or duration of the project. The expert judgement can be internally in the form of experienced managers and sometimes externally as outside experts. The top-down estimation priorities efficiency as it does not need middle management to provide detailed cost break downs, which allows managers to quickly asses potential opportunities, costs and duration. It can also be used for projects with a high degree of uncertainty or when there is a limited information available. However, it is important to note that top-down estimating is less accurate than ground-up estimating, which involves estimating the cost or duration of each individual task in the project, thus top-down is used in the beginning of the project. As a result of the inaccuracy associated with top-down estimations multiple techniques exist to assist in minimizing the error here among consensus method, ratio method and apportion method.

Delphi/Consensus Method

The consensus top-down estimating method involves knowledge sharing across meetings in which the project manager presents an initial estimate to stakeholders, experts or other managers. The group then share their experiences and discusses and adjusts the estimate until a consensus is reached. This process can be repeated several times until a final estimate is agreed upon. However, there are some potential challenges with consensus top-down estimating. One challenge is that it can be time-consuming and may require multiple meetings to reach a consensus. Additionally, there is a risk that the estimate may be influenced by group dynamics or biases, rather than objective data. To mitigate these risks, it is important to ensure that the stakeholders and experts involved in the consensus top-down estimating process are knowledgeable and impartial. On the other hand an advantage of consensus top-down estimating is that it leverages the knowledge and expertise of multiple stakeholders, experts or managers, which can result in a more accurate estimate. Additionally, the project manager should also strive to gather as much objective data as possible to assist the estimation, and should be transparent about any assumptions or uncertainties. Overall, consensus top-down estimating can be a useful method for developing project estimates that are based on the collective expertise and input of key stakeholders and experts. However, it is important to use this method carefully and to ensure that the estimate is grounded in objective data and analysis.

Ratio Method

The ratio method is based on using historical data from similar projects to estimate the cost, duration, and effort required for a new project. The project manager identifies a set of ratios or benchmarks that can be used to estimate the new project, for example a construction project's size is 1000 square metres and project managers may use the companys average cost per metre to estimate the cost of the project. These ratios are then applied to the new project to generate an estimate. An advantage of applying the ratio method is that it is a quick and simple way to generate estimates based on historical data. Furthermore, it can be useful for generating ballpark estimates early in the project planning process when detailed data may not be available . However, there are also some potential limitations with the ratio method. The accuracy of the estimate is dependent on the similarity of the new project to the historical data used to develop the ratios. Additionally, the ratios may be outdated or not reflective of current market conditions. To mitigate these risks, it is important to ensure that the historical data used to develop the ratios is as similar as possible to the new project, and to adjust the ratios as necessary to reflect current conditions. It may also be useful to use multiple ratios or benchmarks to generate a range of estimates and to account for uncertainties in the project.

Apportion Method

The apportion method involves dividing the project into major components, and then allocate a percentage of the total cost, duration, and effort to each component based on historical data and expert judgment . For example, if a construction project has five major components, the project manager might allocate 30% of the total cost to component A, 20% to component B, 15% to component C, 25% to component D, and 10% to component E. An advantage of the apportion method is that it provides a high-level estimate of the project cost, duration, and effort based on expert judgment and historical data by breaking it down into smaller components without going too much into detail as the bottom up approach. It can also help identifying the major components of the project and the associated costs, which can be useful for budgeting and resource allocation. However, there are also some potential limitations associated with the apportion method. The accuracy of the estimate the method relies heavily on the accuracy of the historical data and the judgment of the experts involved. Additionally, the method may not capture the unique characteristics of the project, which can lead to inaccuracies in the estimate. To mitigate these risks, it is important to ensure that the historical data used in the apportion method is relevant and up-to-date, and to involve experts with relevant experience and knowledge in developing the estimate. It may also be useful to use multiple estimation techniques, such as the bottom-up method, to validate the estimates and identify any areas of uncertainty or risk.

Ground-up estimations

Ground-up estimating is a project management technique that involves estimating the cost or duration of a project by breaking it down into its individual tasks or work packages. This method is also known as bottom-up estimating as it involves estimating the costs and time for each task, from the ground-up, before aggregating them to produce an overall project estimate.

In ground-up estimating, the project manager or team first identifies all the tasks required to complete the project. Each task is then estimated in terms of the time required to complete it, the cost of resources needed, and any other expenses that may be associated with it. These estimates are then aggregated to provide an overall estimate for the project.

Ground-up estimating is more accurate than top-down estimating because it provides a detailed breakdown of the project cost or duration. This makes it easier to identify specific areas where costs or timelines may need to be adjusted. Ground-up estimating is often used in later stages of a project when the level of detail required for a bottom-up estimate is available.

One of the advantages of ground-up estimating is that it provides greater accuracy and transparency than top-down estimating. This makes it easier to identify areas where costs or timelines may need to be adjusted, and it helps to reduce the risk of unexpected delays or cost overruns. It also provides a more detailed understanding of the project requirements and can help to ensure that all tasks have been properly accounted for.

However, ground-up estimating also has some limitations. It can be more time-consuming than top-down estimating because it requires a detailed breakdown of all tasks. It can also be more challenging to estimate costs and time accurately for complex projects with many interdependent tasks.

In conclusion, ground-up estimating is a useful technique for project managers to obtain accurate estimates of the cost and duration of a project. However, it is important to recognize that it can be time-consuming and challenging, particularly for complex projects, and may require additional resources to implement effectively. Ground-up estimating should be used in conjunction with other project management techniques to ensure that accurate estimates are obtained and risks are managed effectively.

Annotated bibliography

H. Kwon and C. W. Kang, “Improving Project Budget Estimation Accuracy and Precision by Analyzing Reserves for Both Identified and Unidentified Risks,” Project Management Journal, vol. 50, no. 1, pp. 86–100. This article provides the reader important information about how to estimate the budget accurately, when is the best time to calculate the budget and which cost estimation method is the optimal method for all types of project.

D. A. N. Gregory K. Mislick, Cost Estimation: Methods and Tools. This E-book provides the overview of all cost estimation methods and tools to estimate the cost for all types of project. It has detailed description of estimated tools which can estimate cost of enterprise projects with maximum precision.

R. T. Hughes, “Expert judgement as an estimating method,” Information and Software Technology, vol. 38, no. 2, pp. 67–75, Jan. 1996. This article gives the reader an important information about expert judgment-based estimates of projects specifically in information technology and software domain

C. E. Clark, “Letter to the Editor—The PERT Model for the Distribution of an Activity Time,” Operations Research, vol. 10, no. 3, pp. 405–406, Jun. 1962. This article guides the reader how to use the PERT distribution, estimate the activity duration and cost accurately and how it is efficient method as compared to other estimation methods.