Project Budgeting – Estimations

In this session of Project Budgeting, let us explore on estimations.

While progressing the planning of projects, there are 3 steps or phases in estimating.

1) Rough Order of Magnitude – This is the estimations that are usually done in the initial phase of the project when the team does not have enough knowledge on the functionality to be developed. So the team comes up with a high level of estimations which has an accuracy around -25% to + 75%. This is also referred to as T shirt sizing, where team can provide estimations in terms of XS, S, M, L, XL, XXL. Its up to an organization to relate it to a range of effort such as XS -> 1 week of effort, S ->  2 weeks of effort, M -> 1 month of effort and so on.

2) Budgetary Estimate – As the project evolves and the team has more information on the project such as detailed functional specs, the team does another iteration of estimation which is more detailed. This is referred to as budgetary estimate and is accurate in the range of -15 to +25%.

3) Definitive Estimate – This estimate is more granular when all the functional specs and technical specs are in place. This is accurate in the range of -5% to +10%.

Please note that, Estimations can never be 100% accurate and that is why they are called as Estimations. It is a forecast of how much effort the team is going to need to complete a project or delivery.

As we move along the project and have more detailed estimations, it is imperative that the project plan needs to be updated with these estimates and thereby provide a more accurate budget.

Once the project is finalized or baselined, the costing or budget is baselined too and is usually referred to as Budget at completion or BAC.

It is against the BAC that a project or program manager tracks the actual progress of the work delivered and can track as to whether the project is under budget, over budget or at par with the budget. This is managed through the Earned Value Management (EVM) concept. (Please refer to my earlier blogs on this).

There are different types of Estimation approaches which are:

Expert Judgement: It usually comes from the Subject Matter Experts (SMEs) who provide an estimation of how much effort will be needed for the activities in a project.

Analogous Estimations: Here, the team provides estimations by comparing the current project with a similar project in the past.

Parametric Estimations: In this approach, the estimations are based on units of measurement. This is more common in the construction industry such as cost per square foot.

Bottom up Estimations: The estimations are done for smaller units of work and then rolled up to get the estimates for the complete project.

3 point Estimations: In this model, the estimations for each task are done considering a pessimistic (P), most likely (ML) or optimistic (O) scenario. Then, an average estimate is found out. The average can be calculated either using the triangular method which is simply (P + ML + O) / 3, or using the weighted average method which is (P + 4ML + O)/6.

The weighted average result is more commonly used as it tends to be more realistic and inclined towards the pessimistic scenario.

Here are a few tips for using Estimations more effectively:

1 – Observe standard estimation approaches based on your industry

• Parametric approaches are usually used in construction industries.
• Story pointing or functional point estimations are usually used in software industry.
• Cost per lane or cost per mile is used in the road or rail industry.
• Cost per feature for software projects at a high level.

4 – Keep a track on the economy and costing forecast.

5 – Group similar cost types in the Work Breakdown Structure (WBS).

6 – Finally, double check all your costs for each task.

7 – Check actual cost incurred vs the estimated costs using the typical Earned Value Management (EVM) model.