types-of-estimates-in-project-management

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Estimation is an integral and important part of project management. If a project has to succeed, it has to begin with a successful estimate. It is crucial to correctly schedule the tasks in order to execute the project properly. To do this, the project manager must know things like cost, timelines, the scope of the project, risks involved in the project, resources available, and the quality required. All of these things are taken into consideration during project estimation and are part of the project estimation techniques. Making project estimates is not an easy task. This is because you will not know exactly how much time is going to be required to complete a project till the time it is completed. Until the time for delivering the project arrives, project teams only make calculated guesswork or what is called estimates for making forecasts for the future. The more complexity of the project, the harder it becomes to make accurate estimates and the future of the project becomes murkier. And inaccurate estimates may result in missed deadlines or shooting up of the project budget later on, which are the sure shot indications of the impending failure of the project.

Project estimation techniques help in checking the viability of the project. And if the organization decides to go ahead with a project, these techniques become essential for predicting the accuracy of the project. A skillful and accurate estimate plays an important part in making budgets, setting schedules, and managing resources that would ensure a thriving business. And understanding all these things and knowing how to do them is critical to making the right estimates. There are many types of estimates that are being employed nowadays. But we will have a look at some of the more important types that work for almost all kinds of projects. But first, let us understand what are project estimates.

What are project estimates?

Project estimates help the project manager to predict certain variables like cost, time, risks, and others related to a particular project. The project estimation techniques enable the project team to make an accurate forecast of the important elements of the project like cost, timelines, quality, resources, scope, and risks. The main aim of project estimates is to give a clear picture to the client to make him understand how much investment would be needed for the successful delivery of the proposed project and how much return they can expect to get on that investment. The client has to be sold the project in order to attract investment. So, showing returns is an equally important part. And once the project is approved, these estimation techniques are required to create an accurate plan for delivering the project on time and within the budget. But how do project estimates benefit the project? Well, the following factors of the project benefit from the use of project estimates.

Cost:

Cost is one of the key elements of project management. It is one of the major constraints in any project. When talking about estimates, the cost is the first thing that comes to mind for most stakeholders. And this is natural as most projects are talked about in terms of money. What matters is the return on investment and if you don't get returns, the project is not deemed to be successful. On the other hand, if you don't have enough money for the project, you won't be able to complete it. So, not having enough money for the project or spending too much on it can lead to the project's failure. Therefore, estimating the cost of the project at the very initial stages helps in setting the client's expectations and at the same time, it makes sure that you have sufficient money to complete the project. An accurate forecast of the project cost will help the stakeholders to decide whether to move ahead with the project or not. So, knowing how much money you would need to complete the project and when you will need it goes a long way in ensuring the project's success.

Scope:

This is another one of the three main constraints for a project. The project scope can be defined as everything that needs to be done in the project for delivering it successfully. An estimate of what amount of work needs to be done in the project and what actual tasks you would need to complete for the project's success will make sure that the right kind of materials and skills are available to you for completing the project. Therefore, having a clear view of what all work is involved in completing the project and knowing that all the required materials and expertise are available will ensure that the project progresses unhindered and finishes on time.

Time:

Talking of time, this is the last of the triple constraints that a project faces. It means the total time that you would require to complete the project and the tasks involved in it. When you know what tasks are needed to be done and how much time your team would take to finish them, you can get a fair estimate of the overall time required to complete the project. This is vital for making an accurate project plan. As a project manager, you would be certainly interested in knowing how much time the project would take and the stakeholders would also like to know the deadlines. Creating timelines is also important because it enables you to arrange resources accordingly. An accurate estimate of time also helps clients in understanding when they would get the key deliverables.

Risk:

Estimating project risk is as important as the three main constraints. A risk is an event that occurs unexpectedly and affects the project. The effect could be positive or negative. However, the risk is talked about mostly in negative terms. But whichever way it be, if you want to reduce the risk or benefit from it, you be better prepared. And for this very purpose, a project estimate must include an estimate of project risk. Estimating risk involves predicting or identifying what might come up during the project lifecycle and setting up responses for it. You may not be able to cover everything that might happen but at least you are better prepared. This way you are able to prepare the risk management plan.

Resources:

As we know, resources are all the things you would need to successfully deliver a project including men, materials, and machines. Obviously, before starting a project, you ought to know what and how many resources you would need to work on the project and complete it. You can't start a project without knowing how many people or what software, or any other equipment you would need to carry out the tasks involved in the project. An estimate of the required resources would ensure that the project progresses without any obstacles or that the team does not have to wait to get the required equipment while working on the tasks. Resource management ensures that you have resources in the required quantity and they are being used as efficiently as possible. But without an estimate of what and how many resources you need and when you would need them, it would be a challenge to manage them. If resource estimation is not done, it could lead to people sitting idle without the required material which in turn, may take time to reach. This is surely going to cause delays in the project and may have a cascading effect on the whole project.

Quality:

A project is considered successful only if it has met the triple criteria of timely delivery, is within budget and has met the quality expectations. You may meet the first two criteria but if the project is not delivered with the required quality but has not fulfilled the demands pertaining to quality from the stakeholders and the clients, the project would be called a failure. Quality refers to how well the deliverables of the project have been completed. It may involve certain rules and regulations that need to be fulfilled or there may be certain parameters that need to be met. Quality constraints may result in the need for more money or time. An escalation in the project cost may occur if a proper estimate of quality is not made beforehand. So, estimating the quality level demanded or expected by the stakeholders and the clients would help in better planning the other five constraints that we have described above.

If we look carefully, all these factors are interrelated and interconnected. So, the estimate of one can impact the others. Therefore, employing the same types of estimation techniques would bring uniformity and will improve the accuracy of the estimates.

Let us now look at the different types of estimates in project management.

Types of estimates in project management

Having learned about what are estimates and why they are important, let us now discuss the types of project estimates or project estimation techniques that are more popular and are used more commonly. You may use any one or more of these techniques while making estimates for the project. There are six types of project estimates that are used most commonly.

Top-Down Estimate:

This estimation technique begins with the total time of the project and breaks it into different stages and then to the tasks. First, estimation is done at the project level which is considered the top and then divided into tasks that are considered the bottom of the technique. This can be done with a portion of the project also. You would know what that particular portion of the project would cost and how much time it would take so you can break that down into smaller tasks. It is a typical estimation technique that is based on your project's work breakdown structure (WBS). The top-Down estimate is usually done when the client insists on getting the project completed within a certain timeframe. It works well in this scenario as you have the timeframe and can split it into smaller activities or tasks to meet the deadlines.

Bottom-Up Estimate:

The reverse of the Top-Down estimate is the Bottom-Up estimate. Here, rather than breaking the timeframe into tasks, each task is estimated and then combined to get the estimate for the complete project. This type of estimate proves to be more accurate than the above one because each task is estimated individually and then combined so that a larger schedule is created to give you a better estimate for the project. However, the Bottom-Up estimate takes more time than the Top-Down estimate. This type of estimate has one advantage you first think of what is required to be done and then get the bigger picture which would give you an idea about if it would be sensible to work on the project.

Analogous Estimating:

It is also called comparative estimation. In this technique, data is taken from past similar projects and its variables are studied combined with the Top-Down approach to arrive at an estimate of the time and cost for the project in hand. Similar past projects can be found both within the organization and outside it. The comparison in this technique works best if there is more data as that would provide a more accurate estimate. For example, if the previous similar projects were completed in an average time of six months, your current project may also be estimated to complete in that much time. Then this time period may be split into tasks and activities to make an estimate for the lower-level work. Estimation of the project cost can also be done in this way by comparing it with the costs incurred on previous similar projects. The cost can be scaled if there are any variations in the previous and current projects.

Expert Judgment:

People who have managed and have experience in similar projects as yours are naturally experts in such projects. And asking them for help in making estimates for your project is the most commonly used estimation technique. It is obviously quicker and easier than other techniques as you don't have to make many calculations. Moreover, it is a human tendency to believe those who have already traveled the path they are planning to go to. So, in the expert judgment technique, you rely upon the experience and judgment of the experts. A subject matter expert is the best person to get the project estimation data. He or she can guide you on the range the estimate should be within and that each part of the project is estimated accurately. But the most important thing here is that everyone should be on the same page when it comes to understanding what needs to be delivered. The expert judgment technique is flexible because you can use it in both Top-Down and Bottom-Up ways.

Parametric model estimating:

This estimation technique also makes use of the data from past projects but here data is adjusted so that the differences between each project are reflected. The data from the past project is taken and pro-rated to make estimates for the current project. In the parametric model estimating, the estimation starts with a unit cost, and then it is scaled to the number of units that are needed. This is considered to be a more scientific technique. This is a faster technique but the data available should be robust for making smooth calculations. However, since this technique is mostly about mathematics, the cultural, environmental, and political differences between the projects become difficult to be adjusted.

Three-point estimating:

This is the last of the types of project estimates. This type of project estimate is often used when creating a bottom-up estimate. Instead of considering one time period for a task, you consider three durations - active, passive, and most likely. These values are used to skew the estimates in case there is an upside or downside risk. The estimates of these three durations are combined and their average is taken to determine the actual estimate. The method that uses this three-point estimation is the Program Evaluation and Review Technique or PERT and it takes the weighted average of the three values with 'most likely' getting the highest weight. This method estimates more accurately by using this weighted average technique.

The types of project estimates we have discussed above are really important for any project to succeed. We have seen, how these estimates impact the different areas of the project and how the success or failure of the project largely depends on the accuracy of the estimates. A project, by its definition itself, is a temporary event. So, your estimates need to be as accurate as possible as you would be working on a project for a short period and may not get the chance to rectify any errors in estimation later on so your project may suffer. It is always better to use one or more of the above project estimation techniques to make sure that you deliver a successful project and that your clients and stakeholders are all happy and satisfied.