Project/program manager constantly struggle with budgeting and estimating project schedule and cost. Below are some good estimation characteristics documented by United States General Accounting office report “The theory and Practice of cost estimate for major acquisitions”.
Now that we know what the good characteristics of estimation are, let’s look at some prevalent methods and the advantages offered.
• Analogous techniques – Top down techniques that are used when little information is available about the project, or the new project is similar to a previous project or a subject matter expert experienced with what is going to be estimated is available. These techniques are used to provide early estimates for total project duration and cost. These techniques are primarily used during the business case presentation for cost/benefit evaluation. Some methods under these techniques are:
o Ratio estimation – This technique assumes that there is a linear relationship between the total project costs with one of the basic feature of its deliverable. This method uses an expert judgment or market analysis on feature relationship and linearly progress it to provide most likely estimate. For ex. When setting up a cloud infrastructure, we can use historical cost of similar implementations and linearly adjust the cost and schedule based on the scope. Advance ration methods such as power series estimation exists today to provide more reliable data.
o Range estimation – Instead of providing just most likely estimate, project manager can develop a range of estimates from most optimistic to pessimistic. This method allows for flexibility as well as help management to understand the degree of variability. Also contingency fund can be better estimated by looking at the variability. Three point and PERT estimation are more refined form of range estimation technique.
• Parametric techniques – According to PMI “Parametric estimation use statistical relationship between historic data and other variables to calculate an estimate for an activity, cost duration or resource. “. This technique can use Job based costing (JBC), Feature based costing (FBC) and process based costing (PBC). For ex. if we know that a user interface with 5 input cost $100K ($80K labor cost + 20K overhead) and need to estimate a user interface with 10 input, then we can double the number of direct labor hour and use that as cost driver for overhead expenses to calculate total cost of 200K ($80K*2 + 0.25*$80K*2) or you can look at the number of business processes or feature set that will change/enhance due to the new requirement and cost accordingly. Parameter techniques are useful when a full blown analysis of all the activities in the project is not yet performed but requirements are gathered and baseline is established.
• Bottom up techniques – Bottom up technique is the most reliable method. Bottom up estimate require detailed work breakdown structure, activity list and directory of project resources. Bottom up process require a detail understanding of the activities involved to attain the desired objective and what resources these activities consume. These activities can be consuming volume driven resources (for ex. man hour for coding), batch driven (auto code generator) or product sustainability resources (disaster and recovery planning). Activity based costing (ABC) principles can be employed when doing bottom up estimation. Rolling up the resource estimate, duration of use, and cost of the resources to the top node of the WBS structure will provide resource-by-resource utilization and cost for the entire project. Bottom up estimation is very useful for deriving project cost once the project plan is laid out, requirements are broken down into work packages and associated activities are defined.
Bottom line is that using single estimation technique might not provide the best results depending on the project stage. A published guideline, describing when to use what, available to all estimators is a better way to go. Project manager can publish these different techniques, utilized during different stages of project, to estimators to provide most accurate estimates, leading to an accurate assessment of cost and schedule deviation. A program manager can also use these better estimates to plug in the cost variable in the cost/benefit function and assess the actual benefit realization and whether the project is overrunning the benefit it provide.
