A Quick Guide to Better Project Estimation
Why is Project Estimation Important
Project estimation is of primary importance in project planning and management. It makes sure that your actual project costs do not exceed your budget and that the project changes happen as desired timewise.
Project estimation can be quite complicated because it is a multivariate task. In layman’s terms, it is an estimated measure of how much resources, effort, and time a project will take.
In this guide, I will cover how to perform better project estimation, and make sure that your estimates will stand the test of time.
If you’re not sure how to prepare an estimate that will lead to success, stick around, and you’ll find out everything that you need to know about effective project and cost estimation techniques.
Top-Down Estimation
Many businesses use the top-down estimation technique. With this technique, you start by setting a budget that you likely have at your disposal and then divide that budget between different project components, which could be stages or groups of activities of your project. You need to ensure that a sufficient budget was allocated to each project component.
This technique will help you identify whether your client’s budget is enough for the project and whether you’re going to make a profit or not. You must consider your profit during the cost estimation for the project and make sure that the estimation rates reflect not just the raw costs of your employees but also – include the profit that you would like to make.
This technique is very basic and simple, giving you a rough idea of whether your client’s budget is enough for the project. However, this technique has a few drawbacks: it is not very accurate because you’re assigning the budget to different tasks purely based on your guesses.
You are also not taking future changes into account, which can negatively affect your cost estimation accuracy.
It would be best if you always validated top-down estimates after they are completed, and see whether the allocations made at the lowest component of the project, be it an activity or task, make sense for that task.
Bottom-Up Estimation
This technique is the reverse of the top-down estimation. Just like the top-down estimation strategy, it is based on your project’s different stages and tasks.
To create estimates using the bottom-up estimation technique, the tasks are identified at the lowest level, and effort estimates are created for each task. Then the estimates are multiplied by the cost of those who will be working to accomplish the task.
Cumulatively, the task estimates will be combined into phase-specific estimates, and in turn – those will be combined into the overall project estimates.
This technique is detail-oriented, which makes it reasonably accurate and effective. It provides details about each phase and task, enabling you to compare the estimated and actual cost and time later on during the project to ensure you’re on the right track.
However, the bottom-up estimation can be very time-consuming because it is accomplished at the level of each task. Every task must be analyzed very thoroughly, ideally by the resource who will be accomplishing it, to come up with an accurate estimate, and all of that takes time and effort.
Analogous Estimation
Analogous estimation comes from the word “analogy.” In this technique, you use a similar project that may have been completed to estimate the time and cost of your new project.
For example, if you did a flooring job for a similar office building a few months ago, and if the floor space is nearly the same, you can assume that your project will take a similar effort, cost, and duration. It is an assumption-based strategy, which means that it may not be entirely accurate.
This technique is based on your team’s historical information and expert judgment, as even though two projects may be very similar, they will never be identical. It is best when you are looking to get a rough idea of how much time and resources your project will take.
It doesn’t require you to gather detailed information about each phase of the project, making it very quick and simple.
However, at the same time, it doesn’t account for the nuances that come with the different projects, which means that this technique may not be accurate in some areas.
Parametric Estimation
When it comes to finding a ballpark project cost, parametric estimation is the most accurate estimation technique. It is similar to analogous estimation in that it is based on a previous similar project.
However, it is more accurate than analogous and the bottom-up estimation techniques because this one accounts for the variables in your new project.
For example, you wrote a 1,000-word article on Business process engineering for $200. Your new project required you to write a similar article, but it has to be 3000 words long. Your new project is three times bigger than the previous one. This means the cost will be increased by three times, $200 x 3= $600.
This technique will give you a very accurate estimation as long as the underlying data can be easily manipulated, but as the project’s complexity increases, this technique becomes less accurate.
For example, you designed a portfolio website for $400 that took you one day; your new project requires you to design an E-commerce website, which is not only going to take a lot more days, it is going to be way more complex.
You can’t simply multiply the previous cost by the extra number of days to find the final cost. You also need to account for the complexity and several other factors to arrive at the final estimate.
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Three-Point Estimation
The three-point estimation technique gives you an accurate and realistic project cost. It is not a ballpark estimating technique. It is based on a system where you find the cost by estimating three times and taking an average of three different scenarios: the best-case scenario, worst-case scenario, and most likely scenario.
For example, you take on a new project, and your team thinks that it will cost $10,000 in the best-case scenario, $20,000 in the worst-case scenario, and $15,000 in the most likely scenario. You can take an average of all three amounts and find the expected estimate, which in this case, is $15000.
There is also a variance of this technique called the PERT technique, where we give a higher weight to the most likely scenario and our estimate = (pessimistic + 4 * realistic + optimistic) / 6.
Conclusion
Project estimation can be a daunting task. Many businesses fail to understand its importance and the need to create good estimates beforehand, rather than finding out what it takes to complete the project during its course.
Now that you know the estimation techniques that were covered above, you understand that faulty and inaccurate project estimation can lead to many future problems in your project.
It is imperative that you prepare as accurate project estimates as you can to ensure the long-term success of your project.
About the Author
Eugen Spivak is a multi-award-winning author, business strategist, and a business coach. Eugen is the founder of the Canadian Institute of International Business, an organization dedicated to bringing practical and hands-on business education for modern business leaders.
