Estimates are required, to varying degrees of accuracy, at all stages of the project life cycle. Before an organisation can make an investment decision, an estimate needs to establish how much capital investment is required. An estimate is likely to be needed before any shareholders or stakeholders authorize funding for investment. Further along the project life cycle an estimate is required for tendering and bidding processes and throughout the life cycle the estimate is a control; a document that project stakeholders can reference progress against.
Estimating accurately can be a difficult process but is one of the most critical components of a successful project. The classic challenge for all project managers is to complete their projects on time and within budget, yet projects in every industry often exceed their original projections. The key to producing a good estimate is quality of information. As far as possible each item, resource, indirect cost, overhead, logistical element, paper clip or paper cup! needs to be known if it is to be included in the cost of the project.
Throughout the Project life cycle the accuracy of an estimate will change. Estimates are, after all, only quantified approximations of project costs, durations and resources. Estimates however are vital to any project, without them you cannot put together a schedule, find out what your resource needs are or even draw up a budget. An important factor to keep in mind is that an estimate can never be 100 per cent accurate (unless you are extremely lucky).
The start of a project is the hardest time to estimate, due to the level uncertainty over key factors like what is to be done, when, by whom, etc. At this stage an estimate’s range is likely to be wide, compared to the latter stages of the project when the detail is more clearly known.
There are four main methods of estimating:
Bottom-up estimating (analytical)
Bottom-up estimating requires the identification of each discrete activity required to complete the project. For each activity the resources (labour, materials, equipment or financial) and the elapsed time required to complete the activity are estimated. During this process it is important to allow for normal staffing overheads (leave, training, sickness etc). The activity totals are then added up to give a detailed estimate for the project. This approach is usually used when the fine detail of the programme and/or its component projects (work packages in the case of projects) are well defined.
Comparative estimating (analogous)
Comparative estimating involves comparing current or completed tasks or projects for which you have some measures of time and resources required. This method is based on past experience rather than opinion, but it is only useful if the analogy is valid. The comparative method provides a firm basis for estimating if information is available, this information would then need to be scaled up or down to meet the needs of the project which is being estimated.
Parametric estimating (statistical modelling)
Parametric estimating uses defined parameters by which a project can be measured, such as time or cost involved to build a specific project deliverable. This process can be repeated for a number of different deliverables, multiplied by the number of each of the parameters required to fulfil the project requirements. A reasonable amount of robust data is required in order to make this an easily accessible estimating technique.
Top-down estimating
The most accurate way to estimate is usually to build a Work Breakdown Structure (WBS)and to estimate all of the lowest level, individual work components. However this bottom up approach is the most time consuming. It is also not appropriate for initial estimating that this level of effort is expended at the early stages as a rough estimate may be all that is required to give the project a go ahead or not.
A Top-down approach can therefore be utilised to gain as much estimating confidence as possible. Top-down techniques include the following: