Reasons for project Estimation
November 20, 2009
Project estimation is important to project management because it helps in planning. Since we might not have the whole picture of what the project requires in terms of cost and duration, estimation comes in handy by providing an accurate picture of what will be needed by the project.
Project estimation helps in cost control in that the project manager will have funds based on his estimates and is expected to perform the work with those cost estimates and not going over budget. Thus cost estimates help the project manager control the cost of the project knowing where to use more resources and where to take resources from.
There are various estimation techniques. Activity and cost estimation techniques involve PERT (3 point estimates), Expert Judgment, Parametric estimating, Analogous estimating, bottom up estimating, vendor bid analysis and resource cost rates.
Analogous estimating (top down): This method uses actual duration or cost of a previous project with a similar task or activity to make estimation on the activity duration or cost of a current project. This method is used in circumstances where past and current projects are similar in activities to be carried out and when there is limited amount of detailed information about the current project.
Parametric Estimating: Parametric estimation is the use of independent variables like project specification, deliverables, project features to determine activity duration and cost. According to PMBOK, this method involves estimating activity duration by multiplying the quantity of work to be performed by the productivity rate. e.g. using labor hours to quantify productivity rate and multiplying it by the total resource quantities and dividing that by the number of those resources applied. This method is widely used in situations where a quick estimate is needed.
Bottom up estimating: It is used in circumstances where definitive detailed estimates of effort and costs are required. This involves breaking up the projects into the smallest work components or activities and estimating the cost and duration of these activities and then aggregating the cost with higher level activity costs until the full estimate of the project is done. According to Schwalbe (2004) this estimate technique provides more accurate estimates, but requires more data and well broken down activities of a project. it is also time intensive and expensive to develop.
Three Point estimates (PERT): This method is used in large and complex projects because it can incorporate uncertainty by making it possible to schedule projects while not knowing the details of the activity. Estimates in this technique are based on three types of estimates,
Most likely: i.e. schedule duration given the resources assigned, dependencies on other activities and interruptions, productivity and realistic expectations of availability for the schedule activity.
Optimistic: the best case scenario of the durations of the activity
Pessimistic: the worst case scenario of the duration of the activity
A formula is used to compute the most accurate activity duration.
E= (o+4m+p)/6
Determine Resource Cost rates: This is used when products or services are obtained under contract.
This technique depends on the knowledge of the unit costs for each resource e.g. labor costs per hour, material costs per unit. After determining the unit costs you can then expand and accurately estimate the activity costs.
Vendor Bid Analysis: This is used in situations where projects are done under competitive bid process. Competitive bids and having different vendors bid on the project helps to derive a cost estimate of the project. According to PMBOK (2004) this involves obtaining vendor bid analysis documents showing what the project would cost.
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