CHAPTER 2
PRINCIPLES AND CONCEPTS
Chapter 2 outlines the foundational principles and concepts of project estimating. This includes key principles such as defining the scope, roles, and stages of project estimating. The chapter will also highlight important considerations such as the causes of estimating variances, characteristics of a good estimate, and industry differences around project estimating.
This chapter includes the following sections:
2.2 Scope of Project Estimating
2.4 Estimating Life Cycle Stages
2.7 Causes of Estimating Variances
2.8 Characteristics of a Good Estimate
2.1 Introduction
This chapter introduces the key concepts required to understand and apply project estimating for projects using the approach described in Chapters 6 and 7 of the PMBOK® Guide—Fourth Edition. These principles and concepts are generally consistent with other commonly used approaches to project estimating, although the terminology may differ in some details.
The execution of the project estimating life cycle is explained in Section 2.4 of this practice standard and is therefore not discussed here.
2.2 Scope of Project Estimating
The concepts of project estimating are consistent both in technique and across industries regardless of the type of project being managed. According to the PMBOK® Guide—Fourth Edition, project estimating includes the estimating of activity resources, activity durations, and costs required to complete a project. At times, this practice standard will use the term project estimating to refer to all three components. This practice standard is intended to review project estimating at a high level, therefore, this practice standard will discuss effort, time, and cost estimating as similar processes (although there are nuances among these processes).
There are other related activities that should not be confused with project estimating:
- Contingency Reserve—The amount of funds, or time needed above the estimate to reduce the risk of overruns of project objectives to a level acceptable to the organization.
In project estimating, the estimate should focus on the project scope, and then contingency should be added to those estimates based on risk analysis and available information at the time the estimate is created.
- Organizational Budgeting and Allocation—Planning for organizational budgets generally includes project funding as well as project revenues. These are usually based on project estimates, however organization-specific criteria for overheads are applied (e.g., corporate overhead, management, real estate, taxes).
- Vendor Bid and Analysis—This applies to the price that the vendor is proposing to charge the customer for a particular project. Therefore, a cost-based bid will contain all of the elements of the vendor's estimate plus an amount that would represent the vendor's profit or return on investment.
2.3 Estimating Roles
Several key roles involved in project estimating are described in Table 2-1. It is important that each individual fulfilling a project role is aware of his or her responsibilities in project estimating.
2.4 Estimating Life Cycle Stages
There are four key stages to the project estimating life cycle:
- Prepare to Estimate—This stage of the life cycle is the creation of the estimating approach, which includes the identification of activities, determining the techniques to be used for estimating, identifying the estimating team, preparing estimating inputs, and documenting any constraints to the estimate (e.g., funding limits, resource constraints, or required dates).
- Create Estimates—This is the stage when estimating activity resources, activity durations, and costs are performed for a project. There are several models and techniques for determining the estimates, which are explained in Chapter 4.
- Manage Estimates—When the original estimate is completed and has been validated with the project team members and the project work has started, this stage of project estimating includes many activities that are used to manage the estimate, including change controls, calibrating the forecast, and comparing actuals to the baseline estimate.
- Improve Estimating Process—As projects progress, lessons learned are applied to the estimating life cycle, including calibrating the models based on actual values and maintaining checklists of components to include in future estimates. Improvements can be applied at both project and organizational levels.
Table 2-1. Key Roles in Project Estimating
| Role | Description | Responsibilities |
| Project manager | The person accountable for the estimate, but not necessarily the one responsible to do the estimating |
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| Program manager | Aggregation of estimates across the projects within the program |
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| Estimators | Individual or team responsible for estimating a specific piece of the project; estimators can be team members from the project, people identified as experts in the area being estimated, or other stakeholders |
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| Senior management/project sponsor | Individual or team who reviews and approves the project estimate |
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| Customers of estimates | Individual or team who provides the scope to be estimated and who accepts the estimates |
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The stages of project estimating can be seen in the context of the project life cycle structure as noted in Section 2.1.1 of the PMBOK® Guide—Fourth Edition. Figure 2-1 shows that there is some overlap of project estimating stages within the project life cycle. For example, a project estimate can be created in the starting the project phase as an early rough order of magnitude estimate to determine if a project makes sense to continue with or to perform a cost-benefit analysis. An estimate can also be created in the organizing and preparing phase with increasing levels of detail as the scope is elaborated.
2.5 Evolving Estimates
All project estimates involve assumptions, uncertainty, and risk perceptions. Therefore, the confidence level of estimates is directly related to the activity definition and available information. Project estimates should be refined as information becomes available, making project estimating an iterative and evolving process, aligned with the concepts of progressive elaboration. Figure 2-2 shows that projects early in the life cycle have a limited definition of scope and a limited amount of available information, resulting in reduced confidence and reduced accuracy of the estimate, thereby requiring a larger confidence range. As the project planning evolves, the WBS is created, and as more information becomes available about the business case, requirements, and the desired deliverables, the estimate can be fine-tuned to a higher level of precision and confidence.
As an example, a project in the initiation phase could have a rough order of magnitude (ROM) estimate in the range of ±50%. Later in the project, as more information is known, estimates could narrow to a range of ±10%. In some organizations, there are guidelines for when such refinements can be made and the degree of accuracy that is expected. Contingency reserves are applied to estimates based upon available information and identified risks. Therefore, as Figure 2-2 shows, as the project gains more information and the estimating range decreases, the need for contingency reserves associated with uncertainties in estimation should decrease also. As with cost ranges, some organizations also have guidelines for the amount of contingency reserves to be used in the plan.
An important part of managing evolving estimates is communication and stakeholder expectations management. Project managers should help customers and stakeholders to understand the concepts of evolving estimates and the associated risks, assumptions, and ranges.
2.6 Use of Metrics
It is important to note that metrics play an important role across the different stages of the estimating life cycle. In preparing to estimate, metrics from previous projects such as actual cost and schedule can be gathered as an input. When managing the estimate, it is important to collect metrics to monitor the progress of the project against the estimated variables (e.g., earned value). When improving the estimating process, metrics can also be used to calibrate estimating models.
2.7 Causes of Estimating Variances
The baseline used for tracking a project is approved early in the project life cycle, when the estimate is approved. Variances between estimated and actual costs, resources, and durations are normal on a project and may occur for several reasons. Experience shows that there are four common causes of variance to baseline project estimates. It is important to note that while the four examples listed below are common causes, the references are exemplary—not all inclusive.
- Evolution of Requirements—Baseline project estimates are developed using a high-level view of scope and existing information, with many related assumptions made. As the project progresses in the life cycle (progressive elaboration), the detailed scope gets defined. This elaboration may validate or invalidate prior assumptions. In cases where the scope is easier or more difficult to deliver than originally assumed (under or over estimated complexity or productivity), there is usually an impact to a project schedule, resources, or cost.
- Approved Change Requests—As the project progresses, changes to the original scope and schedule may be introduced by customers and other stakeholders, and be approved by the change control board. These may add cost and schedule beyond the original baseline estimates, so while they are approved variances, they are still considered variances.
- Operational Problems—In creating the baseline estimate, assumptions are made about the activity resources, cost units, and durations. These can change as the project progresses. For example, a resource is assumed at one rate but the actual resource used on the project is more or less expensive. This will have an impact on the project cost. Another example could be a change in the source of materials.
- Faulty Estimating—Due to the complexity and inherent uncertainty of projects, there are always occasions when a faulty estimate is produced. Examples of this include neglecting to estimate a key component or area of work, mathematical errors, inaccurate data from an unreliable source, lack of knowledge by the team regarding the scope being estimated, and not having enough time to estimate.
Each of these causes of variance should be understood and managed throughout the life cycle of the project. The techniques include tracking the progress against the current baseline, re-baselining upon change management approvals, and managing the risk registry and risk management plan as risk events occur and others are realized.
2.8 Characteristics of a Good Estimate
There are several common characteristics of a good estimate, as documented in the United States General Accounting Office report The Theory and Practice of Cost Estimating for Major Acquisitions [8]. These are highlighted in Table 2-2 as follows:
Table 2-2. Basic Characteristics of a Good Estimate
| Characteristic | Description |
| Clear identification of task | Estimator must be provided with the description, ground rules and assumptions, and technical and performance characteristics. Estimated constraints and conditions must be clearly identified to ensure the preparation of a well-documented estimate. |
| Broad participation in preparing estimates | All stakeholders should be involved in deciding mission needs and requirements and in defining parameters and other characteristics. Data should be independently verified for accuracy, completeness, and reliability. |
| Availability of valid data | Numerous sources of suitable, relevant, and available data should be used. Relevant, historical data from similar projects should be leveraged to project new costs. |
| Standardized structure for the estimate | A standard work breakdown structure, including all available detail should be used and refined as the cost estimate matures and the scope becomes more defined. The work breakdown structure ensures that no portion of the estimate is omitted, resulting in easier comparisons to similar projects. |
| Provision for program uncertainties | Uncertainties should be identified and contingencies planned to cover the cost effect of known costs included and unknown costs planned. |
| Recognition of inflation | The estimator should ensure that economic changes, such as inflation, are properly and realistically reflected in the life cycle estimate. |
| Recognition of excluded costs | All costs associated with the solution should be included; any excluded costs should be disclosed and given a rationale. |
| Independent review of estimates | Conducting an independent review of an estimate is crucial to establishing confidence in the estimate; the independent reviewer should verify, modify, and correct an estimate to ensure realism, completeness, and consistency. |
| Revision of estimates for significant project changes | Estimates should be updated to reflect changes in a solution's design requirements. Large changes that affect costs can significantly influence project decisions. |
2.9 Industry Differences
While the estimating life cycle stages are the same for all types of projects, there are some differences in estimation metrics and models that are employed across industries. These variations are primarily related to the nature of the project's product. A few examples of different industries are noted below:
- Software Development—In software development projects, estimates can be based on metrics, such as source lines of code (SLOC) or scientific-based estimation techniques, such as function point estimation, use case estimation, and feature-based estimation. Algorithmic models such as COCOMO (COnstructive COst MOdel) have been developed to use these metrics in conjunction with historical project data and other project information in order to develop cost and time estimates.
- Construction—Different types of construction (electric, plumbing, residential) have standard reference documents, which provide general estimates for specific deliverables. Metrics used are primarily a combination of man-hours and material costs. Parametric cost models have been developed for use within construction, using metrics such as square footage, location, and quality of materials to develop an estimate.
- Petroleum Refining—Metrics used in estimation may include plant capacity, size of storage facilities, man-hours, and materials costs.
2.10 Summary
There are several key concepts for project estimating that need to be understood. Project estimating relates specifically to activity durations, activity resources, and cost. Project estimates require specific roles and follow a life cycle that relates to the project life cycle and also evolve over the course of the project. As a result of this evolution, there is a confidence range and contingency reserve that can be applied. After a project estimate is baselined and the project progresses, there are several reasons why variances may arise. Therefore a project manager should pay attention to the characteristics of a good estimate. It should also be noted that there are differences in project estimating techniques across different industries.