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:
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.
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:
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.
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:
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:
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.