Project Management Estimation

1. Project Management Estimation Minder Chen, Ph.D. CSU Channel Islands Minder.chen@csuci.edu

2. Est modus in rebus Hendrik van Balen, The Measurer, 1600. There is a measure in all things.

3. Estimation Before You Know It

4. Learning Objectives • Define an estimate • Determine what to estimate • Define essential estimating terms • Describe estimating processes to determine project cost and activity duration • Explain various methods used in project estimating • Define estimating unit (EU) • Differentiate between cost estimating and cost budgeting • Define contingency reserve and state how it is used • Generate and validate an estimate

5. Introduction • Estimating: Is the process of determining effort, duration, and costs for the elements in the WBS • Is the process of identifying what resources are necessary for each work package • Is the process of identifying the should cost for each project task and activity • The following terms are key parts of estimating: • Effort is the number of labor units required to complete a task. It is usually measured in staff hours, or person-hours • Level of effort (LOE)describes the activities that are necessary to support a project that cannot be scheduled. It usually consists of short amounts of work that must be repeated periodically. Example: project budget accounting, customer liaison, or oiling machinery during manufacturing, etc. (link) • Duration is the number of work periods, excluding holidays or other nonworking periods, required to complete an activity or other project element.

6. Estimating • Estimating is done as early in the project life cycle as possible and is normally repeated a number of times throughout the life of the project as changes in the project dictate. • Budgeting is the allocation of the cost over the time period required to do the work. The estimate provides the cost for the task or activity, but further analysis is necessary to determine the specific time period needed to perform. • Time periods can be hours, days, weeks, or months depending upon the complexity of the task, activity, or work product. After the costs have been spread out over time according to when the work is to be performed, the project manager must develop a time-phased cost baseline that becomes the plan-of-record cost to a work package. • It uses the estimate to determine how much money is allocated to each work package. This enables project managers to develop a financial measurement baseline that is then used to track and control the execution of the project.

7. An Estimate Is: • An assessment of the likely quantitative result • Usually applied to effort, project cost factors (labor hours or money, or both) and the schedule (duration) • Used with an indication of accuracy (for example, + n percent) • Usually used with a modifier (for example, preliminary, conceptual, feasibility, or final) • Completed at a level that is appropriate for the decisions being made with the data (for example, close-in estimates are more detailed than those for periods three to six months in the future) • An estimate is just that--an estimate. The only accurate estimate is the one done after the work is completed.

8. An Estimate Is Not • An accounting or marketing strategy • A pricing approach, because the price might or might not accurately reflect the estimate • An investment approach, because it is not worth taking a risk today to get business later • A way to ensure sponsor satisfaction, such as arbitrarily reducing your estimate to meet some implied number (you must present reality) • Software or tools • Finding the fastest way (The schedule should not unduly influence the estimate--be realistic and honest)

9. Estimating Projects • Estimating • The process of forecasting or approximating the time and cost of completing project deliverables. • The task of balancing expectations of stakeholders and need for control while the project is implemented. • Types of Estimates • Top-down (macro) estimates: analogy, group consensus, or mathematical relationships • Bottom-up (micro) estimates: estimates of elements of the work breakdown structure

10. Why Estimating Time and Cost Are Important • To support good decisions. • To schedule work. • To determine how long the project should take and its cost. • To determine whether the project is worth doing. • To develop cash flow needs. • To determine how well the project is progressing. • To develop time-phased budgets and establish the project baseline.

11. Factors Influencing the Quality of Estimates Planning Horizon Other (Nonproject)Factors ProjectDuration Quality of Estimates OrganizationCulture People PaddingEstimates Project Structure and Organization

12. Rules of Estimating • Employ the most appropriate approach and the most accurate method. • Communicate the level of accuracy. • Involve the project team that are on board in the estimating process so that they can provide insight and can become vested in the process. • Use historical project data as a base for estimates. • Apply standards when they are available. • Do not work to justify a predetermined result. • Do not undervalue estimates. • Recognize that estimating takes time. • Document the assumptions the estimate is based upon (This is a mandatory step in the process) The rules of estimating focus on honesty; each rule is crucial to successful estimating.

13. Estimating Guidelines for Times, Costs, and Resources • Have people familiar with the tasks make the estimate. • Use several people to make estimates. • Base estimates on normal conditions, efficient methods, and a normal level of resources. • Use consistent time units in estimating task times. • Treat each task as independent, don’t aggregate. • Don’t make allowances for contingencies. • Adding a risk assessment helps avoid surprises to stakeholders.

14. Items to Include in an Estimate • The scope of the work that is included in the estimate • The assumptions that were used • Resources, such as staff, facilities, and material; consider the duration • How quickly can the task be done with the skills available? • What skill level is required to do the job? • Project management cost and time should be included • Expenses, both direct and indirect • Risk and the cost of managing it to acceptable levels • Documentation, which is critically important • If an estimate is not documented, it only exists within the head of one person, it is not an estimate.

16. Estimate Costs: ITTO

17. What To Do If Asked To Lower An Estimate • If you are asked to lower your estimate because the price is too high, what are your options? • To lower the price, you can • Reduce the scope, • Reduce risk and associated contingency • Possibly reduce resource at the expense of schedule • Management can decide to lower the profit margin The degree of accuracy of an estimate depends on what phase of the development cycle you are in; in the concept phase, the estimate has a lower degree of accuracy than in the planning phase.

18. PM’s Reasons for Estimating • Determine and evaluate the estimated costs of a project before authorizing implementation • Have a basis for tracking and managing project expenditures using activity-based costing or other methods • Establish managerial baselines against which to measure expenditures during the execution of the project • Have a tool for evaluating routine project decisions • Establish resources required and the resulting schedule • Provide fact-based information to support investment analysis • Provide a basis for tracking progress

19. When to Estimate • Estimating is not a one-time effort; it is done many times throughout the project life cycle. • There are different points in a project when an estimate should be prepared, reviewed, or revised: • Create the estimate when building the project organizational work plans for the project • Update the estimate when finalizing the project plan with updated work plans • When determining whether to bid on an opportunity • When taking over a project to validate proposal estimates • When moving to the next phase of a project • When an assumption proves to be invalid • When the WBS changes to ascertain the effort and cost associated with the change • When there are authorized changes in resources, materials, or services

20. Estimating Process You must develop the WBS before preparing an estimate, even if it is only the preliminary version.

21. Estimating Considerations • When you prepare estimates, make sure you know the language (unit of measure) used in estimating. • Estimates vary, depending on whether the task is based on effort or duration. • Key difference is elapsed time versus working time. E.g., 4-day and 2 hour each day. • Keep in mind that the time it takes to complete a task depends on both availability and productivity.

22. Estimating Guidelines • Estimating enables you to determine effort and duration for the elements in the WBS. Some guidelines for preparing estimates are: • Effort should be based on average skill • If team members or experts are assisting you in preparing an estimate, remind them to estimate based on average skill level; by using average skill level when estimating, it assures you that the task can still be completed as estimated • Duration is based on utilization rate • Cost is calculated based on an assumed labor rate resulting in a cost estimate

23. Essential Estimating Terms • Effort-based: The task has a total amount of effort that must be completed in order to finish the task (This might also be referred to as staff effort and is usually expressed in person hours) • Duration-based: The duration is constant regardless of how many resources are assigned to the task. • Availability: Is the time a staff person is available and willing to work (this is usually measured in work hours per day or working days). • Productivity: Is a relative measure of work in a time unit; different skill levels have different productivity rates and you must determine which productivity should be used for the estimate (the safest approach is to use an average productivity of 80%)

24. Essential Estimating Terms • Utilization: Is the amount of time a full-time equivalent (FTE)can be used on a project; an FTE is not necessarily a specific individual but can be the combining of two or more individuals whose efforts equal one work day or a portion of a work day. • Utilization Factor:Describes the amount of time a full-time equivalent (FTE) can be used for the length of the project. • Working Time: Is the actual amount of time available for work. Usually measured in working hours/day, working hours/week, working hours/month (working time takes into account the working hours or time available for project team members) • Elapsed time: Is the total number of days over which the task occurs (this is also called calendar time, and is usually expressed in calendar days, weeks, or months)

25. Methods of Estimating • Top-down estimating: compares historical data with experience, this approach is based on collecting judgments, past experiences, and on evaluating past data concerning similar activities. • Bottom-up estimating: involves estimating the cost and duration of individual activities or work packages, which are summarized or combined, resulting in a project total. • Analogous Estimating: means using the actual cost of a previous, similar project as the basis for estimating the cost of the current project (also called analogy/comparison) • Parametric modeling: uses specific measures to estimate the effort required to complete a task or to produce a work product. • Expert judgment: uses expertise provided by any individual or group with specialized knowledge • Vendor bid analysis: provides sources for well-done cost proposals, for bids, and for reasonable price packages

26. Parametric Estimating • Parametric estimating uses a statistical relationship between relevant historical data and other variables (e.g., square footage in construction) to calculate a cost estimate for project work. • This technique can produce higher levels of accuracy depending upon the sophistication and underlying data built into the model. Parametric cost estimates can be applied to a total project or to segments of a project, in conjunction with other estimating methods.

27. Analogous Cost Estimating • Analogous cost estimating uses the values such as scope, cost, budget, and duration or measures of scale such as size, weight, and complexity from a previous, similar project as the basis for estimating the same parameter or measurement for a current project. • When estimating costs, this technique relies on the actual cost of previous, similar projects as the basis for estimating the cost of the current project. It is a gross value estimating approach, sometimes adjusted for known differences in project complexity. • Analogous cost estimating is frequently used to estimate a value when there is a limited amount of detailed information about the project, for example, in the early phases of a project. Analogous cost estimating uses historical information and expert judgment.

28. Three-Point Estimating The accuracy of single-point activity cost estimates may be improved by considering estimation uncertainty and risk and using three estimates to define an approximate range for an activity’s cost:

30. Reserve Analysis: Contingency Reserves • Cost estimates may include contingency reserves (sometimes called contingency allowances) to account for cost uncertainty. • Contingency reserves are the budget within the cost baseline that is allocated for identified risks, which are accepted and for which contingent or mitigating responses are developed. • Contingency reserves are often viewed as the part of the budget intended to address the “known-unknowns” that can affect a project. For example, rework for some project deliverables could be anticipated, while the amount of this rework is unknown. • Contingency reserves can provide for a specific activity, for the whole project, or both. The contingency reserve may be a percentage of the estimated cost, a fixed number, or may be developed by using quantitative analysis methods. • As more precise information about the project becomes available, the contingency reserve may be used, reduced, or eliminated. Contingency should be clearly identified in cost documentation. Contingency reserves are part of the cost baseline and the overall funding requirements for the project.

31. Reserve Analysis: Management Reserve • Estimates may also be produced for the amount of management reserve to be funded for the project. • Management reserves are an amount of the project budget withheld for management control purposes and are reserved for unforeseen work that is within scope of the project. • Management reserves are intended to address the “unknown unknowns” that can affect a project. • The management reserve is not included in the cost baseline but is part of the overall project budget and funding requirements. • When an amount of management reserves is used to fund unforeseen work, the amount of management reserve used is added to the cost baseline, thus requiring an approved change to the cost baseline.

32. Approaches to Estimating Generic Approach Top Down • analogous method • parametric method • experience based. Focus on overall development process. Task Based Approach • Add up WBS tasks. • Detailed estimating. • More definitive estimate. Bottom-Up Focus on individual project process.

33. Bottom-Up Estimation

34. Top-Down versus Bottom-Up Estimating • Top-Down Estimates • Are usually are derived from someone who uses experience and/or information to determine the project duration and total cost. • Are made by top managers who have little knowledge of the processes used to complete the project. • Bottom-Up Approach • Can serve as a check on cost elements in the WBS by rolling up the work packages and associated cost accounts to major deliverables at the work package level. Bottom-up estimating is a method of estimating a component of work. The cost of individual work packages or activities is estimated to the greatest level of specified detail. The detailed cost is then summarized or “rolled up” to higher levels for subsequent reporting and tracking purposes. The cost and accuracy of bottom-up cost estimating are typically influenced by the size and complexity of the individual activity or work package.

35. Top-Down versus Bottom-Up Estimating Condition Macro Estimates Micro Estimates Strategic decision making X Cost and time important X High uncertainty X Internal, small project X Fixed-price contract X Customer wants details X Unstable scope X Conditions for Preferring Top-Down or Bottom-up Time and Cost Estimates

36. Estimating Projects: Preferred Approach • Make rough top-down estimates. • Develop the WBS/OBS. • Make bottom-up estimates. • Develop schedules and budgets. • Reconcile differences between top-down and bottom-up estimates

37. Top-Down Approaches for Estimating Project Times & Costs Project Estimate Times Costs • Consensus methods • Ratio methods • Apportion method • Function point methods for software and system projects • Learning curves

38. Bottom-Up Approaches for Estimating Project Times & Costs • Template methods • Parametric procedures applied to specific tasks • Range estimates for the WBS work packages • Phase estimating: A hybrid

39. Level of Detail • Level of detail is different for different levels of management. • Level of detail in the WBS varies with the complexity of the project. • Excessive detail is costly. • Fosters a focus on departmental outcomes • Creates unproductive paperwork • Insufficient detail is costly. • Lack of focus on goals • Wasted effort on nonessential activities

40. Types of Costs • Direct Costs • Costs that are clearly chargeable to a specific work package. • Labor, materials, equipment, and other • Direct (Project) Overhead Costs • Costs incurred that are directly tied to an identifiable project deliverable or work package. • Salary, rents, supplies, specialized machinery • General and Administrative Overhead Costs • Organization costs indirectly linked to a specific package that are apportioned to the project

41. Refining Estimates • Reasons for Adjusting Estimates • Interaction costs are hidden in estimates. • Normal conditions do not apply. • Things go wrong on projects. • Changes in project scope and plans. • Adjusting Estimates • Time and cost estimates of specific activities are adjusted as the risks, resources, and situation particulars become more clearly defined.

42. Activity Cost Estimates • Activity cost estimates are quantitative assessments of the probable costs required to complete project work. • Cost estimates can be presented in summary form or in detail. Costs are estimated for all resources that are applied to the activity cost estimate. • This includes, but is not limited to, direct labor, materials, equipment, services, facilities, information technology, and special categories such as cost of financing (including interest charges), an inflation allowance, exchange rates, or a cost contingency reserve. • Indirect costs, if they are included in the project estimate, can be included at the activity level or at higher levels.

43. Characteristics of the Types of Estimates Different projects under different situations require the use of specific estimating methods; three common types of estimates are Rough Order of Magnitude (ROM), Budget, and Definitive.

44. Types of Estimates & Accuracy • As project unfolds we gather more data about the project and the accuracy improves +75 +25 Estimate +10 -5 -10 -25 Project Completion Time Early/ Order of Magnitude Definitive Estimate Approximate/ Budget Estimate

45. Elapsed time (duration) versus work time (labor) Elapsed time (duration) versus work time (labor)

46. Estimating Formulas Cost = (Effort/Productivity) x Unit Cost Duration = (Effort/Productivity)/Availability Example: 40 hours to be completed at 75% productivity rate and cost $20 per hour and the person is only available 50% of the time

47. Cumulative Cost Curve: S-Curve

48. Estimating Type Descriptions • ROM is a top-down approach used during the formation of the project for initial evaluation and during the concept phase. Less costly and less accurate • Budget is developed from more detailed project analysis. Budget is also called the design, control, or appropriation estimate. • Definitive is a bottom-up (task-by-task) approach prepared from well-defined data and specifications. • An estimate of individual work items in hours. • Project total is a rollup or summary of the individual work items. • Size of individual work items drives cost and accuracy

49. Validating an Estimate • Review the definition of the project. • Use same information and assumptions as original estimate. • Focus on sources of data. • Compare standards from a similar project. • Review the estimating method to see whether it is appropriate. • Determine whether the estimate meets the objective. • Use different approaches to validate the estimate. • Ensure that all mitigation tasks are included in the estimate. • Pay extra attention to Big Ticket items. Measure twice and cut once!

50. Questions about the Estimator • Does the estimator have experience? • Knowledge of the client's environment • Knowledge of the project • Knowledge of the tools to be used on the project: • Project management tools • Technical tools • What is the estimator's estimating history? • Does the estimator estimate by task or by person?