Cost Management | By William R. Duncan | Read time minutes
This is the second of three articles on estimating. In the first, I focused on definitions since I find that many people use terms such as estimate and budget as synonyms when, in fact, they are very different. Here is a brief recap of the key definitions that we will use in this article:
Estimate: An informed assessment of an uncertain event. Informed means that you have an identified basis for the estimate. Uncertain recognises that multiple outcomes are possible.
Effort: Effort is an expenditure of physical or mental effort on the part of a project team member. Effort is normally measured in terms of staff hours.
Budget: A management metric that is derived from the estimate of the relevant work.
Baseline: A time-phased budget that has received all necessary approvals.
Let's start with a fairly simple example to build a conceptual foundation, then we'll build on those ideas to help you understand how to deal with more difficult estimating problems.
What are you Estimating?
It may seem obvious, but the first requirement for developing an estimate is to know what you are estimating. For now, let's assume that you have been asked to estimate how much effort (how much of your time) is likely to be required to paint your bedroom. Although this is a fairly small activity, it is still one with a significant amount of uncertainty:
- Do you have to paint the ceiling and the woodwork, or just the walls?
- Are there windows to be painted? Do they have mullions?
- Is there furniture in the room? Can it be moved? If it can be moved, is moving it back in part of "painting the room?"
- Is choosing the colour part of this activity? What about going to the store to buy the paint?
- How many coats are needed? Is there any special finishing involved (like marbleising)?
- Will anyone be helping you? Or will you be doing all of the work yourself?
If you don't know the answers to these questions, you have a couple of choices. You can decline to prepare an estimate at all; you can prepare an estimate that allows for a large amount of uncertainty; you can make some assumptions about the answers to these questions and estimate based on those assumptions; or you can try to reduce the uncertainty by getting answers to the questions before preparing an estimate. Any of these approaches is acceptable as long as your stakeholders know which approach you are using!
Most of the time, you will use some combination of approaches. You will make some reasonable assumptions (and you will always document all of your assumptions!). You will ask some questions. Then you will apply your best judgment.
You can improve your best judgment by making range estimates. How does a range estimate work? In its simplest form, you estimate a low value and a high value for the amount of effort that you think you are likely to need. For example, in the case of painting your bedroom, and assuming that the scope is limited to applying paint to the walls, you might estimate 2-3 hours.
The fundamental concept behind range estimating is that you don't need to know the exact amount of effort that is required. You do need to know that it isn't going to take a full day out of your schedule. You do need to know that this isn't a trivial activity that can be completed in a few minutes. As long as the actual result is somewhere between 2 and 3 hours, you have made a good estimate.
Even if the actual result falls outside of that range, you still made a good estimate since it was the best estimate that you could make given what you knew at the time. In addition, you can learn from this variance (an actual result that falls outside the predicted range) and use that learning to try to improve your future estimates.
Using range estimates takes much of the pain out of the estimating process. If you are accustomed to single point estimates (see below), it can be very difficult to choose between 2 hours and 3 hours. Even proposing an estimate of 2.5 hours can be difficult because you know that it might take more or less than that amount. Using range estimates allows you to operate under uncertainty.
Single Point Estimates
Single point estimates are the devil's workshop! They are evil! Don't ever offer a single point estimate to anyone for any reason! If your boss insists on a single point estimate, he or she is most likely looking for a budget, not an estimate. There's no problem with giving them a budget, but you really should share your estimate with them as well so that they understand how much confidence you have in the reliability of that budget number.
Three-point Range Estimates
You can improve your judgment still further by making three-point range estimates. In addition to the high and low values of a simple range estimate, you add an assessment of the most likely in-between result.
Let's say, for example, that you are living in the world of Groundhog Day such that you can paint your room 100 times and keep records of how much effort it actually took. We discover that you never spent less than 2 hours and never more than 5. We also discover that your actual results produce a triangular distribution with a peak at 3 hours (see below).
Based on the availability of this actual, historical information, you would estimate the amount of effort required to paint a similarly sized bedroom as follows:
- Most likely: 3 hours
- Optimistic: 2 hours
- Pessimistic: 5 hours
I understand that you will seldom if ever have such wonderful, perfect historical information to base your estimates on, but the great thing about range estimating is that you don't need perfect data! As long as the three-point range estimate is reasonable, errors are likely to balance out over the course of the project.
Even in this case, with perfect data, you still don't know how exactly how much effort will be required for the next bedroom that you paint. It might be 2.5 hours; it might be 3.75 hours. Doesn't matter. What is important is that you have estimates that are reasonable; that you have estimates that will allow you to manage the project effectively.
Preparing Three-Point Range Estimates
The mechanics of preparing three-point range estimates, particularly if you are working with team members who have never used the technique before, are important.
Let's again start with a simple case where you need an estimate from an individual team member regarding how much of their effort is likely to be required to complete a specific activity. The first step is to make certain that both of you have a common understanding of words like "estimate" and "result." Do your best to keep your language consistent, even if you feel a little awkward.
For example, it is always tempting to say something like "how long do you think this will take?" This question is likely to produce a duration estimate rather than an effort estimate. Try to remember to ask "how much of your time do you think this activity will take?"
Begin the discussion with a review of the work to be done to ensure that both you and your team member have a common understanding of the work. If there are unknowns, decide how to handle them-make assumptions, go get answers, whatever.
Once you have a reasonable level of agreement, ask the individual for their effort estimate of the most likely result. I tend to use words like "if these assumptions turn out to be true, how much of your time do you think this work is likely to take?" After they've answered that question, I ask "if every thing goes well, if you get very lucky with this activity, and still using the same assumptions, how much of your effort do you think this activity will take?" Then use similar language to obtain a pessimistic effort estimate.
Understand that the first few conversations with any given individual are unlikely to go smoothly. They may generate additional questions or ask you to make additional assumptions at any point during the conversation. Fine. Let them. Help them climb the learning curve. My experience is that it takes most people 3-5 iterations to get comfortable with the process. After that, they'll start giving you three-point estimates automatically.
Feel free to challenge their estimates, but do so constructively by asking clarifying questions. Do not cast aspersions on their estimates. If the two of you differ, the most likely explanation is that your understanding of the work differs. Concentrate on identifying and resolving those differences.
It also seems to be important to start by asking for the most likely result, then the optimistic, and then the pessimistic. I don't know why, but this sequence seems to work best.
Working with a group
Most of your estimates will not be developed one-on-one, but rather will be developed by small groups as part of a team planning process. The basic process remains the same for these small groups:
- Review and agree on the work to be done
- Document the assumptions
- Develop three-point range estimates starting with the most likely result
Even when some of the group members don't have deep expertise in the project's work, their presence can help to surface unstated assumptions and to build team-wide commitment to and understanding of the effort estimates.
Other approaches to three-point range estimates
Some project managers try to expedite the development of a three-point range estimate by asking for only two numbers-the most likely and some form of variance (e.g., "10 hours, plus or minus 2"). While this statement equates to a three-point range estimate of 8, 10, and 12, in my experience, it lacks the richness of my process, it doesn't seem to generate the same degree of thoughtfulness from the estimator.
Too Much Time?
I am convinced that the thinking process and the conversations that support three-point range estimating contribute to the development of more accurate estimates. Short-circuiting the process may appear to save time, but this is a false economy.
My experience is that developing three-point estimates almost always takes less time than single-point estimates because the process eliminates the posturing and gamesmanship that often delays the estimating process. I've have had teams in my project management training courses spend less than an hour to develop an estimate for a 4,000 hour project - an estimate that later proved highly accurate. A recent client spent less than a day to discover that a mission-critical, multi-million dollar new product development project was going to be eight months late. An investment of something less than $10,000 is expected to return in excess of $10,000,000. Time spent estimating is not a cost, it is cheap insurance.
In the next and last article of this series, I'll cover some of the more difficult challenges of estimating on projects: what to do when management thinks it should take less, using range estimates with project management software, how to deal with the natural (and normal) biases of the estimators, and how to use some basic, simple statistical methods to create an estimate for the whole project.
William R. Duncan is a principal of Project Management Partners, a project management consulting and training firm headquartered in Lexington, MA USA. He is the former Director of Standards for the Project Management Institute, Inc. (USA) and is currently Director of Certification for the American Society for Advancement of Project Management (ASAPM).
© Copyright William R. Duncan.