"Our sales people gave an estimate for a project and we got the contract. Unfortunately, the estimates were unrealistic and now the project has gone over-budget. We closed on the estimates way to early!" When should we finalize estimates?
Introduction
The Estimate Cost process kicks in after you have completed the following:
- Define Scope: Create artifacts, such as the scope statement.
- Create Work Breakdown Structure (WBS): Detail out the work that needs to be done.
- Define Activities: Create a list of activities that the project involves.
- Sequence Activities: Create a Precedence Diagram (Network Diagram) to view the project activity flow.
- Estimate Activity Resources: Estimate the resources required for each activity.
- Estimate Activity Duration: Estimate the duration of each activity.
Depending on the type of estimate you are looking for, some of these processes can be given a miss. However, ultimately you will have to conduct all processes to get an accurate project cost estimate.
Cost Estimate Ranges - The Need
The type of estimate required in a project depends on the phase the project is in. For example, if you are responding to a Request for
Proposal (RFP), you will most likely not go through all the processes from Create WBS to Estimate Activity Duration. This is because at this stage in business development, expending the effort to compute the project estimates based on a set of vague requirements is wasteful as the estimation will be fraught with inaccuracies. Therefore, at this stage you will provide a broad range of estimates based most probably by using the Analogous Estimation technique and not the Bottom-Up Estimation technique.
As you progress in the business development life-cycle and the client gets closer to giving you the contract, the estimation range will get narrower. This is because estimates get more accurate after you gain more clarity on the work that needs to be done. For example, in Agile projects, an accurate estimate range is only provided when you have defined the stories in a release and divided the work into iterations.
Types of Estimates
The main reason for giving a broad estimate range and gradually narrowing it is to reduce negative risks that can lead to cost overruns. The ranges of estimates are:
- Order of Magnitude: The range is between -50% to +100%.
- Conceptual: The range is between -30% to +50%.
- Preliminary: The range is between -20% to +30%.
- Definitive: The range is between -15% to +20%.
- Control: The range is between -10% to +15%.
Generally, the clarity you have and how close you are from being hired to start work on the project or release determines the range of estimate you will provide.
PMP Exam Tip: You must memorize the types of estimates and their ranges. You should also understand the reasons for gradually providing a narrower range.