Join Bob McGannon for an in-depth discussion in this video Types of estimating, part of Project Management Foundations: Budgets.
Although common and expected of virtually every project manager, estimating in the project management space generally has a reputation for being done quite poorly. Are you one of the project managers that struggle with this? How can you make this better? The key is not to paint a picture that is more detailed than you have facts to support. To do this, your estimation should be performed in stages or types. Let's examine the three predominate types of project estimates.
The first is the rough order of magnitude, or ROM estimate. This gives you a view to how much the project will cost at a really high level. ROMs are built at the project initiation stage, and are usually based on knowledge of similar projects. The rule of thumb with ROM estimates, is that they will come in at a range of minus 25% to plus 75%. This means that the actual costs could be 25% less or 75% higher than your estimate.
For example, if you're building an airplane that is 30% larger than one you built two years ago. You might take the actual cost of the last aircraft project, add 30%, plus a factor for inflation is the ROM estimate for your current project. The second type of estimate is the budgetary estimate. After doing some research and collecting the high level requirements, you normally have additional clarity about your project. You can then provide a refinement to the ROM estimate. This refinement, the budgetary estimate, is typically used to allocate project money into an organization's budget.
With budgetary estimates, you should expect to have a variation of minus 15 to plus 25. That is, our actual costs could be 15% less or 25% more than we estimate. In our aircraft example, we may find that engines are being manufactured from new, easier to handle materials and are 20% cheaper than two years ago. We can use this additional cost clarity information to refine our estimate. When we have even more information, when the detailed design for your project is done and the work breakdown structure is completed for the project.
You can complete what's known as a definitive estimate. This is the third and final project estimation type. This should give you an accurate estimate of your project costs. With it, you can make purchasing decisions and create your final budget. The target for the definitive estimate is a variance of minus 5% to plus 10%. There are a couple of tips I want to share when deploying these three estimation types. First, let management know you intend to use three types of estimation during your project life cycle.
All too often, management will only remember the first estimation number you give them as the cost for your project. Discussing the approach of going through three estimation cycles as you have more solid facts is sound logic and good business practice. It will help you convey to your management that the project is a learning exercise. As you learn more, you can estimate more accurately. Second, do not publish just an estimation figure. I recommend always qualifying any estimate you provide with the type of estimate the figure represents.
So, the current cost estimate for the project is $670,000 would be better stated as, the budgetary estimate for the project is $670,000. This reinforces the notion that you still have more detail to collect and intend to provide a more accurate estimate when that information is available. And that's the key. Information is the basis of all estimating. Be careful not to provide a more detailed estimate than you have data to support, and you will be well on your way to improving your estimation quality.
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- Discovering costing standards
- Examining capital and operating costs
- Assigning costs to resources
- Communicating your budget
- Recovering a bloated budget
- Addressing budgeting issues<br><br>
- The PMI Registered Education Provider logo is a registered mark of the Project Management Institute, Inc.