This video presents the most common estimation approaches used when building a project budget.
- We stink at estimating. I hear this all the time. Are you a project manager that struggles 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 estimate. The first is the rough order of magnitude, or ROM, estimate.
ROMs are built at the project initiation stage and are usually based on knowledge of similar projects. They provide an initial cost to determine if your project is viable. 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 ROM estimate. For example, if you're building an airplane that is 30% larger than the one you built two years ago, you might take the actual cost of the last aircraft and add 30% as the ROM estimate for your current project.
ROM estimates are given based on minimal information about your specific product features and capabilities. The second type of estimate is the budgetary estimate. This is a refinement to the ROM estimate that will assist you and your management team to determine if it's still smart to proceed with your project. With budgetary estimates, you should expect to have a variation of minus 15 to plus 25. That is, you're actual costs could be 15% less or 25% more than the budgetary estimate.
In our aircraft example, we may find that engines are being manufactured more efficiently and are 20% cheaper than two years ago. We can use this additional information to refine our estimate. When the detail design for your project is done, you can complete a definitive estimate. The third and final project estimation type. This should give you an accurate estimate of your project costs. The target variance for the definitive estimate is minus 5% to plus 10%.
There are a couple of tips for deploying these three estimation types. I recommend letting management know you intend to use these 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 of your project. Also, I suggest you never publish just an estimation figure. I recommend 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. For an expanded list of estimation approaches, check out the document I've included in the exercise files for the course. And that's the key. Information is the basis of all good estimating. Be careful not to provide a more detailed estimate than you have data to support and you'll be well on your way to improving your estimation quality.
Note: This course follows the latest guidance from Project Management Institute, Inc., as outlined the PMBOK® 6 Guide.
- Recall best practices for project budgeting and estimation.
- Distinguish common estimation approaches used to build project budgets, and understand when to use them.
- Identify best practices for budget expectation management, while utilizing sound budget refinement techniques.
- Describe and explore agile project budgeting techniques.
- Review various approaches for correcting project budget overruns.
- Review sound budget reporting approaches, including how they can be used to report project status.
- Recognize the issues and changes that can put a project budget in jeopardy.