Project estimation is a vital aspect of project management, as it can determine the success or failure of your project. Without accurate estimates, your project may fall behind schedule or exceed your budget, potentially damaging your reputation as a project manager.
This guide will explore project estimation, why it matters, and various techniques and practical approaches you can use to create more accurate estimates. Whether you're new to project management or looking to refine your skills, these are essential insights for effective planning.
What is project estimation?
Project estimation is a process that helps you understand the complete requirements of a project and then try to predict how long it will take and how much it will cost.
In a way, it’s not different from estimations we make regularly in our everyday lives. How long will it take to get to the restaurant? How much will it cost to buy Christmas presents for everyone this year? How many people will it take to lift and move the sofa downstairs?
In the process of estimating, a project manager must consider four things: project scope, timeframe, people, and budget.
Project estimation priorities vary between organizations. Service-based agencies delivering projects for clients may prioritize budget and profitability, while internal projects within organizations often prioritize timelines and deadlines. The importance given to these factors can impact a project manager's planning approach.
However, regardless of the priority, project estimation is essential for setting expectations, allocating resources, and managing finances.
What’s the purpose of project estimation?
Project estimation is crucial for effective project planning and management. It helps determine the project's scope, schedule, and budget, allowing organizations to forecast funding and financial returns on investment.
Accurate estimations also help plan complex programs of work with multiple dependencies and allocate people's time and resources accordingly.
Without proper project estimation, organizations risk running disorganized, loss-making businesses, with projects running over budget, behind schedule, or failing to meet their objectives.
In contrast, well-estimated projects are more likely to be completed on time and within budget, leading to greater success and profitability for the organization.
Five common project estimation techniques
There are various ways to estimate a project, and here are the most common ones:
Top-down
Typically a project manager's least preferred type, top-down estimates are where most project estimates start when you have limited information. When only high-level requirements are known, someone (typically in senior management) will make a rough guess at the questions of time, people, and money based on high-level requirements.
In an ideal world, top-down estimates are created using an analogous estimate or the Delphi method.
A project manager would typically choose to use the Delphi method on larger-sized projects with multiple experts, on a project where the domain is untested, and when a consensus is needed, as it's pretty time-consuming. It primarily involves creating and sending various rounds of questionnaires to the experts. The results are then processed and distributed back to the experts but anonymized. The experts then complete subsequent questionnaires that consider the input from the others, thus modifying their viewpoints. This is repeated until a consensus emerges.
Bottom-up
Bottom-up estimating is the opposite of top-down and is the most favorable method because it means you have a low-level view of the project requirements. You estimate each low-level requirement that forms the whole project (such as project cost estimation, scope, timelines) and add them to your total project estimate.
You can elevate your bottom-up estimates by incorporating parametric estimation if you have detailed numbers that can be quantified as units. Parametric estimating is when you correlate a parameter with a cost or time value; for example, if it takes one minute to drill a single hole, it will take one hour to drill sixty holes. Historical data is needed for a parametric estimate, similar to an analogous estimate.
While parametric estimating is detailed in PMBOK by the project management institute, it's not often used for software engineering projects due to its complex nature and the need for hard statistical facts about inputs. This estimation technique is better suited to domains like construction, where historical data, requirements, and the project cost are more specific.
Three-point estimates
This approach involves defining three estimates for a project or task: an optimistic, likely, and pessimistic number. These estimates are then averaged to determine the final estimate. This is useful when there are many unknown factors and differing opinions on the estimate.
The upside of this approach is that it considers multiple perspectives and offsets uncertainties by using an average. However, creating three estimates rather than a single top-down assessment can take time and effort. Overall, the time invested in this technique is well worth it for the accuracy and thoroughness it provides.
Planning poker
Commonly used in scrum settings, after discussing a requirement, project team members hold up cards with numbers from the Fibonacci sequence—typically ranging from one to thirteen. The number represents their estimate of the effort needed to complete the work.
The facilitator then focuses on the highest and lowest estimates and asks team members for their reasoning. This discussion brings out differing opinions and assumptions, allowing the estimate to gravitate toward a more informed consensus.
While planning poker is a form of bottom-up estimating, it is not directly linked to time like hours or days. Therefore, a team's stable velocity over time is critical in predicting completion timelines.
T-shirt sizing
T-shirt sizing is an agile top-down estimating approach used for larger pieces of work, called epics, and is not directly linked to time. It calculates the effort of work that is only known at a high level.
People in groups will read or listen to the project requirements and assign one of the values: extra small, small, medium, large, or extra large.
While t-shirt sizing may not result in the most accurate estimation, it can be helpful when combined with historical time-based data to estimate large chunks of work.
What project estimation technique is the best?
In project management, there is no one-size-fits-all approach to estimating. The best estimating technique depends on the specific context in which you are working.
If you have limited information and are under time pressure, a top-down approach, such as using analogous estimating, may be the most suitable. However, if you have yet to do a similar project but have a history of sprint-based work, t-shirt sizing with experts can be an effective way to understand the project's size. A bottom-up estimate is the best option when reliability and accuracy are crucial because it considers low-level requirements and has fewer unknowns.
Ultimately, project managers must choose the best estimating technique that fits their context and helps them achieve their project goals.
Track estimates vs actuals and keep historical information
Estimates are only useful if you can compare them with actuals. Use Float to keep track of hours worked, timelines, and budget spent on human resources. Use information from each past project to improve future estimates.
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Eight steps for effective project estimation
Accurately estimating projects can be challenging even when you have low-level requirements. Here are eight effective best practices to follow to improve your project estimation process.
1. Get as detailed as possible
It's such an obvious thing to state but so often not followed. Getting into the nuts and bolts of each project task will drastically improve the accuracy of your project estimates.
The more detailed your estimation is, the more accurate it will be. It's essential to break down each project task into smaller pieces, giving you a better understanding of the required effort. Even seemingly small tasks can require more time than expected, so it's crucial not to overlook anything.
2. Always use experts to estimate
It can be tempting for a project manager to put a number next to a task when they think they know the domain (or they were a hands-on person in the past), but resist this temptation!
Having an expert estimate each task is crucial because they can provide valuable insights that someone less experienced may not know. An expert can also spot potential issues that someone less seasoned may miss.
It's important to have diverse opinions to get a more accurate estimate!
3. Leverage historical data
Leveraging historical data is a powerful technique that can help improve the accuracy of project estimates. It involves looking at past projects and analyzing the estimates, the actual time taken to complete the project, and any discrepancies between the two.
The easiest way to do this is to make sure project estimates and actuals are captured in a uniform way across multiple projects over time. For example, if you use time tracking software, ensure the categories are always structured in the same way, e.g., discovery, design, front-end build, back-end build, infrastructure set up, testing, etc.
What this allows is a detailed analysis of the past. A project manager may find that, on average, the estimates for design are always 20% under the actual time it takes to complete the task. With this knowledge, the project manager can adjust their forecasts for future projects to account for this discrepancy.
4. Take note of who is doing the estimating
The experience level of the estimator can significantly affect the estimate's accuracy. More experienced individuals can often complete tasks more efficiently, resulting in shorter timelines and lower effort estimates. On the other hand, less experienced individuals may overestimate the effort required for a task due to a lack of familiarity with the work.
Project managers should consider obtaining estimates from individuals with varying experience levels to address these potential discrepancies. Using a planning poker approach, where each individual gives an estimate and then discusses their reasoning behind it, the group can come to a more informed consensus estimate. This approach also allows for a detailed discussion of the project requirements, which can help uncover potential issues or dependencies.
In addition, project managers should track the accuracy of each individual's estimates over time to identify patterns in their estimating ability. This data can be used to adjust future estimates and provide feedback and training to individuals who consistently overestimate or underestimate project efforts.
5. Don’t be pressured into committing too early to an estimate
Time is never on a project manager's side. When under pressure to provide an estimate, resisting the temptation to commit too early is important. It's crucial for project managers to feel confident about their estimates and be able to stand behind them with conviction.
It may cause you some pain to push back on committing, but it will invariably be less than the pain you experience by committing early and delivering late and over budget. As a project manager, it's essential to remember that your expertise is why you were hired, and pushing back when needed is part of that expertise.
In the end, managers and stakeholders will appreciate a well-thought-out estimate that reflects reality, even if it takes a bit longer to produce. It's better to take the time to create an accurate estimate than to rush into a commitment that cannot be met!
6. Don’t let top-down estimates become the numbers you commit to
When someone else creates a top-down estimate, it can be tempting to take it at face value and use it as the final project estimate. However, this can lead to inaccuracies and problems down the line.
As a project manager, it's important to use your skill and political know-how to set the narrative that top-down estimates are just rough estimates and that a bottom-up estimate is necessary before committing to a final project estimate. This approach will help ensure that the estimate is as accurate as possible, considering all of the details and nuances of the project.
If time is tight, and you're forced to commit to a top-down estimate, make sure that you communicate clearly with your managers and stakeholders about the accuracy of the estimate and the likelihood of delivering on time and budget.
7. Don’t forget project management time in your estimates
Project management time is an important part of any project, and it's crucial to include it in your estimates. This is especially true if you bill for project management time, as it is an expense that needs to be accounted for.
To estimate project management time, you should avoid using a flat rate percentage and instead adjust it based on the project type, size, and client/stakeholder. This allows you to more accurately reflect the effort required for managing the project, as different types of projects may require more or less project management time.
You can also use historical data to determine what percentage of project management time is typical for any given combination of project type, size, and client/stakeholder.
8. Avoid first speaker and HIPPO bias when estimating
First speaker bias and HIPPOs (highest individually paid person’s opinion) are two common ways human nature can influence project estimation.
First speaker bias occurs when the first person to give an estimate sets the tone for the rest of the group, and others tend to follow with numbers that are close to it, for fear of being an outlier. To counter this, project managers can use anonymous estimations or ask everyone to write their estimate on a post-it and reveal them simultaneously, to avoid biasing the results.
Similarly, HIPPOs can significantly influence an estimation session by being too forceful with their opinions and making others feel intimidated to disagree. Project managers should develop a close relationship with the HIPPO to counter this and explain how their influence could affect estimation sessions. Having them estimate last and not first can also help avoid biasing the results.
When estimates prove to be wrong
Even with the best techniques, project estimates are just educated guesses, and it's rare for a project to align perfectly with an estimate.
That's where the skill of a great project manager comes in.
They can track estimates for the project budget and scope, as well as project actuals, and make decisions to course correct if the project veers off course. This is done through formal methods like earned value management or less formal project controls.
Experienced project managers plan and set expectations early on with stakeholders that estimates and actuals may vary, so trade-off decisions and additional funding come as no surprise later.
By doing so, they increase the chances of delivering a successful project.
