While learning about Project Management, I felt most interesting and difficult task is to make project estimation. Being a corporate finance student I looked this task from financial decision-making point of view, it is critical know good estimate then how would we accept or reject project by looking at positive NPV.When I went deep into my research, I found companies (specially IT) often overrun 200% of their prior estimate. Obvious question is why such a wide gap? And then what is point of spending time to estimate project (as estimating Project time is itself a big task)
If we look at different tools to estimate cost in the project Management,
Analogous Estimating- The cost of the project is estimated by comparing with similar project previously completed.
Parametric Estimating-First we need to analyzed project requirements and multiply it with historical information.
Three- point Estimating – also called as Three Peart estimates
Most likely cost
Pessimistic cost
Optimistic cost
and making estimates by taking averages of these three.This technique is reducing the biases, risk and uncertainties in estimating assumptions.
Bottom-up Estimating-The cost of each single activity is determines in detail at the bottom level and roils up to calculate the project cost.
Projects typically involve many dynamic aspects and yet projects are often constrained by finite conditions. These opposing forces make it very challenging to identify great accuracy the resources required and can result in budget and schedule collisions. when it comes IT projects/ R&D projects, where we have multiples unknown and no historical data and no possibility to go into details.
and when project have huge cost overrun, there arises a risk of to kill the project, stop and delay due to lack of budget allocation.one of Harvard business review article suggested that to minimize the risk of having your next technical project go awry, stop estimating and start budgeting so to apply this new approach we need robust tools:
Identify decisions– it is critical to know what decision you are trying to make.
Should we start this project or kill it? Hire people or outsourced? Allocate budget this quarter? Start marketing this feature?
Strategic decision-making is important before we move to next step.
Match Precision to decision – Here we need to match tools to the job,Estimation is a good tool to apply here.
Budget – focus should paid on getting details information on how is this going to cost? May be we get value which we cannot afford or sometimes too low budget may be created with little less information.
Ranges and confidence levels: We must assign confidence levels to each topic; first we can prioritize the topics and identify which topics are “required” vs. “nice to have” Ballpark Budgeting tool can be used for this process.
Even I estimated short time to write this article but I overrun with the time as I have started with various unknowns so next time I am planning to use budgeting tools to estimate time and resources of next project.
http://www.projectsmart.co.uk/12-tips-for-accurate-project-estimating.php
http://pmstudycircle.com/2012/06/4-tools-to-estimate-costs-in-the-project-management/
https://hbr.org/2014/12/your-agile-project-needs-a-budget-not-an-estimate
In the past, I have worked with companies that uses bottom-up approach. This approach for the most part is considered conservative and requires collaboration. However, at times, people are tied up in the small details and fail to see the big picture. For example, they may use this approach and forget to see the previous years trend. To be completely realistic, the hybrid approach (bottom up with another budgeting approach) works the best. The project manager must also review the budget for reasonableness.
The company I currently work utilizes a bottom-up approach. As the project manager it is important to see individual costs of various parts and its impact on the total project budget. The project manager determines the appropriate use of the funds and organizes the necessary adjustments for the project. The bottom-up approach relates identification, estimation, and execution all together and this is used effectively in my organization. I hope to build on my skills to further help my firm.
To echo the previous two comments, my company also uses a bottom up approach. We use this approach for aircraft teardowns to evaluate many different aspects of the teardown including total cost, labor costs, and repair costs over the allotted amount of time spent on the teardown project. Using a bottom up approach on a project like this also helps to identify decisions that may be made along the way that may cause us to take on additional costs.
My company also does a bottoms up approach to cost estimating. Because we submit our proposals to the government we are required by FAR and DE-FAR to do so. That being said we don’t just take the functional’s estimates per task. We also look at historical data. As a financial analyst it is my job to supply actuals on prior programs with a similar scope to aid the functionals in supplying estimates. I think it is important for program management to rely on other departments for supporting data when finalizing estimates and putting together risk.
I agree with you that estimate is the toughest part for all financial calculations. As mentioned in our previous class, the three elements of project management trade-offs are scope, cost and time. We first need to decide the scope of the estimate, and then determine if we have sufficient resources to get the job done on time and in budget. There are so many forecasting methods but we probably cannot try all those because of limited resources. In most cases, we probably can only provide our best guess depending on complexity of projects.