How do you estimate and control your project costs?
My name is Christian, I am a certified PMP and running projects for 10 years in finance and telecommunication businesses. During my work I have used the simple “Three-Point Estimate” and some basic Earned Value Managment technique for budget calculation. I found them to be very efficient tools so I would like to share my experiences with you.
In this first part I will discuss how to determine your project budget in a proven and consistent way by using “Three Point Estimates”. In the second part I will explain, how to use Earned Value Management to have an up to date Estimation at Completion during the full project run-time.
Cost Estimation with Three-Point Estimates
The PMBoK lists numerous estimation techniques e.g. Expert Judgment, Analogous Estimation, Parametric Estimation, Three-Point Estimation and Reserve Analysis as estimation tools and techniques.
I use different techniques during earlier project phases (Expert Judgmental and Analogous Estimation). In some cases I consider a parametric estimation as it is supported by CostExpert.
But once the requirements and work packages are defined I prefer using Three-Point Estimates. As you will recall, this estimation technique is asking for three estimates: Optimistic (co), Pessimistic (cp) and Most Likely (cm). By asking for three values you gain a lot of advantages compared to just asking for one estimation.
Your project team needs to really think about the estimation (what can go wrong, what can really work out well) to determine all three values;
- Your team finds a way to express uncertainty by setting co and cp accordingly
- Your team will not add “hidden contingency” in the estimation, as it can be expressed in the pessimistic estimate
- Your team will feel more positive working through the process; I always got great feedback when asking for this estimation type (normally I use a standard Excel document which includes a high level description of the work packages, a field for the estimation and space to add risks and concerns…..)
What you need to do now (see links below for more information):
- With some simple mathematics you can calculate the “expected activity cost”- ce – for each work package:(ce=(co+4cm+cp)/6. If you sum-up these estimations for each work package, you have calculated your mean project budget - be – and considered your teams uncertainty into the process.
- You now can calculate the standard deviation stdev (that expresses how much variation is in your estimations from the mean). Statistics can tell you, that your real project costs will be 70% probability within the range be+/-stdev. This sounds very mathemathical, but simply said, with a 70% probability your budget will remain below be+stdev. This sounds very mathematical, but simply said, with a 70% probability your budget will remain below *be*+*stdev*. This sounds very mathematical, but simply said, with a 70% probability your budget will remain below *be*+*stdev*. If it is not enough for you to stay in budget within 70%, you can get 99% probability by using 3**stdev* for calculation. If your budget is *be*+3**stdev*, you will be under budget with 99% probability. This should be fine for most of the projects.
What you gain from this:
- Adding the right level of contingency is always difficult, now you have a consistent approach to it.
- Many times I carry out a quick, gut feel estimate of contingency needed and I compare it with the output of the “Three-Point-Estimation”. It is an important indicator if both are similar
- If you are asked by your management to reduce your budget, you may respond with a statement like: “if we decrease our budget by xy, there is a 30% likelihood that we will run over budget .”
Conclusion: The three-point estimation is a surprisingly simple estimation tool, that provides you with much information from your team’s estimations and also gives you a consistent approach to determine your project budget and to argue with your upper management! I have used it in several projects, and so far (believe me) it worked – I stayed in budget 
Being fascinated by the Ruby on Rails framework, I have combined my knowledge in Project Management and Programming and developed the application TRACKER: www.project-tracking.org. It combines Earned Value Management and Three-Point Estimation to support you in budget estimation and project tracking. Please feel free to check it out and post your comments.
Additional Information:
- Software tool for cost estimation and project tracking based on Three-Point Estimation and Earned Value Management: www.project-tracking.org
- Mathematical background information: Wikipedia.org (Standard_deviation)
- More on three point estimation: Wikipedia.org (Three Point Estimation)
- Example Spread-Sheet (Google-Docs)
Guest blog post from Christian Neuhaus. Christian (PMP) has 10 years of Project Management experience in telecommunication and finance businesses. He is currently working in Cologne, Germany.
If you would like to contribute to the Camel blog, please contact us, you don’t need to be a seasoned writer or blogger, just someone with something interesting to share about project management.
Twitter: brucewbenson
Encourage your experts to keep track of how things went on past projects (cost, duration, etc.). When experts come into a planning meeting with hard data from previously completed projects, I’ve always found that the estimates are better then those based upon just memory and opinion of high, low and likely.