Dealing With Uncertainty in Estimation
When planning and estimating, you have to deal with the unknown — this includes both the known-unknowns and the unknown-unknowns, so to speak. Everyone likes clear, concise answers, and at least initially, it’s not always possible for project managers to give them.
During the development of the initial scope of a project, it’s difficult, maybe impossible, to deliver an accurate estimate. The first questions the stakeholders, whether clients or senior managers, will always ask how much it’s going to cost, and how long it’s going to take. At the onset, the project manager may not have enough information to answer that question accurately. To give a more accurate answer, a lot more work needs to be done, beginning with the scope documents, and building out from there.
However, early on, stakeholders often press for estimates. If you give an estimate too soon, especially if it’s a wild guess, there’s always the risk that stakeholders, especially the client, will take it as the final number. Then it will become a huge sticking point down the road, “but you said …”
This is why in the initial process, the project manager will often fall back on order of magnitude estimation. The project manager is still making what an uncharitable mind would refer to as a wild guess, but they’re using a plus-or-minus range to manage the stakeholders’ expectations. By telling the stakeholders something along the lines of “You can expect this project to take between 30 to 50 days, and cost between $125,000 and $160,000,” it sets the tone for the project going forward so that more in-depth estimation can be completed.
Order of magnitude estimation is more popular with project managers than the people who hire them because stakeholders always want clear answers to their two main questions: How much will this cost, and how long will it take? Broad ranges don’t give them a concrete answer. However, a broad answer is still more certain than no
answer at all. At that point, good project managers will explain to the stakeholders that the level of certainty in their estimations will improve as the scope development and planning processes continue.
As planning progresses, the most accurate way to develop an estimate with certainty is to use parametric estimation based on known data. In a prior installment, we’d already compared analogous estimation, where you base your estimate on similar projects, versus parametric estimation, where your estimate is calculated based on historical data. This requires your company to archive all your data on old projects, including the rates of completion for specific tasks. If your project management software permits you to collate that data and access it quickly in an easy-to-understand format like tables, you then have a reliable resource to call on when you need to estimate how many hours of work any task on the project requires.
Multiplying those labor hours by labor costs, you can then estimate the costs of each task accurately. The sum of the tasks that make up the project then, in aggregate, add up to the total cost of the project — and the time to complete it. Using averages from existing historical data is neither exact nor perfect. Still, then no form of estimation is, but as long as the data you’re using is accurate, it comes close.