estimation methodology at proposal level

How to Estimate Project: Time, Cost and Resources. Techniques & Types for Accurate Planning

June 13, 2024 · 14 min read

Project estimation is the process of predicting the time, resources, and costs required to complete a project. It involves analyzing the project's scope, objectives, and requirements to determine the effort needed for successful execution. 

This estimation is critical as it forms the basis for project planning , budgeting , and scheduling. Accurate project estimation ensures that stakeholders have realistic expectations, resources are allocated efficiently, and potential risks are identified and managed early. It helps in setting achievable goals, controlling project costs, and delivering the project within the stipulated time frame.

In this article, we unravel the mysteries of project estimation, exploring various techniques and methods to estimate a project.

What Are the Project Estimation Techniques?

Six main project estimation methods are:

• Expert Judgment — the simplest method to estimate a project 
• Analogous Estimation — the fastest way to estimate a project 
• Parametric Estimation — the most accurate way to estimate a project
• Three-Point Estimation — the most flexible way to estimate a project
• Group Decision-Making — the most collaborative way to estimate a project
• Reserve Analysis — the most prepared method to estimate a project

Let’s break down these types a bit more.

1. Expert Judgment

Expert judgment taps into the knowledge and experience of professionals with significant expertise in a relevant field. During the planning phase, experts help estimate timelines, costs, and resource requirements, contributing to a realistic and achievable project plan.

Selecting the right experts is key. Look for professionals with proven experience and knowledge in the relevant domain. It's also important to ensure their past predictions have been accurate, which can be done by maintaining a performance database.

Benefits of Expert Judgment:

• Depth of Insight: Experts bring deep insights that can uncover potential issues and opportunities that might not be evident through data analysis alone.
• Speed: They can provide quicker insights compared to detailed quantitative methods, which can be time-consuming.
• Flexibility: Expert judgment is flexible and adaptable to various project contexts and stages.

Challenges and Mitigation Strategies:

• Bias and Subjectivity: Use structured techniques like Poker Planning or the Delphi method that described below to minimize bias. Ensure a diverse panel of experts to balance perspectives.
• Overconfidence: Maintain a comprehensive knowledge base to improve the reliability of expert judgments.
• Availability of Experts: Develop a network of experts and maintain good relationships to ensure their availability when needed. Consider remote consultation options to widen the pool of available experts.
• Cost: Engaging top-tier experts can be expensive, but their input can significantly reduce overall project costs by preventing major errors and inefficiencies.

2. Analogous Estimation

Analogous estimation is a technique used to predict the duration, cost, or resources needed for a current project by comparing it to similar past projects. This method leverages historical data and expert judgment to draw parallels and make informed estimates. 

The accuracy of analogous estimation depends on the similarity between the current project and the reference project, relying heavily on the experience and judgment of project managers and subject matter experts. 

Advantages of Analogous Estimation:

• Speed: Provides rapid estimates, especially valuable in the early stages of project planning.
• Leverage Historical Data: Utilizes knowledge and experiences from previous projects, helping to avoid past mistakes and replicate successes.
• Dependence on Similarity: Carefully select reference projects and analyze contextual factors. Use multiple analogous projects to increase reliability.
• Subjectivity: Use structured techniques like the Delphi method to gather and refine expert opinions.
• Data Quality: Maintain robust project documentation and regularly update the knowledge base to ensure data accuracy and completeness.

3. Parametric Estimation

Parametric estimation is a quantitative technique that uses statistical relationships between historical data and other variables to estimate project parameters such as cost, time, and resource requirements. 

This method is widely applied in various fields due to its ability to provide accurate and reliable estimates. In construction projects, parametric estimation is used for cost and time estimation by considering parameters like square footage, building materials, and labor rates. 

This type of estimation is not very common in the IT field. Earlier, parameters such as number of code lines were used but soon it turned out inefficient. However, in IT, there are similar concepts in the Scrum methodology, such as velocity and story points. 

Advantages of Parametric Estimation:

• Accuracy and Precision: Enhances the accuracy and precision of estimates through historical data and statistical models.
• Efficiency: Once developed, models can quickly generate estimates, saving time and effort.
• Consistency: Ensures consistency across different projects and estimators through standardized metrics and models.
• Data Dependency: Maintain a robust database of historical project data, ensuring it is regularly updated and validated.
• Model Complexity: Invest in training for project managers and estimators in statistical analysis and modeling techniques.
• Applicability: Continuously refine and adapt models to accommodate a wider range of project types.

4. Three-Point Estimation

Three-point estimation improves the accuracy of project estimates by considering three different scenarios: 

• Optimistic — O; 
• Pessimistic — P; 
• Most likely — M.

This method incorporates uncertainty and risk into the estimation process, providing a more comprehensive and realistic forecast thanks to mathematical calculations.

This is how calculations look like:

First, we calculate EAD (Estimate Activity Duration). In the EAD formula, we add all three estimates, giving the most likely estimate four times the weight. Then we divide everything by 6, as there are six variables in total.

To calculate the range, we need to determine SD - standard deviation. Subtract the optimistic estimate from the pessimistic one and divide by 6.

Next, we can calculate the range: add or subtract SD from EAD to get our range. If we want to increase accuracy, we multiply SD by other values of N. However, increasing accuracy widens the range, so N should be used carefully. A coefficient of 1.645 provides acceptable accuracy with a reasonable range.

Advantages of Three-Point Estimation:

• Incorporates Uncertainty: Accounts for uncertainty and risk, leading to more realistic estimates.
• Improved Accuracy: Balanced estimates through a weighted average in the PERT formula.
• Data Collection: Use historical data and involve experienced team members and experts to provide informed estimates.
• Complexity: Provide training and tools to simplify the process and ensure all team members understand the methodology.
• Bias and Subjectivity: Use structured techniques like the Delphi method to gather and refine estimates, reducing individual bias.

5. Group Decision-Making

Group decision-making techniques harness the collective knowledge, experience, and creativity of a team to generate more accurate estimates, identify potential risks, and develop effective solutions. Key group decision-making techniques include brainstorming, which encourages free thinking and idea sharing without criticism, and the nominal group technique (NGT), which combines individual idea generation with group discussion and ranking. 

Benefits of Group Decision-Making Techniques:

• Enhanced Creativity and Innovation: Involving diverse perspectives leads to more innovative solutions.
• Improved Accuracy and Reliability: Combining knowledge and experience results in more accurate estimates and decisions.
• Increased Buy-In and Commitment: Involving the team fosters a sense of ownership and commitment to project outcomes.
• Dominance by Vocal Participants: Use structured techniques like Poker Planning and Delphi to ensure equal participation.
• Time Consumption: Plan and schedule sessions efficiently to balance thoroughness with time efficiency.
• Groupthink: Encourage open dialogue, critical evaluation , and alternative viewpoints to avoid compromised critical thinking.

Here are two of the most popular techniques used for group evaluations:

5.1 Poker Planning

This is how Poker planning works: each participant is given a deck of cards, very similar to playing cards. Each card has a number on it. Every participant gets an identical deck of cards. Then the manager asks to estimate a task, but instead of speaking out loud, the participants place a card face down with their estimate, having previously agreed on what the number represents (hours, days, etc.). 

Next, we take the highest and lowest estimates and ask their authors to explain the reasons for such estimates. They might see risks that others haven't considered or know of a way to complete the work faster. After listening to the explanations, we ask the team to vote again. If there are still significantly different estimates, the round is repeated. 

During poker planning, the estimates inevitably converge. The goal isn't to reach a single number but to bring the estimates closer together so we can proceed without further poker planning. However, poker takes a lot of time, so not all tasks can be estimated this way, only complex or large blocks of work.

5.2 Delphi Method

The Delphi technique is a similar method that addresses the same problem. The difference is that the survey is conducted anonymously. Participants understand what they are involved in, but they do not know which other experts are participating. It is usually conducted through correspondence. 

You find experts, invite independent experts to participate (they are usually not members of your team), send them a description of the task, and ask them to provide their estimates and comments. Then you share the estimates and comments with the other experts and ask if they want to adjust their initial estimate. Several rounds follow. 

This technique is even slower and takes weeks. It is generally favored by builders, especially for projects with huge capital expenditures. If the project doesn't succeed, the money won't be recovered. The higher the risks, the more meticulously the company plans at the start.

6. Reserve Analysis

Reserve analysis involves identifying and allocating contingency and management reserves to address uncertainties and risks that could impact the project. This approach ensures that the project has adequate resources and time to deal with unforeseen events without compromising its overall objectives.

The steps involved in reserve analysis include identifying risks using techniques such as brainstorming, expert interviews, and SWOT analysis. Next, the risks are analyzed to assess their probability and impact, prioritizing them based on severity. Following this, reserve requirements are determined by calculating contingency and management reserves based on the risk assessments. These reserves are then allocated into the project budget and schedule, ensuring clear documentation.

Benefits of Reserve Analysis:

• Risk Mitigation: Preparedness and proactive management of uncertainties.
• Improved Project Control: Flexibility and increased stakeholder confidence.
• Enhanced Accuracy in Estimation: Comprehensive planning leads to more accurate and realistic estimates.

Challenges and Mitigation Strategies

• Accurate Risk Assessment: Use a combination of qualitative and quantitative risk analysis techniques.
• Allocation of Reserves: Base allocations on historical data and regularly review reserves.
• Management Approval: Establish clear policies and procedures for accessing reserves.
• Tracking and Utilization: Implement robust tracking systems and ensure transparency in reserve utilization.

Who Should Do Estimation?

Estimation should ideally be conducted by a team of individuals who have a deep understanding of the project's scope, requirements, and technical complexities. This team typically includes project managers, subject matter experts, senior developers, and other key stakeholders . 

Project managers bring a broad perspective on timelines and resource allocation, while subject matter experts and senior developers provide insights into the technical aspects and potential challenges. 

Project managers typically play the role of the owner of the project estimation process, although in some organizations, this responsibility may fall to a dedicated project estimator or a project management office (PMO).

When We Do Project Estimation?

Project estimation should be conducted at several key stages throughout the project lifecycle to ensure accuracy and alignment with evolving project details. 

Stage 1. Project Initiation

Initially, estimation occurs during the project initiation phase , where high-level estimates are made based on the project’s scope and objectives to assess feasibility and secure approval. 

Stage 2. Planning Phase

As the project progresses into the planning phase, more detailed and refined estimates that include detailed time, effort, and cost estimations are developed. They are essential for setting realistic expectations and ensuring resource availability.

• Time Estimations: Time estimation is the process of predicting the amount of time required to complete each task within the project. This involves breaking down the project into smaller, manageable tasks and assigning a duration to each. Techniques such as Work Breakdown Structure (WBS), Gantt charts , and Critical Path Method (CPM) are commonly used to visualize and sequence activities. 
• Effort Estimations: Effort estimation focuses on the amount of work or human resources required to complete the project tasks. It involves calculating the person-hours needed for each task, taking into account the skill level and productivity of team members. Proper effort estimation ensures that the project team is neither underutilized nor overburdened, facilitating efficient workload distribution and resource management.
• Cost Estimations: Cost estimation is the process of forecasting the financial resources needed to complete the project. This includes direct costs like labor, materials, and equipment, as well as indirect costs such as overheads and contingency funds.

Stage 3. Project Execution

During project execution, continuous estimation is necessary to adjust for any changes in scope, unforeseen challenges, or new information that arises. Regularly revisiting and updating estimates ensures that the project remains on track and that any deviations are promptly addressed. 

Steps for Project Estimation

Let’s see how to do project estimation with several structured steps to ensure accuracy and reliability.

Step 1. Define Project Scope

The process typically begins with defining the project scope , which includes understanding the project objectives, deliverables, and constraints. Next, gather detailed requirements to clarify what needs to be accomplished.

Step 2. Create Work Breakdown Structure (WBS)

Following this, break down the project into smaller, manageable tasks or components using a Work Breakdown Structure (WBS). This decomposition helps in identifying all necessary activities and their interdependencies.

Step 3. Estimate Project

Estimate the effort required for each task by considering factors such as complexity, resources needed, and potential risks. Use estimation techniques like expert judgment, analogous estimating, or parametric estimating to derive these estimates. Read more about them below.

Once individual task estimates are obtained, aggregate them to form the overall project estimate. Incorporate contingencies to account for uncertainties and risks. Review and validate the estimates with stakeholders to ensure alignment and accuracy.

Step 4. Control and Monitor

Finally, continuously monitor and update estimates throughout the project lifecycle to reflect any changes in scope, requirements, or unforeseen challenges. This iterative approach ensures that the project stays on track and within budget.

In conclusion, project evaluation is a critical component of effective project management, offering a variety of techniques to improve planning, estimation, and risk management. 

Expert judgment brings deep insights and speed, though it requires careful selection and mitigation of biases. Analogous estimation offers rapid and historical data-informed estimates, while parametric estimation provides precision through statistical models. Three-point estimation incorporates uncertainty for realistic forecasts, and group decision-making harnesses collective knowledge for innovative solutions. Reserve analysis ensures preparedness for unforeseen events, bolstering project control.

Understanding these techniques and their respective advantages and challenges empowers project managers to choose the most suitable methods for their projects, ultimately leading to more successful project outcomes.

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How to Estimate Project Time and Cost

This chapter touches on best practices for estimating projects and being prepared for inevitable change requests . Get ready to learn a whole new set of project estimation techniques because you’re about to become the best project estimator in the business.

What is project estimation?

Project estimation is the process of forecasting the time, cost, and resources needed to deliver a project. It typically happens during project initiation and/or planning and takes the project’s scope, deadlines, and potential risks into account.

Why is cost estimation important in project management?

Every business has a budget and wants to know if a project is worth the costs before they invest in it. 

A project estimate gives you and your stakeholders a general idea of how much time, effort, and money it’ll take to get the job done. That makes it easier to build a feasible project budget and plan so you can set your team and organization up for success.

Easy drag and drop features with templates for faster scheduling. Plan a project in minutes, collaborate easily as a team, and switch to calendar and list views in a single click.

How to estimate project cost and time in 7 easy steps:

• Know your team’s expertise & job responsibilities
• Understand how your company's PM process works
• Study project estimation techniques and trends
• Use historical data to create better project estimates
• Ask detailed project questions to improve cost estimation
• Use a WBS to get granular with your estimate
• Assign hourly estimates to tasks and people in TeamGantt

Step 1: Know your team's expertise & job responsibilities

Want to be better at estimating projects? Sometimes project managers focus too much on the numbers and not enough on the people. 

Good project estimation techniques are built on solid working relationships. That’s because, the more you know about someone’s work and process, the easier it is to estimate their work.

Invite your team to be part of the estimation process.

A stronger understanding of—and collaboration with—your team will help your projects come in closer to your project budgets.

Here’s the thing: To estimate projects successfully, you MUST engage in the work. Having a solid understanding of what each and every team member actually does on a daily basis can help you avoid problems down the road.

Get to know each team member's tasks and skill sets.

If you really want to know how or why someone does their job, just ask them! As a project manager, one of the best things you can do is be genuine and honest about what you don’t know. It might sound silly, but most project managers feel like they’re supposed to know everything. You don’t, and that’s okay.

Remember: It’s better to admit what you don’t know and ask questions from the get-go. This not only gives you an opportunity to connect with your team on an individual level. It also helps you understand the inner workings of different types of projects—and their appropriate budgets. After all, figuring out the steps one person takes to create a deliverable will work wonders in helping you calculate a true and accurate project estimate.

Step 2: Understand how your company's PM process works

Once you’ve got a good grasp on who does what and how, it's time to move on to the next step of project estimation: understanding how work gets done in your organization.

Figure out how all of your project’s moving parts fit together—or could fit together.

You may work for a company that abides by a singular method like Agile or Waterfall . In that case, study that process, know all your dependencies, and run with your estimates. 

Does your organization prefer a hybrid approach with room to experiment? Make it your mission to understand how things are done and what might happen to your project schedule if you shift things around. For instance, if you work in construction project management , will painting baseboards before installing carpet have a huge impact on the quality of work or time needed to get the job done?

Have conversations with the people who have a stake in your project.

Do everything you can to understand your process, but don’t just read a book or a manual. Feel free to ask how, why, and when things are done. The more you know, the better you can strategize with your team or clients to find alternate ways to make project estimates work and save on effort.

Include your team in any discussions related to project estimation.

Be sure to talk about the process you’d envision taking on when estimating projects, as it will impact how you think about effort and scope. You never want to sign on for a project your team isn’t invested in.

Step 3: Study project estimation techniques and trends

No matter where you work, things will change. A career in project management means you have to always stay on top of trends, changes, and deliverables in your industry. It isn’t easy, but it’s worth it because it will directly affect your success as a project manager.

So how can you improve your project estimation process?

Approach your job as though it’s continuing education.

Read relevant trade publications, websites, and blogs. Attend training and networking events. There are growing numbers of local meetups and conferences on project management and estimation.

Learn different ways to estimate projects.

It’s also important to understand different approaches for estimating projects so you can determine what works best for you. Here are a few project estimation techniques you may want to learn more about:

• Top-down estimating : This estimation technique takes a broad look at the project as a whole, then breaks the total estimate down into major phases of work. It’s typically used when you have limited information about the project to work from.
• Bottom-up estimating : The bottom-up approach is considered more accurate than top-down estimation because it starts with a detailed list of tasks and estimates each step. Individual task estimates are then combined to create an overall project estimate.
• Analogous estimating : This top-down technique compares the current project to similar past projects to quickly produce a general project estimate. 
• Parametric model estimation : Parametric modeling also uses past projects to inform new project estimates. It takes forecasting a step further by applying past data to current project specs for more accurate cost estimation.
• Three-point estimating : This approach estimates a project based on 3 different scenarios: best-case (or optimistic), worst-case (or pessimistic), and most likely. Estimates for all 3 scenarios are then added up and divided by 3 to generate a simple average.

Step 4: Use historical data to create better project estimates

Without a doubt, historical data can help you with new projects. When history’s documented, you can analyze the information to help you create better estimates. 

Start by asking your team to track their time on tasks.

This will give you a better sense of a project’s overall level of effort. It’s not about playing big brother to make sure people are doing their work. It’s being honest about what it takes to get the job done while also being profitable.

Of course, every project is unique.  But seeing how long your team spent on a certain task or deliverable will give you a sense for estimating a similar task on a new project.

Check your tracked time, and use it to create a realistic project estimate. 

If nothing else, review your project history to make sure you’re not habitually underestimating project costs or hours.

As project managers, we tend to underestimate project tasks, thinking we’re doing our clients and team a favor. But underestimating a project does everyone a disservice and causes stress when budgets and timelines go over their estimates.

Use project baselines to compare estimates with actuals.

You can mark your originally planned schedule, compare it against your actual work as the project progresses, and note where there might have been issues and how those issues might have impacted your level of effort. This will help you determine where you have room to improve your estimation of certain project tasks.

Step 5: Ask detailed project questions to improve cost estimation

Whether you’re estimating a project based on a Request for Proposal (RFP), a discussion, or a brief written message, you need to know every possible detail of the project before you can provide a realistic estimate.

Take time to understand your project's triple constraints.

These are the things that could cause your project to go over budget: time, cost, and scope. If you keep track of these 3 things, you’ll be a better project estimator. You can use our online gantt chart software to help estimate your RFP.

Ask questions that help create an estimate based on what your clients need—not what you think they need.

Here are some questions that can help you estimate project time and budget more accurately. This list could go on and on depending on the level of information you’re provided.

• What’s the goal of the project?
• How will you and your client determine if the project is successful?
• What returns will you and your clients see as a result of the project?
• Who will participate from the client side?
• What range of services does the project require?
• What’s your client’s budget for the project?
• Is there technology involved? If yes, what is the technology?
• Does your client employ anyone with expertise on the topic?
• What is the timeline for the project, and will your client require your services after your work is complete?

Be persistent, and get the answers you need. 

If your client isn’t inclined to answer every question, take it as a sign. If answering important questions now is too much to help you form a good estimate, will being a good partner when the project is underway be too much for them too? 

Use your judgment in this respect. Not every estimate becomes a real project, so not every request needs to become a real estimate.

Step 6: Use a WBS to get granular with your estimate

A work breakdown structure (WBS) is a project planning technique that breaks a project into smaller components. Creating a WBS for any plan or set of tasks helps you get granular about the work that needs to be done on any given project. 

If you can map it all out and estimate each element, you should be able to create a solid project estimate. Learn how to create a work breakdown structure for your projects, and download a free WBS template.

Break your project down into phases, tasks, and subtasks. 

This step provides a framework for detailed cost estimation, as well as guidance for schedule development and control. Our example shows a basic WBS for a common deliverable—moving to a new house! Notice the tasks and subtasks we’ve taken into consideration. Is anything missing?

Apply a time estimate to each component in your WBS.

If you estimate your projects based on units—whether it be weeks, days, or hours—using a WBS will help you quickly understand if your project estimate will exceed the intended budget. Let's take our project estimation example further and assign estimated hours to each step. 

Example: Pack current house - 8.5 days total

This estimate includes the time needed to wrap objects, pack boxes, and prep for movers. Here’s how the estimated timing breaks down by room:

• Kitchen - 1 day
• Bathroom - 0.5 days
• Bedroom 1 - 0.5 days
• Bedroom 2 - 0.5 days
• Living Room - 1 day
• Dining Room - 1 day
• Basement - 2 days
• Garage - 2 days

This exercise can be extremely helpful during the sales process when a client tells you they have X dollars to spend. You can easily map a set of tasks or deliverables to something that works for both the dollar amount and the client’s goals.

Just remember, it could change when you dig into the actual work. (Time estimates should be based on a combination of experience and hypotheses.) 

Use your WBS to negotiate project cost and scope.

If a potential client comes back and says your project estimate is more than they want to spend, lean on your WBS to find opportunities to scale back. This enables you to create a project estimate that maps to a specific budget, while also working out a solid set of project requirements .

For instance, I could likely remove the cleaning step from my moving WBS to cut down the time and cost (though someone might be unhappy about that). 

Step 7: Assign hourly estimates to tasks and people in TeamGantt

Using these project estimation techniques as a foundation for your project will help you with the final step: turning it into a project plan . TeamGantt gives you a more formalized way to outline your WBS and calculate a project’s time and effort.

List out your project tasks , and add the estimated hours.

If you’ve organized your project into phases, TeamGantt will automatically calculate the total estimate for each task group as you enter hourly estimates for individual tasks.

Then assign resources to tasks in your project plan. 

From there, you can schedule people and tasks against other project work.

Estimating projects and tasks in TeamGantt

Let’s take a closer look at how hourly estimation works in TeamGantt so you know how to add and assign estimates to your tasks and teams.

How to add Estimated Hours to a task in TeamGantt

First, make sure Estimated Hours is enabled on your project by going to Menu > Project Settings > Enable Hours and selecting Yes . (Note: Hourly estimation is only available on Advanced plans.)

Once you’ve confirmed hourly estimation is enabled on your project, you’re ready to add estimates to tasks in your gantt chart. To assign hours to a task, simply click into the text field in the Estimated Hours column, and enter your estimate:

Don’t see the Estimated Hours column for your project? Click View > Estimated Hours to enable this column on your gantt chart.

How to assign estimated hours to your team

One of the biggest benefits of using hourly estimation in TeamGantt is being able to determine your team's workload more accurately. To do this, you’ll need to take project estimation one step further by adding estimated hours to the people assigned to the tasks. 

There are 3 different ways to add hourly estimates to people or labels . It all depends on your particular project scenario.

Option 1: Assign both users and estimated hours to a task at the same time.

• Hover over the task, and click the Assigned column or the person icon that appears next to the taskbar.
• Next, select the resources you'd like to assign to the task, and enter either the Avg Hours/Day or Total Hours . (The other field will populate automatically.)

Option 2: Add estimated hours after users have already been assigned to a task.

• Hover over the Estimated Hours column, then click into the text field to enter the total estimated hours for the task.
• A pop-up window will appear, asking if you'd like to adjust the hours for the users/labels assigned the task. If you select the checkbox before clicking Yes or No , your preference will be noted for all future instances. (You can adjust this preference anytime by going to My Preferences .)

Option 3: Assign people to tasks after estimated hours have already been added.

• First, hover over the task, and click the Assigned column or the person icon that appears next to the  taskbar.
• Next, click either the Fix button at the bottom of the user assignment window or simply select users to assign hours to.

Note: When a task's length is changed—for instance, a 2-day task is extended to a 4-day task or vice versa—you'll be prompted to choose between increasing/decreasing users' assigned hours accordingly or leaving the daily assigned hours as-is. Learn how to set your hourly scheduling preferences.

How to use Estimated Hours to determine team availability

Now that you’ve assigned estimated hours to your team, you'll have an even better understanding of how busy everyone is. Just click the Availability tab found at the bottom of your project's gantt chart, and toggle to Hours Per Day :

Any day that includes over 8 hours of work will automatically be highlighted in red to indicate a potential overload. 

Sign up for a 30-day trial, and try TeamGantt with hourly estimation for free.

Build your project estimation confidence with practice

Ready to dig in and estimate a project of your own? Start with some practice so you’ll feel confident in your estimating skills.

Create an example project of your own, and list out all the steps that go into completing it. Then run it by one of your team members to see what they think. Did you miss anything? Did you underestimate the hours? Doing a test run will help you prepare for your first real estimate or hone your project estimation skills for your next one.

There’s no right or wrong way to create a project estimate. Your approach to estimating projects will include a mixture of project knowledge, historical review, client inquisition, and a ton of gut instinct.

Estimate your project in minutes

Learn how easy project estimation and planning can be with TeamGantt. Try TeamGantt’s Advanced plan free for 7 days! ‍

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The Science (& Art) Of Project Estimates + Top 6 Techniques

Marissa Taffer, PMP, A-CSM is the founder and president of M. Taffer Consulting. In her consulting practice, she helps organizations with project management processes and tools. She also serves as a fractional project manager supporting digital agencies, marketing departments, and other consultancies.

Everything you need to know about project estimates: the pros and cons of each estimation technique, what to know before creating an estimate, + an estimate template.

When making a big purchase decision, what is the first thing that you do? Probably a little research to understand what market rates are like and what you should expect to spend. This is a slight oversimplification of a project estimate—but it’s what you’re doing.

Before kicking off a new project, your teams and clients are likely doing the same thing—trying to understand how much it will cost to complete the work.

But the cost isn’t the only thing that needs to be considered in your project estimation process; everyone will also need to understand how many people and how much time it will take to complete the work.

In the digital world, prices, staffing, and timelines can vary widely for similar projects. This is because there are so many variables, including:

• The scope of the work that needs to be completed
• The team members available to do the work
• The skill sets of the team members on the project
• How much time the team has to complete the work

So how does a project manager and their project team determine how much something will cost before they’ve started doing the work?

Cost estimation can be a real challenge—creating a project budget that works for your team and clients if you work for an agency is a blend of art and (data) science.

This guide will provide you with the tools and techniques you’ll need in order to create more accurate estimates.

What Is A Project Estimate, And When Do You Need One?

An estimate is simply an approximate calculation of the effort and cost it might take to complete a project.

It’s not a guarantee of the final cost—instead, it provides a client with a quote or guide (often a ballpark range estimate) of how much it might cost to do or deliver something so that they can secure the budget to start the project . Budgetary estimates are made before a project is officially started.

New to estimation or want to practice? You can download the project budget template for a website redesign below. By the end of this post, you’ll know which type of estimate to use—and when—and the steps and tools to manage your project estimate and, ultimately, your project budget.

What's the difference between an estimate and a budget?

An estimate is an approximation, while a budget is the total amount of funds you have to complete your project. Usually, a project estimate becomes a project budget after the project sponsor or client approves it.

One important distinction before we really dive in: before you estimate, you should know how much things cost internally. This number may be less than you actually bill a client (to account for overhead and profit).

You should know the hard costs of doing business before you provide a client-facing estimate (Note that this doesn’t apply to in-house digital teams).

This article won’t focus on how to determine costs, as we can cover that in another article.

Why Do Project Estimates Matter?

Estimating might seem like a painful process, but it’s a crucial one. And while it might be tempting to copy and paste a cost estimate and send it on its merry way, it’s important for project managers to understand that every cost estimate is unique.

Estimating is a fundamental part of the role of project management—the process of calculating how much a project might cost is important in defining the parameters of a project.

Here’s why you need to create an estimate for your project before getting kicking off the work:

• Estimates provide pricing guidelines : you need to know what you’re going to charge the clients (and when) so the client can decide whether they have the budget and whether it’s worth the investment to proceed with the project
• Estimates provide clarity : when you know how much budget a client has, the process of producing a cost estimate helps define the approach. You can use what you know of the overall budget to determine project roles, responsibilities , and deliverables. If a client’s budget is 20% under your estimate, for example, you can consider reducing the number of deliverables in the project or try reallocating resources in order to avoid overspending.
• Estimates can help dictate a resource plan : when you complete an estimate, you may also outline the steps or approach you’ll take to complete the work, which can be used when creating your resourcing plan or building your project team.

What's Included In A Project Estimate?

The project estimate needs to include all costs associated with the project.

This could be the cost for the project team’s time (billed hourly or at a fixed project rate), the cost of any hardware or software licensing needed for the project work, licenses or subscriptions to any third-party software that will need to be integrated as part of the project and any other costs that will be charged back to the client for any reason.

Some project estimates also include a contingency budget. This can be really helpful if there are any unknowns about the project. Having 10-20% of the budget as a contingency can give project managers and their teams a little “wiggle room” when creating an estimate.

If you and your team do add a contingency to your estimate, be sure to align with your client on how you’ll communicate your needs to dip into this budget.

How project estimates are shared with clients or sponsors can vary from agency to agency or team to team. Some are more transparent than others. A word of advice, the more transparent you can be, the easier it is to make sure nothing is overlooked and that everyone is aligned on the costs.

3 Types Of Project Estimates

What are the types of estimates? There are many, but here are a few of the most common estimates that digital agencies use:

Rough Order of Magnitude Estimates (ROM)

Sometimes called a ballpark estimate, a rough order of magnitude estimate helps a client understand the cost and level of effort involved in a project. This type of estimate is usually used very early in the process of deciding whether or not to move forward with a new project and is generally a rough estimate provided as a range.

For example, if a client is looking to your agency to build a new website and you know your agency’s sweet spot is website projects in the $95,000 to $150,000 range, but their budget is only $50,000 the client might determine the project is not a fit for your agency and may look for an agency that more closely aligns with their budget and needs.

Budget Estimate

A budget estimate is going to be much more specific. You should use a budget estimate when the client is fairly confident that they have the budget, but they need a little bit more detail around how it would be allocated before they decide to move forward with the project.

Let’s say your client is happy with the rough order of magnitude estimate you provided. The next step will be to put together the proposed project plan along with the cost for each phase or deliverable. You could even include a suggested timeline that tells your client when you could kick off and how long the project will take.

If your rough estimate was a wider range, you could even consider creating two budget estimates, one for the high end and one for the low end. While it’s likely you and your client will shoot for the middle of the range, this will give some more specific information about what they would get (and when) at each end of the range.

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Definitive SoW Estimate

Use a definitive SoW estimate when you’ve completed all due diligence and need project budget approval.

Let’s say this client was really happy with your budget estimate, and they are ready to move forward with the work. The final step in estimate refinement is pulling together the statement of work (SoW), which will include the estimate and total project budget.

Remember that the SoW is what you’re building your contract with the client on—it should outline the full project scope and the costs associated with it. So if there are any changes to the project budget (or the project scope) after the SoW is signed, you will most likely need to execute a change order.

How To Calculate Project Estimates: 6 Estimation Techniques

So what are the project estimation methods in project management? There are a few different ways to estimate a project, and it’s worth being familiar with them so that you know what project estimation technique to use in your project and when to use it. In this section, we’re going to cover six estimation techniques:

1. Top-down Estimation

In a top-down estimate, you’ll decide (or have the client tell you) the final budget for the full scope of work and then divide that total into the tasks or phases.

Once you have the budget broken out by task or phase, you can look at these smaller chunks of work to determine if the allocated budget feels like enough. 

This is where the art and science part comes in. You might have some data about how long certain tasks may take to help you decide if these estimates feel right. You also want to use your experience and intuition to understand where things in the project may need more time or resources than they typically do. 

This could be because of the creative needs or because you’re working on an app that has more complex functionality than the team has ever worked on.

Top-down estimating is a useful technique to use in the early phases of a project when you’re trying to validate if a client’s budget is sufficient to deliver a project.

The advantage of top-down estimating is that it can be a very quick way to produce an estimate. This can be useful if you’re trying to help a client determine whether or not their budget is viable. It’s also useful in helping a client try and understand what kind of scope their budget might allow for.

The disadvantage of top-down estimating is that it’s not always accurate. If you use a top down estimate as a starting point, you will want to make sure to validate with your team that the budget is allocated correctly in order for them to complete all of the needed project work before moving this estimate into a statement of work.

2. Analogous Estimation

The analogous estimation process uses data from similar projects to determine the overall project cost.

An example of analogous estimating would be if a client came to you asking for a website re-design and wanted to know how much that might cost. You would then go look at similar projects and base your initial estimate on what past projects billed.

Remember that if you are looking at projects over a year or so old, you’ll want to adjust your estimate for any rate or cost increases to keep the budget estimate as accurate as possible.

Simple right? Well, yes, if you’ve actually got relevant historical data that accurately matches the current project you’re trying to estimate. It assumes you’ve got data from previous projects that are similar enough to provide a useful comparison.

Analogous estimates can also be derived from examples outside your—or your team’s—project experience (for example, here’s a survey with rough figures on mobile app development costs ). 

Use caution—outside examples can be a good place to start if you’ve never done that type of project before, but you’ll still need to do a fair amount of due diligence as you break down the costs for your specific case.

The advantage of analogous estimating is that it’s very quick and easy and can be used with limited information available about the project—similarly to top-down estimating, it’s a great estimation technique to use when you just need a ballpark estimate.

The disadvantage of analogous estimating is that it can often be inaccurate. While there may be similarities between projects, projects are always unique – it’s often like trying to compare apples and oranges. 

Furthermore, for analogous estimates to be viable and useful, they’re heavily reliant on accurate historical data (here’s a shameless plug for you to do some data analysis at the closing of your project!).

3. Parametric Estimation

If you’ve got the data and some more time on your hands, a potentially more accurate ballpark estimating technique is parametric estimating. Parametric estimating takes variables from similar projects and applies them to the current project.

For example, suppose you had a project to develop a 2-minute animation. Say the cost of a previous project that involved developing a 30 second animation was $10,000. You could then extrapolate the cost for the current project would be roughly 4 times the cost, or around $40,000.

The advantage of this process is that it’s more accurate than analogous estimation because it employs more than one data set and uses the statistical relationship between historical data and variables.

The disadvantage is that with digital projects, it’s often hard to find useful data points as there is a lot of variety between projects. One place this may not be true, is if you do repeat business with the same client. 

Say your animation client loves their 30 second animation and comes back to you 6 weeks later to produce 2- 40 second animations. The data you have from the first project (assuming the next one is similar) can easily inform this new project.

4. Three Point Estimation

Assuming you’re done with ballpark estimating and the client has asked for a proper budget estimate, you need to start using more accurate estimating techniques. A single hourly estimate per task is easiest, but sometimes it’s nice to think in ranges and take a weighted average.

Three-point estimation is a way to calculate a realistic cost estimation using three data points:

• The best-case estimate
• The worst-case estimate
• The most likely estimate

How does this work? Let’s say, after discussing with your team, you estimate the time to design a web page as follows:

• Best case: 3 hours
• Worst case: 9 hours
• Most likely case: 5 hours

If you know the best and worst case, you can also average them to determine what is most likely (somewhere in between the best case and worst case).

The advantage of three-point estimating is that it reduces risk by taking into account best, worst-case, and most likely outcomes.

The only real disadvantages of three-point estimating are that it takes a bit longer to do, and if you’re estimating for tasks you’ve never done before, you might not know how long it will take.

If you’re taking or have taken the PMP exam, you may have heard the three-point estimation technique referred to as PERT. “ The Program Evaluation and Review Technique (PERT) is used to find the estimated time for activities to be completed when there are many unknown factors. With origins in the US Navy, PERT has been in use for over 60 years.”

5. Bottom-up Estimation

When you’re at the point of creating a statement of work, it can be helpful to do a bottom-up estimate.

Bottom-up estimating uses a work breakdown structure (WBS) which you can take from your project plan and break down a project into its individual tasks, which are estimated separately and then added together to calculate the total project cost.

The advantage of the bottom-up estimating technique is that it’s the most accurate and, by being granular, enables robust tracking of a project’s progress against the estimate. You know very quickly if a project is going over budget if tasks start taking longer than were estimated.

The disadvantage of bottom-up estimating is that it’s time-consuming to produce and can only really be used when you know all the details about every task in a project.

Also, by becoming very granular (and estimating at a task level), it can sometimes inflate the cost of an estimate. For this reason, it’s a great technique to use alongside analogous estimation when you’re trying to validate the appropriateness of your estimate.

6. Critical Path Method

The critical path method (CPM) has more to do with the project timeline than the budget. That said, while some of the estimation methods we’ve looked at in this article focus on estimating costs, we’ve also talked about the importance of your project’s estimate addressing the timeline for the work.

The critical path is the shortest duration between the project’s start and end. In a project, there are some tasks that can be performed concurrently and others that have dependencies.

For example, if your project was to implement software for a new digital kiosk, you cannot implement your developed software in the kiosk until the kiosk has been set up. 

So the tasks for ordering and assembling the kiosk are on the critical path of the project, and the project cannot be completed (ie. the software can’t be installed) until the kiosk has been assembled and is ready for the software to be loaded into it.

How might the duration align with the budget? If your client wants the project delivered faster than is feasible with the current team and plan timeline, you may need to adjust the budget to accommodate your resource management and allow you to add people to the project to hit their target deadline. Resource management software might be useful for this type of analysis as it lets you visually organize project costs and efforts across the team and plan for any contingencies related to your resources.

Which Estimation Techniques Should You Use?

There’s no right or wrong estimating method, and sometimes you might use more than one per project! To determine which estimation technique to use, consider the type of estimate you need based on what you know about the work and where your team or client is in the decision-making process.

One important caveat

The more accurate a cost estimation method is, the more time-consuming the process of producing it becomes.

So while bottom-up estimating might seem like the best approach, it’s not always advisable when you are short on time and resources or you still have a lot of unknowns, even though it might be the most accurate.

Project Estimation In Practice

If you’ve never done a project estimate before, now is a good (safe) chance to give it a try.

For the purpose of this exercise, let’s make a cake. A very expensive cake.

Below, you’ll find a budgetary estimate for making a cake. You could present a document like this to a client and see if they could secure $1,000 to start the cake-making project. Then, after refining the cost estimate, you’d create a statement of work and get approval with a purchase order.

Then, you’d bake your kick-ass cake. Admittedly, it’s a ridiculously expensive cake, but hey, you deserve it.

This example estimate includes some critical project information with the project name, project manager, and date. The estimate breaks down the tasks into phases and shows who will be doing what task in each phase of the project and what level of effort they will apply. 

Importantly, this estimate example also shows third-party costs (which, very generously, we didn’t mark up) and an estimate summary that a client could use as their budget.

In this project budget example, we didn’t include a risk budget, change budget, contingency, or assumptions because, after all, it’s just a cake, and we’re trying to keep it simple.

Project Estimate Template

If you’re on the hunt for a project estimate template, then you’re in luck. We’ve created this project budget template for a web design project that’s priced at $100k. It matches the project plan that we created, so that you can use the two in tandem.

Download the template and use it as you follow along with the rest of this guide. 

The files include project cost estimation and project estimate templates which you can repurpose for your own projects. If you’re looking for a project budget template for Excel, we’ve included that in this bundle, as well as a simple project estimate checklist.

5 Things To Know Before Creating A Project Estimate

In order to create your own estimate, there are some things you’ll need to know. Whether you’re working in-house and considering a new project for your team or functional area, or you work for an agency and are potentially being retained for client work, here’s what you want to gather in order to create the best estimate possible.

1. Define the project

Before you start estimating anything, the first thing you need to get your head around is why you’re doing the project in the first place. You have to understand the client’s brief, what they’re trying to achieve, and why. 

You need to understand the desired results of the project and what success looks like to them. Without that basic understanding of strategic objectives, it’s difficult to know where to put an emphasis on effort in the project.

If the project is technical in nature, ask for any tech specs you can get. For example, for a website project, ask about what platform they want to build on, where it will be hosted, and any functionality or integrations that will need to be developed. 

If your client doesn’t know yet, you have two choices: you can make (and document) some assumptions/recommendations based on their current site, or you can provide an estimated range and come back to it!

2. Ask about the Project Budget

It’s good to have some sense of a client’s budget before you start doing anything. Often a client will claim they don’t know their project budget, which means you’ll need to discuss a few options. You could try throwing out a few numbers and gauge the client’s reaction.

Say something like, “How would you feel about spending $75,000 for this work?” If the client says that sounds really high, you’ll know that you need to aim lower, or if you know based on your understanding of the project that you cannot complete a successful project based on that number, you can shut it down here and now.

Even if this is new territory for you and your potential client, the person signing the checks should have some idea of what they anticipate spending or what they are allowed to spend.

Getting this information upfront will save you a lot of time and back and forth, or the disappointment of spending hours creating an estimate/ proposal that doesn’t fit your client’s needs.

3. Have A Plan For The Project

When you’re estimating a project, it’s much easier to do if you’ve got at least a simple project plan. The reality is that you’ll need to edit the project plan (and project schedule ) to align with the estimate, and you’ll need to refine the estimate to align with the project plan.

The relationship between cost estimation and project plan is symbiotic; they feed from one another. If you dive straight into an estimate with no plan, you’ll quickly discover that you’ll need an accompanying project plan for it to have any meaning.

That said, it can also be helpful for project planning if you do a quick top-down estimate. Think of it as similar to a project plan sketch. Its purpose is to put a stake in the ground and work out how much effort you could afford to apply to different phases of a project to see if it might be feasible.

One other key component of the plan that is especially important for estimates in an agency setting is considering who will work on the project and how much time they will spend. 

For example, if you have three developers who do website work and they’re at different levels of seniority, they will bill at different hourly rates (assuming you’re estimating work at an hourly rate). Let’s say the most senior developer bills at $250/hour, the mid-senior developer bills at $175/hour, and the junior developer bills at $115/hour.

You will need to base your estimate on who is the most likely to work on this project and how much time you think they’ll need in each phase or to reach each milestone in the project.

Don’t forget to include some billable time in your estimate for senior leaders to consult on or review work. This could be your lead developer looking at some code or the creative director helping to ensure brand standards are being applied correctly.

4. Know Why You’re Estimating

Are you estimating to get an accurate project budget? Or are you estimating to hit a specific number? Are you trying to win new business or sell a project as a loss leader to get more work down the line? Do you want to invest heavily in the upfront discovery, which can be leveraged for a group of projects in the future, or is it a risky technical project where more effort should be allocated for development?

Cost estimation will always have a context. Knowing the full picture ensures that you don’t waste your time producing something that might be technically correct but totally inappropriate for the project.

5. Know What Kind Of Estimate You Need

In the run-up to a project budget being signed off by a client, there’s a process of defining the budget. So how do you make sure you’re not wasting time creating a detailed cost estimate that’s way outside of a client’s budget? At different phases of a project, we can use different types of estimates.

Project Estimate FAQs

When should project estimates be created.

Project estimates should be created to help make decisions about projects. This could be to help the team or client decide if they are going to move forward with a project or to determine the final budget for a project before it kicks off.

It’s possible you will need to do a more general rough estimate in the early stages of planning for a project and a more detailed accurate project estimation in order to get a signed and executed statement or work or contract.

Does estimating matter in agile projects?

It does, but it’s not done the same way as in a traditional waterfall project. In agile , work is categorized into a product backlog and delivered in sprints. During the sprint planning meeting , features are estimated to be completed within the sprint. Throughout the course of the work, new items are added to the backlog, and items may be removed if they become obsolete.

So, how can this work in an agency or contract project where you need to give a client an overall price for the work and set a timeline for completion? It can be a challenge!

Is it better to over or under-estimate projects?

One of your project manager responsibilities is to deliver projects profitably and on budget. So the easy and safe option can be to over-estimate and add lots of padding to your estimate to make yourself and your team look like superstars when you come in at or under your budget.

But, one project risk associated with inflating your budget is that it could cost your agency the entire project. If you estimate too high, the project could get written off as too expensive and never get started.

If you end up going to the other extreme and underestimating the budget for a potential project in order to accommodate a client, you risk putting your agency or team in a position to potentially have to run the project at a loss or cut corners and sacrifice quality in order to deliver.

The real answer: walk the estimate tightrope. Getting the balance right between estimating too high or low enables you to manage the tension between these two elements, safety and risk— creating a cost estimation that the client can buy but that’s high enough to enable you to deliver on budget.

Managing the Final Project Budget

Once you’ve established a budget (and it’s approved by the client), you’ll need to manage and track budget usage throughout the project. You can use your project management software to allocate and manage your budget (as well as track everyone’s to-dos).

There are several ways to do this, which we don’t have time to cover in this article fully. But we’d never let you go without resources for managing your budget, so make sure to check out our articles on the project management life cycle and scope creep for some expert tips.

Check out this real life example of budget management , where the project manager had almost zero funds.

What’s Next?

Need more project budgeting help or some project budget management advice? Check out Galen’s article on ways to improve your project estimation process , and find out more about how accurate time tracking can help improve your project budgets .

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6 techniques for accurate project estimation

Project estimation helps project managers and stakeholders get a sense of how long a project will take, what kind of resources are needed, and what deliverables will be required for project completion. In this article, learn six different strategies for how you can accurately estimate key aspects of your next project.

When you’re cooking dinner for your family, you have a small group of hungry people wondering when it’s time to eat. You know that you have to prepare vegetables, preheat the oven, and set the table. When you tell your family, how do you accurately tell them the right amount of time to wait?

Estimating how long things will take to complete is an essential part of both dinner preparation and project management. Both require accurate information and communication with stakeholders—the more accurate the estimation, the happier the stakeholders will be.

What is project estimation?

A project estimation is an informed prediction for the time, cost, and resources a project will need from start to finish. Most project estimations use past information to make an educated prediction. For example, this information can include timelines and budgets from similar projects, past project estimation experience, and previous stakeholder requirements.

Project estimation is important for project managers because it helps you establish your project scope . A project scope then helps project team members understand what deliverables to complete, who is working on what tasks, and any required deadlines. 

How to accurately estimate a project

The estimation process starts with the same tool: the project management triangle. The project management triangle consists of three main variables:

The idea is that every project requires a perfect balance of all three variables. If you have to increase one part of the triangle, something else has to change for the project to remain balanced. For example, if the project scope increases, often the cost or the time must increase as well. If a project’s time decreases, either the scope or the cost must increase to balance it out.

The project management triangle is an important part of the project estimation process. Because of the relationship between these three variables, you can accurately estimate the third variable if you have enough information about the other two variables. 

6 common project estimation methods

If you aren’t able to estimate a project with the project management triangle, try these six additional estimation techniques. These techniques will help you uncover enough information to make an accurate estimation. 

1. Top-down estimation

The top-down estimation strategy estimates an overall time for a project, and then breaks that project down into smaller phases and tasks based on that estimated final time. This estimation technique is commonly partnered with the work breakdown structure (WBS) project management strategy. The WBS strategy helps to break down larger deliverables into smaller, subtasks.. 

Top-down estimation in action

If you think of a project as a pizza, top-down estimation is like dividing up that pizza into smaller slices.

If your team has a deadline to complete a project within one calendar year, you’ll take the one year timeline and divide the project into different parts with key milestones in-between. For example, a product development team is set to launch a new product within one calendar year. The project manager will set key milestones , such as completing the product wireframe, alpha build, product testing, and the final launch date within that calendar year. 

Using the pizza analogy, each section of the project is a “slice” and the entire project from beginning to end is the whole pizza.

2. Bottom-up estimation

Bottom-up estimation is the opposite of top-down estimation. Instead of knowing how long the project will take and then dividing it up into smaller tasks, bottom-up estimation looks at how long each smaller task will take and adds them together to estimate the final project deadline. 

This technique is similar to the critical path method . However, the main difference between the two is that bottom-up estimation takes into account every single task a project requires, while the critical path method only looks at the essential tasks that need to be completed.

Bottom-up estimation in action

Going off the previous pizza analogy, bottom-up estimation is taking all of the slices of the entire pizza to figure out how big the final pizza is. 

You have the task of developing an e-commerce marketing website, and the client wants to know approximately how long it will take. As the project manager, you list out all of the tasks necessary to complete the project, and then add up the estimated time of each task to come up with the final estimated timeline for the client.

3. Three-point estimation

Three-point estimation can make a bottom-up estimation more accurate. This technique takes the average of three different variations of a bottom-up estimation: the most optimistic timeline, the most pessimistic timeline, and the most likely timeline to come up with the final time estimate for the project. You can find these three estimations by using a PERT chart .

For example, a team may have three estimates for their project: 10 days for their most optimistic timeline, 14 days for their likely outcome, and 30 days for the most pessimistic outcome. When you find the average of these timelines, it ends up coming out to approximately 21 days. 

4. Analogous estimation

Analogous estimates look at past projects and identify specific details that are similar to the current project. The information from past projects are then applied to the current project. Then, based on the similarities and differences, the project manager estimates their current project’s cost, scope, and time. 

For example, a website development team may be tasked with updating the website for their new product. They can look back at the last time they updated the website with a product and use that to estimate the timeline for this project.

5. Parametric estimation

Parametric estimation uses historical data from past projects to estimate any part of a project including resources, budget, equipment, and project timeline. Parametric estimation is often used in combination with analogous estimation to come up with a more accurate estimate. This is because it takes both historical data and experience into consideration to create a more accurate estimation. 

For example, imagine you’re an IT project manager and your task is to install a specific software onto 150 different devices. Since you know the installation process takes about 10 minutes on one device, you would use that estimate and multiply it by 150 to get an estimation for how long this process would take. 

6. Expertise-based estimation

This estimation method is entirely based on the experience of the project manager. Very experienced project managers may know how long a specific type of project will take because they’ve completed a similar project many different times. If you’re thinking about using an expertise-based estimation, it’s best to discuss this with someone who is an expert in their field. Otherwise, it’s best to use this technique in combination with other estimation methods.

For example, a web developer may have started building websites back in the early 2000s. With 20+ years of experience, this web developer would know exactly how long it would take to build a simple website, based on all the sites they’ve completed before. 

Why estimation is important for project management

Estimations are a necessary part of the project planning process . Almost every type of project— from Agile projects to more linear waterfall projects —can benefit from project estimation. Here’s why.

Estimations keep your team on track

One common way project managers keep projects running smoothly is by making sure their teams match estimations as closely as they can. Because they know exactly how much time, budget, and resources they have available for a certain phase of a project, they’re able to help the team stay within those boundaries.

When project managers, team members, and stakeholders are all aware of the project’s estimation, everyone can hold each other accountable. To make this happen, make sure you share your project estimation in one central location, like a digital project management software . 

Requires a project plan before the project starts

To make an accurate project estimation, a project manager must first identify the key tasks that need to be completed before the project actually kicks off. This means that project managers will clearly identify the critical path and major dependencies prior to project kickoff. Establishing the critical path also gives you a high-level overview of what tasks need to be completed, and what resources you need to complete those tasks.

Having all of this information before a project begins can help prevent any confusion. Should a project member have questions or if they’re unsure of what comes next, they can refer back to the project plan that was established during the estimation phase. 

Helps mitigate risk

Project estimations can help project managers mitigate risk as the project progresses. Establishing a clear timeline before the project starts is a good way for your team to reference the project timeline and budget. To mitigate risk, add a little bit of extra time, budget, and resources to your project plan to prevent the risk from going over deadline or exceeding budget restrictions.

If your team does happen to run into issues, quickly jot down issues and resolutions into an issue log and help guide the team back towards the plan created during the estimation process. The project estimation and critical path can be used in conjunction as a reference point so the project team understands where they are in the project process.

Plan projects using a collaborative work management software

Compile project estimations in one place by using a collaborative tool like Asana . With Asana, project managers can clearly outline projects with key milestones, mark dependencies, and assign tasks to individual project members.

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Estimating Cost of a Project: Techniques and Examples

Estimating cost is an important process in project management as it is the basis for determining and controlling the project budget. Costs are estimated for the first time at the beginning of a project or even before a project has started. Subsequently, the (re-)estimation of the project cost is repeated on an ongoing basis to account for more detailed information or changes to the scope or timeline.

For instance, if the earned value management measures that are used for controlling project cost indicate significant variances from the budget, a re-estimation of the cost and schedule and a revisiting of the overall budget can be inevitable.

The methods introduced in this article are tools and techniques of the “Estimate Costs” process that is part of PMI’s Knowledge Area “Project Cost Management” (see PMBOK®, 6 th edition, ch. 7.2).

What Is a Cost Estimate?

Rough order of magnitude vs. definitive estimate, estimate to complete (etc) and estimate at completion (eac), when are cost estimated, why is cost estimation important in project management, comparison of estimation techniques, expert judgment       , analogous estimating , parametric estimating, bottom-up estimating, three-point estimating.

A Cost estimate is a quantified expectation of how many resources are required to complete a project or parts of a project.

Such cost estimates are often expressed in currency units. However, other units such as man-days can also be used if the currency amounts are not applicable or irrelevant.

There are different types of cost estimates. The Project Management Body of Knowledge lists the rough order of magnitude (ROM) and the definitive estimate. Both types differ in respect of their accuracy, the project phases in which they are used as well as the available tools and techniques. Some projects use additional, sometimes industry-specific types of estimates.

Cost estimating involves different tools and techniques which typically include

• Expert judgment,
• Analogous estimating,
• Parametric estimating,
• Bottom-up estimating,
• Three-point estimating, and
• Cost of quality.

Read on to learn the details of these techniques, supplemented with examples and practical considerations.

What Are the Types of Cost Estimates?

According to the PMBOK®, there are 2 types of cost estimates:

• Rough order of magnitude (ROM) with an accuracy of -25% to + 75% (other frameworks quote a range of +/-50%) and
• Definitive estimate with an accuracy range of -5% to +10%.

Some sources also list so-called preliminary estimates and budget estimates as further gradations of estimate types. There are also industry-specific types of estimates such as design and bid estimates in construction projects ( source ). However, the current PMI project management framework only refers to the 2 above-mentioned types.

If the budget has to be revisited part way through a project, a so-called estimate to complete (ETC) is determined.

The obvious difference between these 2 types of estimates is the accuracy: the ROM is rather inaccurate with a broad range of possible outcomes. It is therefore typically used in project initiation phases where a ballpark figure is sufficient to get a project started.

The definitive estimate is determined in the course of the project when more information and resources for accurate estimates are available.

Read this article for more details on the ROM and the differences between ROM and definitive estimate .

If partway in a project it turns out that the budget baseline (based on previous estimates) cannot be met, a re-estimation of the project cost is required.

This is done by determining an estimate to complete (ETC) which is used to calculate a new estimate at completion (EAC) that replaces the initial budget at completion and thus becomes the new cost baseline of a project.

Costs are estimated at different points in time throughout the project. The PMBOK states that the process is performed “periodically throughout the project as needed” (source: PMBOK®, 6 th edition, ch. 7.2).

The first point to estimate cost is during the initiation phase, e.g. when the project business case or the project charter is created. For these documents, a project manager has to determine the amount of resources that is required to complete the project.

As the information that is available at that point is usually not very detailed, the project manager will likely end up producing a rough order of magnitude estimate rather than a definitive estimate. Later in the project when more information is available, this order of magnitude estimate will be replaced with a definitive estimate.

After the project initiation phase, the cost will be re-assessed during the planning phase, using the techniques introduced in this article.

In subsequent phases, costs are typically (re-)estimated if relevant new information and details become known or if changes to the project scope or timeline occur. One of the common reasons for re-estimating cost is, for instance, when the indicators of the project controlling suggest that the original budget baseline cannot be met.

Estimating costs is one of the core activities of project management and planning. This is because a project is defined as being subject to at least three fundamental constraints : scope , budget and time. Cost estimates are obviously addressing the budget constraint; hence they are highly relevant for the management of a project. The initial rough cost estimate is usually included in the project charter as well as in the business case of a project.

The estimation of costs is also necessary to compute the project budget which is subject to the approval of the project sponsor(s). In fact, the process “determine budget” uses a technique called “cost aggregation” which directly refers to the outputs of the “estimate cost” process.

Cost estimates are the basis for allocating budget to work packages and deliverables which can be politically sensitive within a project as well as among its stakeholders. Therefore, budget determination and assignment require some stakeholder involvement, communication and, in many cases, their approval.

In addition, cost estimates are input parameters for the earned value and variance analyses as well as forecasting of project costs .

Tools and Techniques for Estimating Project Cost

This section provides an overview of the tools and techniques for estimating project costs. These methods refer to chapter 7.2.2 of PMI’s Project Management Body of Knowledge .

Click on the links to the detailed articles on these techniques to find further explanations and practical examples.

This table compares the approaches to estimating project costs and highlights the differences between these techniques.

This technique is suggested by the PMBOK (ch. 4.1.2.1) as a way to produce a cost estimate.

If you or your team have experience with the kind of work that is in the scope of a project, you can use expert judgment to produce an estimate. This requires a certain level of familiarity with the subject of a project and its environments such as the industry and the organization.

Expert judgment can be applied to both bottom-up and top-down estimating. Its accuracy depends greatly on the number and experience of the experts involved, the clarity of the planned activities and steps as well as the type of the project.

Two examples of expert judgment are:

• Estimating the rough order of magnitude at the beginning of a project. At that time, estimates are often performed top-down due to a lack of team members. more accurate estimation techniques (such as parametric estimating) may also not be available due to a lack of data.
• (Re-)estimating the efforts needed to generate the deliverables of a work breakdown structure (WBS) by asking those responsible for work packages and activities to estimate their resource requirements. This type of expert judgment can lead to comparatively accurate results.

Besides being an estimation technique on its own, expert judgment is also inherent to the other estimation techniques. For instance, if the comparability of previous work and the current project is assessed or adjustments to parametric estimates are determined.

Analogous estimating refers to the use of observed cost figures and related values in previous projects (or portions of a project). In order to be accurate, the type and nature of these reference activities must be comparable with the current project.

“Analogous estimating, also called top-down estimating, is a form of expert judgment.” Source: Heldman, Kim. PMP: Project Management Professional Exam Study

This technique uses historical data in the form of values and parameters to determine the expected resource requirements of a current project. The historic values are adopted for the current work and can be adjusted for differences in scope or complexity. Analogous estimating is categorized as a gross value estimating approach.

In general, analogous estimates are used if a project has access to historical data on similar types of work while the details and resources for more accurate estimates in the current project, such as parametric or bottom-up estimating, are not available.

Parametric estimating is a statistical approach to determine the expected resource requirements. It is based on the assumed or proven relationship of parameters and values. Simple examples are the building cost per square foot in construction projects or the implementation cost per data field in IT projects.

If, for instance, the cost of implementing a new data field in an IT system were $20,000 according to historical data, and a project required 15 new data fields, the total cost of this part of the project would be 15 x $20,000 = $300,000.

The input data can be obtained from previous projects or external data sources such as industry benchmarks or publicly available statistics.

In practice, this technique is employed with a broad variety of sophistication and accuracy. It can be used with a simple ‘rule of three’ calculation but also in conjunction with a complex statistical or algorithmic model that may consider multiple quantitative and qualitative parameters for detailed regression analyses.

In projects that do not use an explicit statistical correlation analysis, some expert judgment is required to assess whether it would be reasonable to apply the historic parameters to the current project. Complexities of projects and activities vary and may therefore require certain adjustments.

For instance, building a highway in a mountainous region likely produces a higher cost per mile than in a flat area. IT development projects in complex IT architectures or systems tend to require more resources than a less complex environment.

Another consideration concerns the expertise and experience of the project team. If a previous project was delivered by highly skilled and experienced resources while the current team is just at the beginning of its learning curve, using unadjusted historic data may understate the estimated cost.

Similar to analogous estimates, adjustments can be made to adapt the parametric estimates to the current project.

Depending on the quality of the input data and its applicability to the current type of work, the parametric estimation technique can produce very accurate figures. However, the higher the accuracy desired the more resources are needed to perform the data gathering and statistical analyses.

Bottom-up estimation refers to a technique that involves estimating the cost at a granular level of work units. The estimates for all components of a project are then aggregated in order to determine the overall project cost estimate.

In practice, these estimates are often performed at the lowest level of the work breakdown structure (WBS), e.g. for work packages or even activities.

While there is no clear rule on who should be performing this estimation, it seems to be a good practice in project management: asking those project team members who are operationally in charge of the respective work packages or activities to estimate there on work.

Thus, this approach to estimating costs often comes with significantly higher accuracy than top-down estimations. However, obtaining and aggregating these granular estimates normally requires some resources and can potentially become a political challenge, especially in large or complex projects.

Three-point estimating is a technique that usually leverages on bottom-up estimates, analogous or expert estimates. The concept requires three different points of estimates: the optimistic (best case), pessimistic (worst case) and the most likely cost estimate.

Based on these 3 points, a weighted average cost estimate is determined that overweighs the “most likely” point. This can be done by assuming a triangular distribution, a PERT or beta distribution.

Read this article for further explanation and examples of this technique.

In this article, we have discussed the techniques of cost estimating as suggested by the PMBOK. Note that the level of detail and granularity of the estimates usually increases throughout the project.

In the initiation phase, the rough order of magnitude (ROM) is often the only type of estimate that can be obtained. Definitive estimates will usually require techniques such as analogous, bottom-up and parametric estimating that may only become available in later stages of a project.

Parametric and bottom-up estimates are usually the techniques that provide the most accurate cost projections. They are commonly used if the budget needs to be revisited and replaced with a new estimate at completion.

When a budget is determined and approved, earned value analysis and variance analysis help project managers control the cost and value generated in a project. You will find more details on the measures and the techniques in this article .

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How to Develop a Basis of Estimate for More Successful Government Contracts

A basis of estimate (BOE) is an organized set of data and narrative information that explains the logic, methodology, calculations, and assumptions you use to define the tasks and determine the resources needed to accomplish the scope of work described in a government or other request for proposal (RFP). It provides data and narrative information that can be used to determine the ability of the bidding contractor to carry out the project.

To create data driven basis of estimates , it is important to provide fact-based information in your proposal response. 

This makes it easier for your government customer to verify you have:

• Understood the RFP scope of work, technical requirements, and deliverables.
• Defined the sequence of tasks to meet the RFP’s technical requirements and deliverables.
• Identified the necessary resources – whether labor, material, travel, outside services or suppliers, and other direct costs to accomplish the tasks.
• Selected an appropriate estimating methodology for the tasks along with applicable narrative information so someone else can follow your thought process.
• Produced a realistic cost estimate.

Two important ingredients for producing a credible basis of estimate include selecting the appropriate estimating methodology and accessing verifiable source data from your business systems.

Government contract proposal writers often lean on one of these four important estimating methodologies. Let’s take a high-level overview of each, along with what data and narrative information you need to produce your basis of estimate.

Analogous Methodology

This method often works well for proposals that include development work effort where some aspects of the project are not yet fully defined. You may have performed similar work effort that can serve as the basis to calculate a likely cost estimate.

For this estimating method, you will need the historical actual hours and cost data from another project or set of completed tasks that are similar to the tasks in your proposal. You may want to apply complexity or other factors to account for any work scope, technical, resource, or other differences.

In your cost estimate narrative, include details about how you arrived at your cost estimate such as:

• The source of the historical analogous data;
• Why you think the analogous data are relevant;
• Differences between the analogous data and the proposal requirements ; and
• The factors you applied.

Cost Estimating Relationship (CER) Methodology

This method works well when you frequently perform similar work effort and you have established a library of statistically valid cost estimating relationships using historical data to support linear regression for parametric analysis. Parametric types are unique to your business environment. You could also use CER data provided from other organizations. If you do use data from another organization, be sure to note the source of the data.

In your cost estimate narrative, include details such as:

• The base or independent variable you used such as lines of code to determine the number of labor hours required;
• Information about the source data and relevant statistics such as mean and standard deviation of independent variables, number of data points, and range of data;
• The equation, input variables, and calculated output value; and
• Any adjustments you made to the output value and why you made those adjustments.

Task Based or Bottoms Up Methodology

This method also works well when you frequently perform similar work effort and can access a library of historical performance data or you use a set of standards for accomplishing comparable tasks. You often need to work with other technical experts in your company, such as a design engineer, to calculate labor hours from known factors such as engineering drawings or specifications. There may be related material and purchased parts requirements. 

In your cost estimate data as well as narrative, include details such as:

• Historical or other basis for the estimate and whether any work standards were applied;
• Methods used to determine the cost of materials or purchased parts;
• Bills of material including which items apply to which elements of work; and
• Basis of pricing for material items and why a specific supplier was selected.

Level of Effort (LOE) Methodology

There is usually some level of support tasks that are required for a project such as allocating hours for project management, quality assurance, or supervisory personnel. You use the LOE methodology for these support tasks. The support services often vary depending on the type of work, complexity, contract type, or other factors. You may have an established set of standards such as a percentage of labor hours to support specific types of tasks. In the cost estimate narrative, include details such as:

• The basis for determining the allocations for support services;
• Which tasks are included in the allocation; and
• Rationale for the period of performance for the support services – this may be based on specific tasks.

Engineering Judgment Methodology

This is the least desirable cost estimating methodology because you are relying on the expertise and rationale of one or more technical resources. You don’t have relevant historical actual hours or costs you can use to independently verify the cost estimate they develop is realistic. The technical expert develops the estimate usually at the lowest level of the work breakdown structure (WBS) based on the statement of work, specifications, drawings, or other details the customer may have provided. This is where the content of the cost estimate narrative is critical. 

The technical expert needs to provide sufficient detail so someone else can verify their:

• Thought process and any source data they used with detailed explanations;
• What calculations they used, rationale, and assumptions; and
• Qualifications to provide a realistic cost estimate.

Interested in Learning More About Cost Estimating Methodologies?

Cost estimating is both an art and a science. The International Cost Estimating and Analysis Association (ICEAA) is dedicated to furthering the profession. ICEAA provides publications, webinars, and certifications to help cost estimators hone their craft. They sponsor an annual workshop and maintain chapters that plan training workshops, networking events, and other meetings throughout the year.

The Right Cost Estimating Software Can Help

Cost estimating is arguably the most critical and challenging part of creating a proposal response, but the right software can make a big difference. For example, during our work with clients, we have uncovered that for many, Excel is the tool used to create proposal cost estimates (and even for project cost management in the execution phase.) Use of multiple programs, cut-and-paste data compilations, and unsynced data sources can lead to time-consuming –and error-prone– outcomes.

Cost estimating software tools such as ProjStream’s BOEMax can make a difference because you can create data driven basis of estimates easier and faster, greatly decreasing the time it takes to create and iterate proposals. 

With BOEMax integrated cost estimating and pricing software, you can:

• Maintain a single database of historical proposal cost estimates as well as actual hours and cost source data you can search and copy into your proposal project to substantiate your BOE.
• Maintain a process library of standard or common tasks. These are templates of reusable engineering or manufacturing processes that include the applicable bills of material and related labor requirements (skill mix and hours) required to produce an output. You select the applicable tasks and apply quantity or complexity factors when you copy them into your proposal project. Once again, you have reliable source data to substantiate your BOE.
• Maintain a library of cost estimating relationship historical data for parametric estimating.
• Maintain a master part and assembly list so you can quickly build hierarchical bills of material for your proposal project from reliable source data.
• Identify resource allocations for common support services.
• Combine the cost estimate data with the built-in rich text documentation all in the same database to easily produce standard cost summary reports required for responding to government RFPs.

Using ProjStream’s tools helped to reduce a large military defense organization’s proposal iteration time by 90%. Change requests that once took 30 days now take an average of only three. 

The contractor’s vice president of business development noted, “We now consider this portion of the RFP response phase a competitive advantage because we can save our starting point, make logical batch changes based on scope or rate changes and then compare the deltas using project version reporting.  Things that used to take us days now take hours to complete….The benefits of an integrated BOE, scheduling and pricing tool has been a much more efficient use of our B&P (bid and proposal) funds and resources.” 

Call us today to schedule a demo of BOEMax basis of estimate software or explore ProjStream’s integrated set of software tools for an end-to-end solution for both proposal and project cost management using a single database design. See for yourself the difference ProjStream’s solution can make in the quality of your cost estimates and your proposal process.

Updated January 17, 2022

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Project Estimation Techniques: A Quick Guide

A successful project starts with a successful estimate. To properly schedule the work to execute your project, you need to know the timeline, costs, scope, risk and more. All of these considerations are part of project estimation techniques.

Estimation techniques help make decisions on the viability of your project. If you decide to move forward, they’re essential to forecasting projects accurately. Let’s define project estimate techniques, including a checklist of what needs estimating, and offer some of the more popular techniques that you can implement.

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What Are Project Estimation Techniques?

Project estimation techniques are tools that help project managers forecast cost, time and other variables as they relate to a forthcoming project. These estimation techniques allow for a more accurate forecast of key elements in every project and include cost, time, scope, risk, resource and quality. Resource allocation estimates tend to be used more in agile IT operations.

The purpose of project estimation techniques is to help clients understand the investment necessary to deliver the project. The project manager has to sell the project to the client and convince them that they’ll get a return on their investment. If the project is approved, the project manager needs these estimation techniques to figure out a feasible plan to deliver the project on time and within budget.

Specifically, project estimation techniques include a rough calculation of price, time or other measurable project aspects. These estimation techniques are necessary for clients, stakeholders and the project planning process because, without them, you’re making a guess. Instead, project estimation techniques allow you to calculate a realistic number.

Project management software can help when using estimation techniques. ProjectManager is online project management software that not only helps you estimate project cost, time, resources and more but also has the features you need to plan, monitor and report on that project. Our Gantt charts let you estimate time, cost and resources to help you build your project schedule, including a work breakdown structure, linking dependent tasks to avoid bottlenecks and even filtering for the critical path. When you set a baseline, you’ll be able to automatically calculate variance as you execute your project to stay on track. Get started with ProjectManager today for free.

Project Estimation Checklist

We’ve gone over the essential items that should be part of your project estimation techniques, but it’s helpful to know more about them individually. As noted above, six main areas should be estimated when researching or planning a project . They are cost, time, scope, risk, resource and quality. Let’s look at each of these project elements more closely.

Cost is what most people think when they think about estimate techniques. This is understandable as most projects are discussed in dollars and cents. Projects are an investment and if you’re unable to get a return on that investment, you haven’t delivered a successful project.

If you’re familiar with project management, then you know the triple constraint : cost, scope and time. These are the three main forces that impact any project. Cost is simply money; you either don’t have enough to complete the project or you spend too much and the project ends up costing far more than was predicted. Neither scenario is ideal.

Accurately forecasting how much the project will cost before execution is important to your client and stakeholders. That figure often determines if they move forward with the project or not. It also helps you manage your client’s expectations about the project, so finding out how much you’ll need and when you’ll need it are critical project estimates.

Another pillar of the triple constraint is time. This refers to the overall amount of time it’ll take to complete the project and accompanying tasks. If you know how long your team will take to do their tasks, those tasks can be included to offer a fairly accurate time estimate.

This is vitally important for the project manager as they begin to formulate the project plan and schedule. While project managers want to know how long a project takes and the project stakeholders certainly are interested in deadlines, there are other reasons why time is a crucial project estimate.

Just as money dictates project funding, knowing how long the project will take enables the project manager to schedule the necessary resources. Coordinating resources is dependent on the timeline developed. Time also informs when the key deliverables will be received.

The last triple constraint is scope. The project scope is simply everything that must be done in the project for it to be successfully delivered. In other words, project managers need to estimate how much work is involved to receive the final deliverable. By doing this, including what tasks are involved, you’ll know the materials necessary to execute the project.

Scope dovetails nicely with time and cost to create the triple constraint and a foundation on which any accurate project estimate techniques must be based. In fact, scope, time and cost are so interdependent that they’re key to managing a project.

If, for example, a project requires more time, then either the scope or the cost will have to change. The same is true if extra costs occur. It’s like a balancing act with the project’s success being held up by these three legs. But that doesn’t mean they’re the only estimates required for estimate techniques.

Outside of the triple constraint but no less impactful is project risk . Risk is anything that’s not expected to happen that does happen and impacts the project. Risk can be bad and is mostly thought of as a negative, but there are positive risks that can be opportunities.

Whether you want to mitigate or take advantage of a risk, you need to estimate what might occur so you’re prepared. Estimate techniques for risk involve identifying what might happen and coming up with a plan to respond to it. This might not cover all bases, but it puts you in a better position to act.

This is the start of a risk management plan . There will also be team members who are responsible for identifying risk, and if an issue shows up, there will be team members who own it. That means they’re responsible for tracking its progress as it’s mitigated or used to the project’s advantage.

5. Resource

Resources are anything you need to get the project done including your team, materials, equipment and so forth. Naturally, resources need estimation techniques, too. You don’t want to start executing a project without knowing how many subcontractors you’ll need or what software your team will be using.

Resource management helps you know what you need and when you need it so there aren’t delays as teams wait for equipment when working on tasks. You also need to know who is available and when so they can be assigned work. It’s important to know who’s assigned what work to make sure to balance their allocation.

It’s clear that while the triple constraint features three of the most important factors in bringing a project to a successful end, they’re not alone. Certainly, resources are critical. They might even be more difficult to estimate as they often come from a variety of vendors, suppliers and outsiders that are beyond the control of the project manager.

Finally, the project isn’t a success unless quality expectations are met. You can deliver the project on time and even under budget, but without meeting the demands set by your client’s customers or stakeholders, that’s a failed project.

Quality is delivering on certain regulations or expectations, depending on the project. There might be environmental restrictions or the product has to work as advertised. Whatever the quality constraints, they can lead to more time and money poured into the project.

Making an accurate estimate of what quality level is expected informs the other five estimates above. In a sense, all six of these project estimates are related or, at least, interconnected. Whatever quality estimates you come up with are sure to impact your cost and time, possible scope, risk and resources, too.

Types of Project Estimation Techniques

Now that we understand what we’re estimating, let’s look at some of the more popular project estimation techniques. Projects will likely use one or more of these when making estimations and the more you use, the more likely your estimates will be accurate.

1. Top-Down Estimate

Top-down estimates are an estimation technique that starts with an overall time for the project and then breaks that down into phases, which are then broken down further into tasks. This is a classic estimation technique that uses a look such as the work breakdown structure (WBS) .

This is commonly used when a client demands that the project be completed within a certain timeframe. This project estimate technique works well for this scenario as you have a block of time and can split it into activities to meet the deadline.

2. Bottom-Up Estimate

This is the reverse of the above estimate technique. Instead of breaking up the timeline into tasks, you estimate each task and combine them into an estimate for the whole project .

This is a more accurate method as using smaller tasks to build a larger schedule will give you a better estimate of the time it’ll take to complete the project. The problem is this estimation technique takes more time.

3. Analogous Estimating

Analogous estimating is a technique in which the project manager looks at a previous, similar project and studies its variables to come up with an estimate for the time and cost of the current project. This comparison works best when there’s more data that leads to more accuracy.

This is a top-down estimating technique as the project manager is first estimating the project’s costs and then breaking it down into smaller parts. It’s helpful to use this estimation technique when you have limited estimation resources.

4. Parametric Estimate

This is another estimation technique that takes advantage of past project data. In this estimation technique, there are attempts to adjust the data to reflect the differences between the past project and the new one you’re estimating.

By taking the details from a previous project and pro-rating it, the project manager can estimate the current project more accurately. This is sometimes referred to as parametric modeling.

5. Three-Point Estimating

Often when estimating from the bottom up, three-point estimating will be used. In this case, instead of estimating the duration of a single task, three estimates are applied. One is the optimistic estimate, the other is a pessimistic one, and, finally, the most likely guess. The average of these will be used as the actual estimate.

You might be familiar with three-point estimating if you’ve ever used the program, evaluation and review technique (PERT) . It, too, uses what’s called a weighted average as an estimating technique to forecast more accurately.

6. Expert Judgement

Seeking the help of experts or those with experience managing the type of project is by far the most common estimating technique. It’s certainly faster and easier than making calculations. People tend to trust others who have gone through a similar experience.

It’s a flexible estimating technique in that you can use it for top-down or bottom-up estimating. In some cases, experts and experiences don’t align with your current project. Experts can still be helpful, but their opinions should be tempered by other estimating techniques.

Estimation Techniques & ProjectManager

ProjectManager is project management software that helps you turn estimating techniques into project plans and schedules. Our software delivers real-time data so project managers can track progress and performance as it happens. Using the software is the best tool in your arsenal for adjusting plans when estimates are off. Estimating techniques are educated guesses, but real-time data are facts.

Monitor Costs in Real Time

Making sure your estimates are accurate and that you’re not overspending is hard. Being unable to track those costs can mean trouble for the project’s success. That’s why we have real-time dashboards that give you a high-level view of the project, automatically calculating and displaying six metrics, including costs. For a deeper dive, there are timesheets and reports on timesheets, costs and more that can be customized to focus on only what you want to see.

Keep Track of Scope

The same goes for your project scope. You’ve made an accurate estimate but is the project holding to it? We have resource management tools that allow you to track the workload of your project team. If they’re over-allocated or under-allocated with tasks, that could mean trouble. A quick glance at the color-coded workload chart and it’s clear to see who is doing what. You can then balance the workload from the chart to keep your team productive and stay on track.

Estimation techniques are important. Project managers can use our Gantt chart or sheet view to plan the project and figure out costs, time, scope and more. But once the project starts that’s when the rubber hits the road. You better have a project management tool that can monitor in real time and track your time, scope and cost in order to deliver success.

Related Content

• Project Estimate Template
• Time Estimation in Project Management: Tips & Techniques
• Calculating Estimate at Completion (EAC)
• 5 Tips for Task Estimating
• Parametric Estimating In Project Management
• Cost Estimation In Project Management: How to Estimate Project Costs

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Simplify project estimation with 6 intuitive methods

Project management requires careful preparation. A project manager needs to know how much money, expertise, and time team members will require to accomplish the intended goals.

Although you can’t pinpoint the precise resources needed to deliver a successful project before you begin, you can reliably predict these totals using project estimation techniques. With a rigorous project planning and management process, you can produce resource and cost estimations that ensure your team has what it needs to succeed. 

These estimation methods require accurate information and ongoing communication with stakeholders to ensure their veracity. If you’ve never produced an estimate, the process may seem intimidating. However, your estimates will become more reliable once you familiarize yourself with the process, consult your peers, and gain some experience.

What is project estimation?

When project management generates an estimation, they consider every aspect of the initiative. They review data from previously completed work, similar projects or tasks, and expert input to establish expected timelines and budgets. Managers consider everything the team needs from start to finish (e.g., time, money, and resources) to deliver the required outcomes. 

The estimator considers vital information about technical elements from:

Subject matter experts

Industry professionals

Project team members

They then balance those factors against the client’s needs. A project manager can better understand a client’s requirements by learning about their:

Expectations

Definition of success

Best- and worst-case scenario budgets

After gathering information, leadership combines their historical data, expert opinions, and best judgment with client input to generate a project budget and resource list. 

How to properly execute a project estimation

Project estimation is a rigorous process. You must consider crucial elements of the project plan, such as staffing, funding, and timing, to determine the project’s viability. Only then can you establish a capacity plan . 

Here’s a breakdown of the information needed to calculate an estimation:

An accurate estimate of the work’s total cost allows you to deliver the project within budget and allocate funds to cover unexpected issues, such as scope creep or risk emergence. 

A cost estimate includes two types of expenditures: direct and indirect costs. Direct costs describe any specific expense required to produce the desired income. These can include:

Risk mitigation 

Indirect costs are general expenses that support multiple projects simultaneously. They cover fees for:

Project management

Quality control

A scope statement or statement of work (SOW) establishes a project’s scope, outlining crucial information for the initiative’s success. The document contains essential info for a project estimate, including: 

Objectives and deliverables

Assumptions and potential risks

Stakeholders

Key meetings

Once you’ve defined the scope, you can estimate the project’s duration. Account for these factors to ensure a precise time estimation: 

Communication

You must also prioritize activities according to corporate deadlines, such as fiscal years or quarterly reporting periods. 

Time estimates should also consider the following factors:

Task duration: You’ll find it easier to estimate overall time requirements after breaking a project into smaller steps.

The level of detail for each project phase: Vague time estimates may come into focus as you uncover more project details.

Unexpected obstacles:   Supply delays, equipment failures, and accidents can impact the project’s timeline.

Client completion times: Clients often underestimate task duration. Build a buffer into time estimations for any work that requires their input.

Project management can use the SOW or scope statement to forecast requirements for various resources, including:

Contractors

The following factors may impact your resource management estimations :

The team: Account for vacation time, parental leave, sick days, and other reasons team members may not be available to work.

The industry: Client expectations vary across industries. For example, some sectors take longer to deliver approvals.

Published data: Project management journals may shed light on resource requirements for specific projects.

Commitments: If a project’s required resources are contracted for other jobs, determine when you’ll need them and avoid scheduling issues .

Past performance: Reference the resource plans from prior successful projects to inform future estimates.

Project risk management involves identifying, assessing, and mitigating potential threats to project delivery. Common risks include:

Scheduling risks: Falling behind or getting ahead of schedule can impact the availability of resources, such as labor, equipment, and facilities.

Technical risks: Essential tools may fail, or your team may require special training to use them. 

External risks: Market and environmental changes (e.g., supply chain disruptions or natural disasters) can impact the outcome of long-term projects.

6 successful project estimation methods

Numerous project estimation methods exist, each tailored to specific project needs and information environments. Once you’ve decided on an approach, you can employ specialized project management software to help you calculate estimates.

Here are six popular project estimate techniques you should be familiar with:

1. Top-down

The top-down estimation strategy forecasts a project’s overall duration, costs, or resource needs. Once you have the total, you can allocate assets according to project phases or deliverables. The work breakdown structure (WBS) helps you establish an accurate breakdown of tasks by deconstructing project deliverables into individual jobs and sub-tasks. 

2. Bottom-up

Bottom-up estimation works in the opposite direction, asking you to estimate the resources needed for individual tasks or phases and then calculate the total. This technique improves estimate accuracy but requires more time. 

3. Three-point estimation

Three-point estimating combined with the bottom-up method results in even greater accuracy. Identify the optimistic, pessimistic, and most likely projections. Then, average them to arrive at a final estimate. 

Three-Point Estimate = (Optimistic + Most Likely + Pessimistic ) / 3

4. Comparative or analogous estimation

Analogous estimating reviews successful projects from the past that are similar to the current project. You can apply those insights to generate cost, scope, and time forecasts. This method is best suited for routine projects.

5. Parametric estimating

The parametric model uses detailed data from past projects. Parametric estimation is often used alongside analogous estimating techniques to improve the accuracy of predictions.

Consider this simple example: If the IT department took 40 hours to update 160 work terminals, you can calculate that they need 15 minutes per terminal. If the team performs a similar update on 210 terminals, the project will take about 52.5 hours.

6. Expert judgment

An experienced project manager may know a specific project’s time and resource requirements thanks to extensive past experience. It’s best to check with multiple experts or combine this method with other estimation techniques. 

Why is project estimation important for your team?

Project estimation controls projects and sets them up for success. Inaccurate estimates lead to missed deadlines and cost overruns that threaten a project with failure.

Here are the primary benefits of accurate project estimation:

Improved risk management

A comprehensive plan mitigates risk by accounting for scope creep and unexpected obstacles. To build in these buffers, you need a solid estimate of the minimum time required to complete the project (aka the critical path). Team members can then prioritize tasks to safeguard project outcomes when challenges arise. 

Increased accountability

When you’re transparent about the time, funding, and resources available for each project phase, team members can respect those boundaries and hold each other accountable. Share your estimates within your project management software so everyone can reference them.  

Greater stakeholder and client confidence

Accurate estimations require a project plan that identifies essential tasks, requirements, and dependencies. Keep this information on hand and demonstrate how it informs your estimates to reassure project stakeholders and clients. 

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Project estimation is too complex for project managers to rely exclusively on spreadsheets and calculators. With so many factors to consider, they need project management software to do the heavy lifting and ensure accurate calculations.

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Tempo provides a comprehensive suite of tools to aid in your project estimation.

Resource planning and management

With Tempo’s Portfolio Manager , you can estimate costs, resource needs, and staffing for your project teams. This resource management platform helps you manage multiple teams simultaneously, overseeing shared resources so everyone has what they need to meet their project plan.

Project managers can also use these insights with Tempo’s Capacity Planner to make informed decisions about hiring and assigning resources. 

Resource and cost management

Tempo Timesheets and Financial Manager allow project teams to track time, costs, and progress across multiple projects. Analyze historical data to improve the accuracy of parametric estimates. 

Project roadmaps 

Tempo’s project roadmapping tool, Strategic Roadmaps , provides visibility into your initiatives by ordering the required tasks into one intuitive diagram. Visualizing the project helps your team identify the critical path and generate a bottom-up estimate of the necessary timeline and resources.

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Project cost estimation: types and techniques for project success in 2024

Table of contents

Project cost estimating is the process of predicting the total cost of the tasks, time, and resources required to deliver a project’s scope of work.

Unfortunately for project and resource managers, humans can’t see into the future 🔮 and that’s what makes cost estimation for projects a daunting task.

But even if you’re not a clairvoyant, there are several methods and tools to help you create cost estimates that will be close to the project’s actual cost. We’ll cover them below, including:

• What a project cost estimate is
• How to create one
• Methods and tools for cost estimation

Plus, we’ll also give you an example of how one of our customers figured out how to estimate costs for a new project.

What is cost estimation in project management?

Project cost estimation is the process of forecasting the financial resources required to complete a project successfully. It involves analyzing various factors such as labor, materials, equipment, overhead, and other expenses associated with the project to come up with an estimate of the total cost.

Cost estimation is a critical aspect of strategic project management as it provides stakeholders with valuable information for decision-making, budgeting, and resource allocation .

It helps ensure that projects are completed within budget constraints and enables project managers to identify potential cost overruns or risks early in the project lifecycle.

Imagine you’re a digital agency owner about to send a proposal to a client to revamp their website. Your main question is probably: How much is this going to cost us? Well, one way to figure that out is by looking back at a similar project you’ve tackled before: how long it took, who was involved, and what they charged per hour.

If you’ve been storing all this project info in a dedicated resource management tool , accessing these details should be a breeze.

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5 project cost estimation methods & techniques

You can estimate how much a given project might cost in different ways. Here are five cost estimation techniques and who they might work best for—but remember, this list is not exhaustive.

1. Analogous estimate

Analogous estimation is a top-down approach that uses historical data from similar past projects to estimate the cost of a new one.

Let’s say you want to estimate the cost of an advertising campaign for a new Netflix film: you’d look at the cost analysis of a past project that is similar in size and scope and make some adjustments based on changes in equipment, inflation rates, and resource costs.

This cost estimation technique is best for you if you have a reliable record of the cost and duration of past projects.  

2. Bottom-up estimate

Bottom-up estimating is where you estimate the cost for individual tasks or components of a project and then sum them up to get to the total project cost.

It involves creating a work breakdown structure and including overheads for contingencies .

This cost estimation technique is best for projects with a well-defined scope and list of tasks.

3. Parameter estimate

Parameter estimation is a method that makes predictions or estimates based on specific characteristics or data points. It’s like making an educated guess using known factors or measurements.

For instance, a paid ad agency estimates that reaching the target audience on a specific platform might cost $4,000 based on past campaigns and the client’s objectives. So they project that creating multiple ad variations could cost $10,000, and they sum up these estimated costs to provide the client with an overall estimate for the advertising campaign.

Parametric estimation works best when you have a lot of information from similar projects in the past.

4. Three-point estimate

A three-point estimation is a way to calculate a project’s cost based on likely, optimistic, and pessimistic cost projections.

The benefit of a three-point estimation is that it ties a project’s costs to uncertainties and risks, which allows you to plan for "worst-case" scenarios.

Let’s say you’re to find the cost of building a new website. Your estimate could look like this:

💰 Likely cost: $10k 😃 Optimistic costs: $7.5k 😟 Pessimistic costs: $15k

These three figures become a basis for building an average estimate. Simply add them together and divide by three:

10,000 + 7,500 + 15,000 = 32,500

32,500 ÷ 3 = 10,833

As a result, the average project estimate is $10,833.

Three-point estimates are best for where there’s a lot of uncertainty or variability in the tasks or projects.

5. Ballpark estimate

A ballpark estimate will give you the approximate value of a project based on the combination of similar projects you’ve done in the past and expenses unique to the particular project.

Let’s say your client needs a website built and your team has done similar projects in the past for $10k. Using the ballpark estimate, the cost might range from -25% to +50% ($7.5k - $15k).

Ballpark estimates are best used when there’s limited information available like at the start of a project.

How to create accurate cost estimates using a dedicated tool

The cost estimation process we will outline below is best suited for you if

1. You are running a professional service business, not an internal project

2. You have some idea of how much things cost based on historical data

If you don’t have any historical cost data, you can skip to the section below this one to see how to estimate costs for new projects. Note that we will be using our tool, Float, throughout this example; if you are using a different tool (or none at all) some parts of this may not be applicable, but the overall approach remains the same. Here is how you can create accurate project estimates :

1. Gather data from past projects

Start by collecting data from past projects that are similar in scope, size, and complexity to your current project. This data should include total costs, duration, resources used, and any other relevant information.

To find similar projects in Float, here’s what you would do:

• Head over to the Project tab in Float
• Toggle the project view options to “Archive” and voila, all your old projects will apply

If you don’t have any projects in Float, you can sign up for a free 14 day trial , import your project details in, and get started. You can learn how to get set up with this guide .

2. Identify variables and adjust costs

A few things (or a lot) might have changed since you worked on other similar projects. Before estimating costs for new projects, look for any changes from previous work like higher billing rates or pricier software like VFX instead of CGI.

Aside from cost, consider how durations might have to change. Check if certain phases in past projects took longer than expected and adjust for new projects accordingly.

You can easily check for variations in duration by heading to the Report page in Float and comparing the actual and scheduled time spent on tasks.

3.  Create a tentative project to calculate the estimated costs

By now, you should have a good idea of the people, duration, and billing rates you need for the new project.

To get a good idea of how much will cost, create a tentative project in Float. You can do this by simply selecting Tentative on the project menu.

Then, allocate your team’s time to the project and set your budget type and billing rates. You can use placeholders if you plan to hire freelancers.

Because the project has been marked tentative, the new allocations will not affect your team’s time schedule .

Once you are done setting up the project, head over to the project report to check for the total estimated cost.

4. Review the estimate with your team

Verify the estimate with stakeholders, experts, or team members to ensure its accuracy. Different team members might notice things that were initially overlooked. This process helps uncover any missed details or factors in the initial estimate.

A real-life cost estimate example for new projects (without past data)

One of our customers , a marketing and communications company, took on a project they had never worked on before (we’re not going to share their name to protect their privacy 😉)

Since they had not done similar projects in the past, they anticipated a learning curve and expected to spend more time than initially scoped due to several potential client revisions.

To accommodate this uncertainty, they added buffers—increasing the estimated cost by 50% and extending the project duration from 30 to 45 or 50 working days.

These measures allowed them to manage additional costs caused by a slower pace and multiple rounds of client feedback.

Use resource management software to track and control costs in real-time

When your project budget gets a thumbs up, there lies a new challenge of cost management and control. The things to pay attention to never end!

This is where a dedicated resource management tool can help you not just make estimates, but also track spending as it happens, ensuring that you always know how much money is available and when you’re running out of funds.

And, yes: you can also do this in a spreadsheet. But if you track your projects in Float, you can just click on a project and see the entire budget. Ta-da!

Depending on the budget type you choose, you can either see the budget displayed in hours or currency.

You can see how much was spent per project phase and the remaining budget.

You can also keep tabs on your team’s hours and individual rates. And if there are cost overruns , Float alerts you by showing how much over budget your project is.

If you’re ready to take control of your project costs, sign up for a free trial today .

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Some FAQs about project cost estimation

What factors influence cost estimates.

Several elements can influence cost estimates. These cost elements include:

• Scope of work
• Material costs
• Equipment costs
• Project duration
• Market conditions
• Location factors
• Inflation rates
• Contingency allowances

Who performs project cost estimation?

Cost estimating can be performed by various individuals or teams depending on the nature and size of the project. This may include project managers, cost estimators, engineers, financial analysts, and other relevant stakeholders.

How can businesses choose tools and software for estimating costs?

Choosing the right estimating software depends on several factors, including the specific needs of your organization, the complexity of your projects, your budget, and the features you require.

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Table of Contents

What are project estimation techniques, why is project estimates important, who estimates projects, the 3 major parts to project estimation, project estimation techniques, when should estimates take place, choose the right program, conclusion , 6 successful project estimation techniques in 2024.

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There are many different types of project estimation techniques used in Project Management with various streams like Engineering, IT, Construction, Agriculture, Accounting, etc. A Project manager is often challenged to align mainly six project constraints - Scope, Time, Cost, Quality, Resources, and Risk in order to accurately estimate the project . The common questions that come into the mind of a project manager at the start of the project are–

• How much work is to be estimated (scope).
• How to estimate the project (techniques).
• How much time it will require to complete the project (Schedule).
• Who will be doing the project (resources)?
• What is the budget required to deliver the project (cost)?
• Any intermediary dependencies that may delay or impact the project (Risks).

We will next learn about the major parts of the project estimation techniques.

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Project estimation techniques refer to the procedures and tools used to develop rough calculations of various aspects of any project. An excellent example of this is a project cost estimate that provides an overview of the anticipated expenses associated with the project. 

Whenever stakeholders or clients require information on any project aspect, these techniques help project managers evaluate realistic numbers essential to plan a project successfully.

Accurate estimates are critical to plan and execute a project successfully . Without precise estimates, it becomes tough to determine how long a project will take or the number of resources required. 

Project managers use these estimates to ensure the team has the right people, materials, and tools available whenever needed. These estimates also help managers set realistic goals and expectations for the team members and the stakeholders. 

Estimating a project is typically done by the project team . Although the project manager may be in charge of the database or documents used to record estimates, the whole team and subject matter experts need to participate in creating and refining the estimates. 

Engaging more knowledgeable individuals in the estimation process increases the chances of generating realistic figures. The project manager ensures the estimates are complete and updated whenever necessary.

• Effort estimation
• Cost estimation
• Resource estimate

While accurate estimates are the basis of sound project planning , there are many techniques used as project management best practices in estimation as - Analogous estimation, Parametric estimation, Delphi method, 3 Point Estimate, Expert Judgment, Published Data Estimates, Vendor Bid Analysis, Reserve Analysis, Bottom-Up Analysis, and Simulation. Usually, during the early stages of a project life cycle, the project requirements are feebly known and less information is available to estimate the project. The initial estimate is drawn merely by assumptions knowing the scope at a high level, this is known as ‘ Ball-park estimates ’, a term very often used by project managers.

We will next learn about the top project estimation techniques.

1. Top-Down Estimate

Once more detail is learned on the scope of the project, this technique is usually followed where high-level chunks at the feature or design level are estimated and are decomposed progressively into smaller chunks or work-packets as information is detailed.

2. Bottom-Up Estimate

This technique is used when the requirements are known at a discrete level where the smaller workpieces are then aggregated to estimate the entire project. This is usually used when the information is only known in smaller pieces.

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3. Analogous Estimating

This project estimation technique is used when there is a reference to a similar project executed and it is easy to correlate with other projects. Expert judgment and historical information of similar activities in a referenced project are gathered to arrive at an estimate of the project.

4. Parametric Estimate

This technique uses independent measurable variables from the project work.  For example, the cost for construction of a building is calculated based on the smallest variable as the cost to build a square feet area, the effort required to build a work packet is calculated from the variable as lines of codes in a software development project. This technique gives more accuracy in project estimation.

5. Three-point Estimating

This technique uses a mathematical approach as the weighted average of an optimistic, most likely and pessimistic estimate of the work package. This is often known as the PERT (Program Evaluation and Review Technique) .

6. What-If Analysis

This project estimation technique uses assumptions based on varying factors like scope, time, cost, resources, etc., to evaluate the possible outcomes of the project by doing impact analysis. In a usual scenario, the project estimate is done by conducting estimation workshops with the stakeholders of the project, senior team members who could give valuable inputs to the estimation exercise. The high-level scope is broken down into smaller work packages , components, and activities, each work package is estimated by effort and resources needed to complete the work package. The project may be detailed into the smallest chunk that can be measured.

The following activities are done during the workshop:

• Break down the scope into smallest work package, components or activities ( WBS )
• Sequence the activities in the order in which they will be performed
• Identify the effort required to complete each activity
• Identify the resource estimate to complete each task or activity
• Identify the dependencies to complete each activity
• Identify the possible risks and assumptions
• Define the resource and cost estimate to the completion of each activity, component and work package

In a Waterfall project that follows a traditional approach, the planning phase occurs after project initiation. During this phase, estimates are made and recorded for different aspects such as scope, cost, time, resources, quality, and risks. These estimates may be subject to adjustments throughout the project as and when new information arises. For example, if new risks are identified, project risk estimates must be updated accordingly.

Agile projects, on the other hand, adopt a more iterative planning approach. Such projects are usually divided into sprints or iterations in most Agile frameworks. During the initial stage, estimates are created when compiling the overall project backlog - a list of features and requirements. During each sprint, estimates are updated either in the sprint retrospective or the sprint planning session for each new sprint.

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Project estimation techniques are essential to accurately estimate several project aspects such as cost, time, scope, and more. An accurate estimate helps project managers plan and execute projects effectively while ensuring the right resources are available when necessary. 

Suppose you want to learn more about the different types of project estimation techniques or gain an in-depth understanding of project management. In that case, a PMP® Certification Training course can help you learn, get certified, and apply these estimation techniques effectively. The course highlights the role of project managers while focusing on new technologies, emerging trends, and core competencies that a project manager should possess. 

The above exercise gives an exact estimate of the project and the outcome of the workshop may be a project plan and a project schedule with effort, resource, and cost estimates for pmp professionals.

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An In-Depth Guide to Cost Estimation Techniques in Construction Projects

By Diana Ramos | November 9, 2020 (updated November 8, 2023)

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Accurate construction cost estimates are crucial to successful builds. In this article, you’ll find the top approaches to construction estimating, including templates, and expert tips on selecting a method and improving estimates.

On this page, you’ll find the following: a chart detailing construction cost estimates by levels of accuracy , the costs to include in a construction cost estimate , construction cost estimating methods that rely on judgment , expert tips on how to improve construction cost estimating , and the ways in which technology changes construction cost estimating . 

Why Construction Cost Estimates Are Important

A construction cost estimate is a projection of how much money a new structure will cost to build. This estimate plays a vital role in the success of a construction project. 

“Providing accurate and detailed construction cost estimates early in the planning and design process allows you to create a roadmap for a successful project,” explains Marcene Taylor, President of construction estimating firm Marcene Taylor Inc. and former President of the American Society of Professional Estimators, an organization that represents construction estimators. 

In the field of building construction management, owners use different types of estimates for different purposes. For example, you might use one type of estimate to evaluate whether a project aligns with your budget and use another type of estimate to assess how much a building costs to operate once you complete it. Owners also compare estimates from contractors in order to pick a winning bid. 

Architects and engineers need to ascertain whether a building is appropriate (given its intended purpose) and safe (given the estimate). Contractors look to estimates in order to choose among subcontractor bids and determine whether they can make a profit on construction. 

Construction cost estimating requires a great deal of skill and knowledge. Numerous firms dedicate themselves specifically to the estimating function. Some full-time estimators also work for construction, real estate development, architecture, and engineering companies.

Both owners and contractors need reliable estimates because these cost models serve as the foundation for a smoothly run, financially viable project. Here are the other major advantages of making solid construction cost estimates:

• Improves Plans: By reviewing the plans and specifications that produce estimates, you can find errors and omissions before you begin building. In this way, you can also identify gaps in scope or overlap among trade subcontractors. 
• Saves Money: The estimating process can highlight opportunities for value engineering, which refers to the process of making changes to the design, material, or construction method to reduce costs without sacrificing usability. 
• Allows You to Make Better Bid Comparisons: Owners who have construction cost estimates are able to evaluate contractor bids with more insight. These estimates allow owners to calculate how much of a profit margin a contractor is incorporating into their bid. Once you have the ability to figure out profit margins, then you can determine which bids are fair and realistic.
• Reduces Risk: When owners are able to plan for the cost and timing of construction, they are able to optimize the financing of a building and, thus, reduce the risk to their overall business. And when your projected completion dates and costs are more dependable, you can manage your real estate more efficiently. For example, a company with an accurate construction estimate can schedule the smooth relocation of employees into the new building. With a solid estimate, the company knows whether to sell or give up leases on the old property, so it does not have to carry unneeded space. With this knowledge, the company can also determine when to start hiring staff and acquiring inventory for a new store location without increasing costs prematurely. Using accurate estimates, contractors can reduce the risk of underbidding or making unrealistic commitments that would otherwise require overtime.
• Cuts Down on Change Orders: With a robust cost estimate, your project brings fewer surprises, requests for information (RFI), and change orders. This way, you increase the likelihood of staying on time and on budget. (For more on RFIs, see “ How to Write and Respond to Construction RFIs Effectively .” For details on change orders, including templates, see “ The Complete Collection of Free Change Order Forms and Templates .”)

What Costs Are Included in a Construction Cost Estimate?

Construction costs include all the expenses you generate when transforming a piece of land into a finished building ready for occupancy. These costs include everything from building permits to labor, materials, equipment, and professional fees. 

Construction cost estimates do not include the cost of acquiring a site or furnishing a building. An owner includes those amounts in their project cost estimate and asset valuation. 

Following are some of the main expense categories in construction cost estimating:

• Contingencies and Variances: Builders allocate reserves to cover unexpected conditions that can arise or to cover cost increases that can result from change orders, delays, or inclement weather.
• Equipment: The (rental, leasing, or amortizing) cost of machines you need for construction, such as earth movers and cranes 
• Indirect Costs: Permit and inspection fees, administrative expenses, legal bills, technology, overhead, insurance, security, and utilities
• Labor: Wages and related costs (such as benefits, if applicable) factored by the number of workers and the necessary hours of work, including overtime
• Materials: Supplies ranging from screws and nails to cement, wood, and rebar
• Professional Fees: Architecture, design, and engineering costs
• Quality: The quality of your building affects your cost. Top-of-the-line fixtures, superior amenities, an aesthetically impressive design, a high-rise structure, and striking architectural details are more expensive. The construction industry grades commercial buildings as A, B, or C, designating them to be of high, average, or below-average quality, respectively.
• Other: Expenses such as environmental remediation, demolition, or disposal or government-mandated amenities such as parks and public art work

While these costs sound straightforward, construction estimators are sometimes required to give general estimates for elements that architects have not yet designed.

Jared Malapit, certified estimating professional and Principal at Precision Estimating Services explains, “The most difficult costs to estimate are the ones that do not appear on a plan or that the owner does not communicate during the early stages of design. In many cases, the owner’s only chance to communicate with potential contractors prior to construction is through the RFP (request for proposal) documents and plan sets. Errors and omissions in plans and specifications mean poor communication, which ultimately leads to delays and increased costs.”

In addition, you might encounter difficulties estimating some work scopes, such as framing, because the means and methods vary greatly among contractors, Malapit says.

Where Do Construction Estimators Get Cost Information?

To come up with forecasts for project costs in each of the expense categories above, construction estimators draw on different kinds of information, such as historical data and the opinions of technical experts. Following are the primary sources for construction cost information:

• Historical Data: Many cost estimation methods in construction rely on historical data, such as the cost per square foot to build past structures, the average labor costs per hour for trade specialties (such as plumbers or electricians), and the units of work, such as the cost per pile cast. The data can come from internal sources, such as a company’s own projects, or external sources, such as industry references. To learn more, consult “ Construction Cost Estimating: The Basics and Beyond .” 
• Cost Research: You can access the most current data by gathering contemporaneous cost checks. By amassing this kind of data, you increase accuracy, but the process can prove to be highly labor intensive. Imagine contacting suppliers to get a price quote for each individual input — i.e., all the materials, labor, and equipment you’ll need to build a big structure. Fortunately, books including Walker's Building Estimator's Reference Book and industry databases, such as RSMeans, perform this research by frequently sampling rates in hundreds of locations for labor, materials, equipment, and contractor overhead. These books and industry databases also supply data regarding profit margins.  Another way to find current costs is to use cost indexes, which reflect trends in prices for various construction inputs, as well as productivity and inflation. With this method, you factor construction industry reports and government data together. The Turner Building Index is one private gauge among many, and the Engineering News-Record , U.S. Census Bureau , and Federal Reserve Bank also produce price index information. 
• Expert Judgment: Experts in construction have a wealth of knowledge and can be a source of highly accurate information. For example, a master HVAC contractor has the expertise and experience to look at a building plan and estimate costs within a range. By repeating this process with each substructure or subcontractor, you can compile an overall estimate. For even more robust estimates, you can collect multiple estimates for each element of a job and average the numbers. Please see below for the types of construction cost estimates that rely on expert judgment.

If none of the above sources has adjusted their data, your estimating team should revise its numbers to reflect factors such as inflation, regional variances, or site conditions.

Cost Estimation Techniques in Construction Projects

Construction cost estimation techniques differ in their methodology, purpose, and degree of accuracy, making the discipline a complex one. Moreover, the nomenclature concerning the field’s techniques is vast and can cause confusion. In many cases, you’ll find multiple synonyms for one concept. 

Gray areas also exist between different types of construction estimates, and estimates can fall into more than one category. Furthermore, most projects go through multiple rounds of estimating, with each round requiring a different estimate form and purpose. In all, you’ll find at least 45 different types, names, and methods for construction estimates.

The most important classification regarding construction cost estimates is the degree of accuracy. This level of accuracy (as well as the effort you require to achieve it) determines how and when you use a particular cost estimation technique in construction projects. 

Another important division regarding estimation techniques is the figure with which you begin. Perhaps you choose to make a top-down estimate — i.e., start with a big-picture estimate and then add more details as you go along. Or perhaps you choose to make a bottom-up estimate — i.e., start with individual costs and then add them up.

Construction Cost Estimates by Level of Accuracy

The American Society of Professional Estimators (ASPE), the body that represents construction estimators, classifies estimates according to a five-level system. The least accurate and reliable label is Level 1, and the most accurate and reliable is Level 5. Confusingly, some authorities, such as the Association for the Advancement of Cost Engineering (AACE) and the U.S. Department of Energy (using its construction estimating directive) , reverse the numbering, designating Level 1 as the most precise estimate. 

Because you need a well-defined project plan in order to generate a pinpoint accurate cost estimate, it’s standard practice to create multiple estimates during the pre-design and design phases. These estimates become more accurate as your project’s level of definition increases.  

If you’re an estimator working for an owner or a design team throughout the entire design process, you are continuously researching cost options and estimating costs as design work progresses and your project gains definition. The estimate that you work on (in preparation for your contractor to submit their bid) acts as the foundation for the construction work plan.

(Construction cost estimating has a lot in common with cost estimating for other types of projects. You can read more about key concepts and tips in “The Ultimate Guide to Project Cost Estimating .”) 

In reality, this successive refinement of estimates occurs only when you’re working on exceptionally elaborate houses, multi-family housing, or commercial buildings. The significant effort that this kind of refinement requires only makes sense when a lot of money is at stake. As the size and complexity of a structure increase, so do the time and effort you invest in order to produce a detailed estimate. 

On the other hand, you can easily generate a highly accurate estimate for a minor project. For example, in order to build a fence, you only need to do the following: make a list of all the materials you require (e.g., fence posts, post hole digger, cement, fence panels); keep a tally of all corresponding costs; check the prices at a hardware store; and add up the amounts to calculate a total. 

When considering the complex five-level system, however, each level serves a variety of purposes, depending on how much certainty is needed about the project’s costs. Making a screening decision requires a less accurate estimate than evaluating a contractor bid does. 

Here are details of each level under the ASPE system: 

• Level 2: Construction Feasibility Estimate: At this level, an estimate helps you determine feasibility and gives owners a basis for deciding whether to proceed with or reject a project.  Definition ranges from 5 to 20 percent and accuracy between 10 and 25 percent. Fowler says this document typically errs on the side of slightly overestimating anticipated costs and takes 2 to 24 hours to produce. According to the AACE, this estimate takes two to four times the effort of a Level 1 estimate. This is sometimes called a conceptual, screening, factored, pre-design, intermediate, budget, or schematic design estimate . The most common use or purpose of this estimate is for a go or no-go decision.
• Level 3: Preliminary Construction Estimate: This estimate is based on a more defined project scope, and it gives owners a basis for choosing among design features and configurations, so they can select the best option. You might also present this estimate to lenders to obtain financing.  Project definition varies between 10 and 40 percent, and accuracy is within 10 to 15 percent. Fowler says this estimate uses a coded work breakdown structure (typically a numbered system for project components in a hierarchical order) along with quantity takeoffs (projections of material amounts) and the number of labor hours needed to achieve the desired outcome.  This sort of estimate takes 16 to 100 hours to create, according to Fowler. The effort involved is 3 to 10 times a Level 1 estimate, the AACE advises. This is also called a design development, budget, scope, semi-detailed, preliminary control, authorization, target , and basic engineering phase estimate .  The most common use or purpose of this estimate is for design decisions and financing.
• Level 4: Substantive Construction Estimate: This is a detailed estimate with a complete work breakdown and quantity takeoff based on near-final plans, specifications, and milestones. Quantities of materials and labor for each part of the project are well defined, along with their estimated costs. Those are then totaled or “rolled up,” and profit margin, contingencies, and reserves are added. The project is more than 90 percent defined, and accuracy is 5 to 10 percent. Fowler says time to produce this estimate ranges from 50 to 200 hours, and the AACE puts preparation effort at 4 to 20 times a Level 1 estimate. Contractors use substantive estimates to bid on projects, and owners use them to solicit and assess bids, as well as evaluate whether the project is progressing within budget. Other names for this estimate are construction document, detailed control, execution phase, master control, engineer, government, bid, tender , and change order estimate . The most common use or purpose of this estimate is for budget control, construction contract, and performance evaluation.
• Level 5: Definitive Construction Estimate: This estimate is prepared using costs agreed on in the construction contract. In a sense, it is no longer an estimate; the final costs are known, though they can vary due to change orders or a contractor triggering penalty clauses. A Level 5 estimate represents the maximum accuracy (0 to 2 percent variance) and virtually 100 percent project definition. This estimate is often completed after work begins. Fowler describes a Level 5 estimate as a final pass on all items for clarity and ease of making references. The AACE says that due to the degree of effort, definitive estimates are sometimes created only for certain important parts of a structure. If so, these estimates are used to spot check a contractor’s bid or to investigate disputes. The organization says a definitive estimate requires 5 to 100 times the effort of developing a Level 1 estimate. These are also called detailed, full detail, tender, final, control, trial, firm price, as-bid, master control, execution phase , and as-sold estimates . The most common use or purpose of this estimate is for performance evaluation, project control, and dispute investigation.

Example of How Construction Firms Use Accuracy-Based Estimates

Let’s look at an example of how these accuracy-based estimates work in practice. 

A food manufacturer completes a five-year plan in which it decides that baked goods are poised for rapid sales growth. After examining its bakery facilities, the company concludes that if growth meets its projections, its Midwest plant in Wisconsin will run out of capacity to meet demand in three years.

The firm anticipates that, at that point, it will put a new plant in service to serve the Lower Midwest and have its current plant supply the Upper Midwest. The real estate team scouts locations in southwestern Missouri and southeastern Kansas. 

Construction cost estimators put together order-of-magnitude cost estimates for building the facility at two sites. Based on the estimates, the company buys the preferred site in Missouri. (In reality, other factors come into play, such as proximity to customers and distribution networks, but we will leave them aside for this example.)

About 18 months to two years before the old plant is due to reach capacity, the company develops a feasibility estimate to see if building a new plant still makes sense. When they confirm the need, the project team spends several months drawing up design options for the plant and puts together preliminary cost estimates for each. Executives evaluate the estimates and merits for each design, then select a final plant design. 

The project team then has an engineering firm execute detailed design work, so they can tally material quantities. Next, cost estimators make a substantive estimate, which the team uses to put the project out to bid with contractors.

Builders break ground on the new factory about a year before targeted completion, and the project team compiles a definitive cost estimate. During construction, the owner and contractor assess progress based on the contract timeline and definitive cost estimate.

Simplified System of Construction Estimate Classification by Accuracy and Phase

You can also use a simpler system of classifying estimates by accuracy and project phase with just three categories: design, bid, and control estimates. In those categories, you’ll find the same specific estimate types as in the five-level system, such as a preliminary estimate. 

• Design Estimates: These estimates, prepared during a project’s pre-design and design phases, generally start with very little information about the structure. In the pre-design phase, you begin with an order-of-magnitude estimate or screening estimate to evaluate if the project is viable. For small or straightforward projects, a simple template, such as the simple construction estimate or contractor estimate templates in “ Free Estimate Templates ,” can help you determine an initial assessment of costs involved in a project. Next comes the preliminary, feasibility, or conceptual estimate , which you base on the schematic design. Then the project progresses to the detailed estimate , or definitive estimate , which you base on a developed design, meaning all elements of the building have been defined. The last of the design estimates is the engineer’s estimate or quantity estimate , which includes quantities for all materials, drawing on the construction documents that specify each piece of material and construction method. From beginning to end of the pre-design and design phases, estimate accuracy increases from Level 1 to Level 4 in the five levels discussed above.
• Bid Estimates: Contractors prepare bid estimate s in efforts to win the job of constructing the project. Contractors will draw from a number of data points to prepare their estimates, including direct costs, supervision costs, subcontractor quotes, and quantity takeoffs. Accuracy here equates to Level 4 (substantive estimate) on the earlier scale. 
• Control Estimates: These are the most accurate estimates and include tender estimates, contract estimates, and project control estimates. These align with Level 5 (definitive estimate). Prepared after an owner signs a contractor agreement and before construction begins, the control estimate functions as a baseline by which you assess and control actual construction costs. The control estimate also allows contractors to plan ahead to meet upcoming costs and determine the project’s cost to completion. Another common technique in major construction project control is earned value analysis . This technique compares work completed to total planned work on various benchmarks, including schedule and cost. The amount completed or spent is calculated as a percentage of the planned amount to determine the builder’s earned value and to assess if the progress is on time and on budget. You can learn more about this technique and find earned value management templates in “ The Champion’s Guide to Earned Value Management .”
• Performance vs. Forecast Estimates: Earned value analysis is a performance-based estimating technique, also known as ETC or estimate to completion . Noting how much work has been completed, you can estimate how much more time and money the rest of construction requires. A significant amount of work, about 20 percent of the project, needs to occur before an ETC is reliable. But this technique can spotlight problems early and has an advantage of being objective. Forecast-to-complete estimates are more subjective and predict how much time and money the remainder of the project will cost. This incorporates a construction manager’s judgment about how the work will progress, such as new challenges arising. Perhaps she knows that the wrong materials were delivered, so she adds time to the forecast for getting the right materials substituted and overtime costs for workers to install the late materials over a weekend. Those factors would not be reflected in an estimate based simply on the percentage of work completed.
• Current Working Estimate: This estimate also serves a budget control objective and evolves over the course of the project, reflecting the latest cost and design information. A current working estimate also updates contingency costs and hardens numbers for any areas of uncertainty as early as possible.

Preliminary Estimating Method in Construction, Plus Intermediate and Final Estimates

Outside the ASPE’s five-level system, the term preliminary estimate applies to cost forecasts produced in the planning and feasibility stages of a project and includes order-of-magnitude, feasibility, and budget level estimates. 

The idea that particular degrees of accuracy and estimation methods should be paired with certain phases of a project works both ways. Timing can determine an estimator’s choice of technique or level of accuracy. 

Preliminary, intermediate, and final estimates approximately equate to design, bid, and control estimates. 

Intermediate Construction Cost Estimates: Project teams produce an intermediate estimate after design work is finished and costs are generally known. Substantive estimates, discussed above, break down the costs according to project segment. Contingencies and profit margins are added to arrive at a total cost estimate.

Final Construction Cost Estimates: Final estimates are developed when all costs are identified, construction has been put out to tender, and bids are received. This estimate sets the contract value, and definitive estimates mentioned above are used.

Different Types of Construction Cost Estimates: Analogous and Parametric

Regarding accuracy, analogous and parametric are two of the major estimating models for forecasting construction costs. Analogous estimates are less accurate but faster and easier to produce. Parametric estimates are more accurate but take more time and effort to compile. 

The choice between analogous and parametric estimates depends on the type of cost information you can access, how important accuracy is, and how much work you can do. Often, a combination of historical and current data, along with expert judgment, is used. See the parametric cost estimating templates below to forecast costs for materials and labor, as well as total costs.

Analogous Construction Cost Estimate: If you only know the cost of similar buildings, an analogous estimate is your best best in construction management. This technique works by taking past project costs and analogizing to your current project. 

This kind of estimate is the fastest and easiest option but also the least accurate because no two buildings are exactly the same. Making comparisons is tricky.

Typically you employ analogous estimates early in the project when you have little information about your own structure. 

An analogous estimate is also called top-down because it starts with a total cost. To refine a top-down estimate, you break this total into estimates for the major building components, then further into materials and other inputs.

Taking the example of our food company above with plans to build a new bakery, suppose that the firm built the Wisconsin plant for $12 million in nine months. Thus, it estimates the new plant will also cost $12 million and take nine months.

But things rarely work out this neatly in reality, and the difficulties of analogous estimates become evident. Remember that the old plant’s cost data will be five years old, and inflation is not factored in. You can consult references and make statistical adjustments. But there are limits to the level of precision you can achieve. 

For example, suppose a technological advance reduces the power needs of the ovens in the new plant, but wiring for the new controls is more sophisticated. Using the analogous technique, it might be difficult to know how to adjust electrical costs from the old project to reflect these changes. 

As the number of variables between the benchmark project and the new construction — such as differences in region, season, labor availability, and more — increases, so does the likelihood of inaccuracy in the analogous construction cost estimate. 

Parametric Construction Cost Estimating: Using parametric estimating, you multiply a unit cost by the number of units in the construction project. For example, you can take the cost per square foot of similar structures and multiply that by the number of square feet in your current project.

Or you can look at functional units such as hospital construction costs on a per-bed basis, school construction costs on a per-student basis, and highway construction costs on a per-mile basis.

Parametric estimates are another form of top-down estimating. You can use historical data or current cost information with parametric estimates; expert judgment also comes into play. A parametric method called unit cost estimating works with the unit cost of project components and requires working drawings and specifications.

Download Parametric Cost Estimating Template

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Early in the estimating process, this might be based on assemblies , or combinations of materials that perform a specific function, such as the foundation or windows. The number of assemblies is multiplied by the unit cost. Buildings are divided into six major systems under a framework called Uniformat II, sanctioned by the ASTM standards organization; these components can be used in assembly construction cost estimates . You can expect the accuracy of these estimates to be within about 10 percent.

The major elements of buildings in the Uniformat system are the following: substructure, shell, interiors, services, equipment and furnishings, and special construction and demolition. Another system of organizing construction work based on materials called MasterFormat is also available. 

Unit-cost estimating works well when there is a linear or direct one-to-one relationship between cost and units. But adjustments are often needed to reflect different site conditions, variations in quality, shortages of labor or materials, and more.

“Different trades have different techniques for estimating a job. For example, roofing is determined by the square foot, plumbing by the fixture count, and electrical by the opening,” says Bill Samuel, an Illinois real estate developer at Blue Ladder Development and general contractor.

Another approach to parametric estimating is to use area or volume to extrapolate construction costs. You can use the following estimates when you know the size and use of the proposed structure but little other information. An accuracy range of plus or minus 15 percent is common for these estimates.

• Plinth Estimate: The plinth estimate looks at the horizontal areas in the interior of a building and applies a cost factor per square foot, estimating each story separately. 
• Cubic Foot Estimate: A cubic foot estimate takes into account the building’s volume. Multiply the plinth or horizontal area by the ceiling height of each story to arrive at a volume or cubic foot estimate. Soil excavation and pouring cement are also often measured in cubic feet.
• Square Foot Estimate: A square foot estimate typically considers only the finished floor area of a building and applies a historical unit cost to the number of square feet. You can calculate the areas of other unfinished and semi-finished parts of the building and use a lower cost factor to arrive at a total estimate.

Two parametric estimates that adjust for economies of scale in building plants are factor estimates based on capacity cost and equipment cost in process plants. 

• Capacity Cost Factoring: This method, also called scale of operations or six-tenths factor , is used early in the project lifecycle for studying feasibility of plants and factories where capacity and cost do not vary one to one. (For example, economies of scale exist at larger capacities.) A factor or multiplier is applied to historical cost information for similar plants of different sizes to reflect the nonlinear relationship. The multiplier 0.6 is often used (thus, the name six-tenths factor ). With this multiplier, doubling capacity of the factory raises costs by 50 percent, and tripling capacity increases construction costs by 100 percent.
• Equipment Cost Factoring: Similar to the capacity-driven estimate, the equipment cost factor estimate multiplies cost of equipment installed in a plant by a factor derived from the total installed cost of equipment in historical projects.

Examples of Parametric Construction Cost Estimates

In a simple parametric example, you want to estimate how much a new 135,000-square-foot luxury hotel in New York City will cost to build. You learn that recent high-end hotels ran an average $595 per square foot. By multiplying that unit cost by the number of units (in this case, square feet), you calculate that your project will cost $80.3 million to construct. 

$595 x 135,000 square feet = $80.3 million

The basic parametric formula is the following: 

Unit Cost x Number of Units = Cost Estimate

But the value of a parametric estimate becomes more evident when you get into detailed unit costs. For example, you could break your project into all the components or assemblies such as site work, structure, plumbing, roofing, and more. With a unit cost for each segment multiplied by the number of relevant units (square footage, length of pipe laid, labor hours, etc.), you would arrive at a more refined estimate.

In our bakery example, the company has decided that its new Missouri plant will be twice as big as its Wisconsin facility, which covered 60,000 square feet and cost $12 million (or $200 per square foot). 

With this information, we can easily conclude the new building will cost twice as much. 

Cost per square foot x square footage = Cost OR $200 x 120,000 square feet = $24 million 

But for the old bakery, more of the construction budget was spent on the parts of the plant where ingredients were weighed, mixed, and baked, whereas the storage and loading bays cost less to build. 

The parametric cost estimation can account for these variables by using unit data on the different plant areas. Suppose the storage area of the old plant consisted of 20,000 square feet at a cost of $100 per square foot (or $2 million total), while the food preparation area totalled 40,000 square feet at a cost of $250 per square foot (or $10 million).  

(Food assembly cost per square foot x square feet) + (Storage area cost per square foot x square feet) = Cost  Or ($100 per square foot x 40,000 square feet) + ($250 per square foot x 80,000 square feet) = $24 million

These different unit costs become more important when expert judgment is factored in. Bakery construction experts know that since the old bakery was built, the firm has moved to just-in-time supply lines, thus needing less storage space. This enables the company to build more baking capacity in the same footprint and increase productivity.

The company’s new plant will have a food assembly area that is 1.25 times larger than the old plant’s with a storage area that is only half as large. Now the calculation can reflect a more accurate number of units for the smaller storage and loading area, as well as the larger baking area: 

($100 per square foot x 20,000 square feet) + ($250 per square foot x 100,000 square feet) = $27 million

That’s $3 million more than the earlier estimate. By fine-tuning the unit amounts in this parametric estimate, the food company can avoid being surprised by the cost increase. 

To further refine the estimate, the project team would factor the total by construction cost index information, adjusting for inflation/deflation and region.

Malapit says that parametric estimating is best used in pre-design work, the earliest design stages, and challenges or validations for a more detailed estimate.

Bottom-Up Construction Cost Estimating

Bottom-up, also known as stick, analytical, or deterministic estimating, is a highly accurate cost estimation technique that calculates total cost by adding up the cost of each input on a construction project. 

Rather than calculating the cost per square foot of a bakery line, the bottom-up or stick estimate is granular and prices out the amount of concrete, steel, fasteners, wiring, labor, etc., in every aspect of the project. By multiplying all those units by cost reference amounts and adding them up, the team produces the estimate.

This method uses the bill of quantities, quantity takeoff, or material takeoff, a document that a quantity surveyor produces listing amounts for all the materials, parts, equipment, and labor required to complete each component of the structure as drawn on the plans.

Unless you use software, bottom-up estimates are time consuming because of the large number of data points involved.  

“It is easy to take macro cost data such as cost per square foot of building (either from databases or past experiences) and apply those numbers to come up with a starting point for a project budget,” notes Malapit in comparing top-down and bottom-up estimating. “However, that approach doesn’t account for site-specific or schedule constraints, which can have dramatic cost impacts.

“We take a bottom-up approach to creating our cost estimates. This allows us to think through the project in detail and pass that understanding along to our clients – allowing them to not only understand how much their projects should cost, but also why and what opportunities may be available for value engineering the design.”

Analogous, parametric, and bottom-up estimates have their strengths and weaknesses, which you can see summarized below.

Construction Cost Estimating Methods That Rely on Judgment

Many cost estimating projects rely on the expertise of experienced builders and technical specialists to improve accuracy. But some estimating techniques depend on expert judgment even more heavily.

• Delphi Method: Named for the ancient oracle at Delphi, this method arose in the 20th century as a form of crowdsourcing, the idea that a group of knowledgeable people can arrive at a better solution than an individual working alone. In this method, a group of experts submits its construction estimates to an organizer, who shares the responses anonymously, along with any supporting reasoning or calculations. The experts then revise their own estimates based on reviewing that material. The process continues through a predetermined number of rounds or until everyone reaches consensus. A twist on this method is called the wideband Delphi or estimate-talk-estimate (ETE) method, which adds a group meeting before the subsequent round of estimating when participants discuss areas where their forecasts varied the most.

• Empirical Construction Cost Estimate: A specialist estimator arrives at this cost estimate. Its accuracy depends on data available and the expertise and experience of the person compiling the estimate. This estimate is described as empirical because the estimator’s past observations in the field shape the outcome. Also in construction cost estimation, you’ll find empirical cost inferences, in which statistical analysis relates construction costs to a predictive model.

Other Methods and Types of Construction Cost Estimations

Several other construction estimate types in use differ due to purpose, technology, or approach.

• Resource-Based Estimate: You can apply resource-based cost estimating to construction inputs that can be measured in time, such as labor and equipment. To start this estimate, identify the timing for these resources in your calendar and schedules. With this info, you calculate how much time a resource will be used. Then you can arrive at total hours (and related cost) for various parts of the project and the project as a whole. While this can be very time-consuming to create, these estimates are more accurate than the average time reference figures you might call upon. Resource-based estimating is most common in projects that have interdependent, time-sensitive resources, such as a ship ferrying supplies to build an offshore oil drilling platform. When a ship arrives late, it throws off the timing of other activities. Resource-based estimates contrast with activity-based construction estimates, which include bottom-up estimates. In those, you estimate the labor or equipment needs based on historical averages or your own past projects. 
• Model Estimate: The key differentiator of a model construction cost estimate is that it bases the quantity takeoff on a 3D computer-drawn model, rather than 2D plans and drawings. The model helps estimators better visualize the building and improves accuracy. The models have become possible thanks to the rise of building information modeling (BIM), which uses digital tools to make 3D representations of buildings. In a technique called model extraction, estimators create a quantity takeoff from the drawing.
• Allocation of Joint Costs Estimate: This estimate allocates costs that are difficult to assign to individual project elements by using different accounting formulas. For example, you can prorate field supervision proportionally to tasks based on their share of the total basic costs. 
• Supplementary Estimate: A supplementary estimate is prepared in response to a change in scope — meaning design or structural elements not covered in the original construction documents — and reflects detailed costs for labor, materials, and other inputs for the added scope along with an updated total. This differs from a revised estimate in that the changes are out of scope.
• Revised Estimate: The revised construction cost estimate is an update to the original estimate required because of change orders, cost overruns, or savings within scope.  
• Independent Construction Cost Estimate: Independent third parties not affiliated with builders or owners prepare these estimates. Construction estimating firms and independent estimators perform this work. Some government-funded construction projects require independent cost estimates that are used to crosscheck estimates presented by parties to the project. 
• Bilateral Construction Estimate: This is also called a two-party estimate and comes into play when two parties, typically in government construction projects, have mutual interest or responsibility in the total cost of the project. The parties, which may be government agencies or different contractors, work together on the bilateral estimate. A bilateral modification is a contract change that both contractor and owner agree to as a result of a change order. 
• Annual Repair Cost Estimate: This estimate looks at how much annual upkeep, repairs, and maintenance for a building will cost. In large construction projects, owners might want to know these costs so they can decide if a building will be efficient to operate in the long term. If not, they might pursue design or material changes. More typically, architects and engineers build operating cost control into their plans, so a maintenance cost estimate is more the domain of an owner’s facilities management team. 
• Production Function Estimate: Production function estimates use statistical analysis to determine the maximum output that can be derived from a combination of inputs such as money and labor. Production function is rarely used for forecasting the cost of building a specific structure. These estimates are largely used by researchers and economists for big-picture purposes — for example, to explore tradeoffs in time and resources, track housing market dynamics, and gauge the economic contribution of the sector.

Expert Tips on How to Improve Construction Cost Estimating

Mistakes, inaccuracies, and lack of clarity are some of the most common weaknesses in construction cost estimates, and experienced pros have advice on how to combat them.

• Standardize the Process: “Having a consistent approach to compiling estimates helps to eliminate common mistakes, improves communication within the teams, and simplifies project management as well as quality control procedures,” recommends Malapit. 

• Don’t Stay Behind a Desk: A common mistake is preparing an estimate without touring the site, says Andrew Wilson, a construction cost estimator for a residential contractor in Madison, Wisconsin, who also runs a blog for contractors . Without a site visit, you could miss issues like poor access that complicates logistics and increases cost. 
• Factor in Project-Specific Criteria: In the design phase, too many estimates rely solely on historical data, several estimators said. That overlooks site-specific or schedule constraints that can have a big impact on cost. “In estimates during the planning and design process, I believe most mistakes are made by relying on historical data only without looking at the specific needs, wants, and constraints of the current project,” Taylor contends.
• Double-Check Everything: “Mathematical errors are hard to catch in detailed spreadsheets, and other common mistakes are missing items or specifications, and areas of overlap between trades. Along with our standard estimating procedures, our estimating models have rigorous built-in checks to ensure that nothing slips through the cracks,” notes Malapit.
• Describe Scope Clearly in Estimates and Bids: “The greater the generality, the less precise the communication of scope. That usually causes problems once the estimate goes to contract,” warns Shank. “If we are crystal clear on scope, both inclusions and exclusions, there is now room for negotiations, value engineering, a distinct level of adequacy from competing bids, and can even assist the customer in understanding their own design.”
• Pay Close Attention to Subcontractor Bid Estimates: “When it comes to bidding, mistakes are made in developing the subcontractor scopes of work where pieces of work may either be missed or doubled up,” Taylor says. 

In a study published in the Journal of Construction Engineering and Management , researchers Li Liu and Kai Zhu in Australia looked at how construction estimates could be improved at each phase by influencing factors within the team’s control, such as clarity of owner requirements, historical data quality, team experience, and team alignment. They sought to develop a framework that identified the critical factors at each phase to ensure effective estimation.

The study found that in the conceptual project stage, the most important factors were project information (such as scope definition), cost information (having historical data for similar jobs), and team experience (in the local market and with similar projects and contract types).

In the design stage, that shifts to estimation design (structure and methodology) and process, as well as project information and cost information. At the tendering stage, the focus falls on expected accuracy level, use of benchmarks, and team alignment (effective communication, team integration, and level of project manager involvement), along with estimation design and process. At the preconstruction phase, the critical factors are review of estimate, estimation design, team alignment, and benchmarking.

Construction Estimates for Government Projects and an Estimate Checklist

The process of performing construction estimates for government projects is subject to highly rigorous procedures and contracting rules. These procedures and rules, in turn, impact your estimates.

The U.S. federal government requires all contracts with a value of more than $100,000 to submit to an independent government estimate (IGE). Developed and overseen by the Department of the Interior (DOI), IGEs calculate estimates without input from contractors. The DOI uses these estimates as a basis for setting aside funding and assessing bids. 

The General Services Administration, the acquisition arm of the U.S. government, has a 92-page manual for construction estimates . Each project phase has matching estimate requirements. 

The Federal Highway Administration, which funds many road and transit construction projects, suggests checking the following points as part of estimate quality control. 

• Are estimate costs adjusted to reflect the year in which each element of the project occurs? (A multiyear project estimate needs to account for cost increases during the course of the project.)
• Were risk-based assessments of unknown and all uncertain costs performed?
• Is the estimate well documented?
• Has the estimate been independently validated?
• Is the estimate consistent with project scope?
• Does the estimate include all initial preliminary engineering costs and final design costs?
• Does the estimate include all right-of-way and administrative costs?
• Does the estimate include all third-party costs?
• Does the estimate include all construction costs?
• Does the estimate include construction contingencies?
• Does the estimate include construction administration costs?
• Does the estimate include public outreach costs?
• Does the estimate include a management reserve?
• For planning or conceptual estimates, was consideration given to expressing the estimate as a range?
• For projects under design, do estimates include a design contingency at each stage of design?

How Technology Changes Construction Cost Estimating

In today’s commercial construction industry, using software to prepare cost estimates is standard practice, as is using spreadsheets to format your output. These two applications in particular reduce errors.

In order to enhance this capability to reduce errors, some estimators customize their software models to perform cross-checks of estimates. 

Common features of construction cost estimating software include historical databases, templates, project reporting, a cost database, a proposal generator, and an analysis of what-if scenarios. 

In addition to standard industry software, machine learning , a cornerstone of artificial intelligence, has become a crucial tool for improving the efficiency of construction cost estimating. Artificial neural networks (ANN) are layered computing designed to emulate the reasoning of the human brain. They use data from actual building projects in order to create and train an algorithmic model to estimate costs for new construction projects. 

In a paper published in the Journal of Artificial Intelligence , Mohammed Arafa and Mamoun Alqedra, professors in the civil engineering department at The Islamic University of Gaza, cited early success with ANN-enabled cost estimation . Since then, researchers around the globe have used machine learning to refine models for construction cost estimating. 

In an Advances in Civil Engineering survey of computer-driven techniques, including machine learning, researchers in Saudi Arabia concluded that research gaps in construction estimating methods persist and future work should focus on adding human expertise . Such human contributions should include the provision of design work and a standard accuracy benchmark.

Improve Your Construction Cost Estimates with Smartsheet

From pre-construction to project closeout, keep all stakeholders in the loop with real-time collaboration and automated updates so you can make better, more informed decisions, all while landing your projects on time and within budget.

The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed.

When teams have clarity into the work getting done, there’s no telling how much more they can accomplish in the same amount of time. Try Smartsheet for free, today.

Unite construction teams through real-time collaboration with Smartsheet.

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Agile Estimation Techniques: A True Estimation in an Agile Project

True Estimations in an Agile Project: A Complete Insight with Examples of Agile Estimation

It is very crucial to do Agile Estimation at different Levels. This is done for proper planning, management, and estimating the total efforts that we are going to use for implementing, testing, and delivering the desired product to the Customers in terms of time within the specified deadlines.

Due to a lack of Estimations in Agile projects, there may be no proper planning and management which may end in delivering the undesired product and thereby leave the customer unsatisfied. Storypoint Estimations are done in Agile projects using different techniques like Planning Poker, Bucket System, Affinity Mapping, etc.

Different estimation templates at different levels are used for this purpose like Agile Project Plan Template, Release Plan Template, Sprint Plan Template, RoadMap Template, User Story Template, etc.

Table of Contents:

Introduction

Story point estimations in agile, different agile estimation techniques, calculating budget in agile, estimation templates for agile development project, stages of estimation in agile project, was this helpful, recommended reading, agile estimation techniques.

Given below are the 3 main levels of Agile Estimation.

#1) Project or Proposal level is the one that uses Quick Function Point Analysis during the initial phases of the project development.

#2) Release Level includes assigning story points to user stories that can help in defining the order of user stories based on priority and can also help in deciding which stories can be taken in the current release and which can be taken later.

#3) Sprint Level is the one where the user stories are broken into tasks and estimated hours are assigned to the tasks according to their complexity. Here, we also define the person responsible for the task along with the status of the tasks.

This information can be later used to calculate the budget for the Agile project. Calculation of Budget is crucial to make sure that the project does not go over the budget due to the pre and post iteration tasks or some other reasons.

StoryPoint estimations are a comparative analysis to roughly estimate the product backlog items with relative sizing. Team members for estimating user stories include Product Owner, Scrum Master, Developers, Testers, and Stakeholders.

Given below are a few steps to reach the final decision on relative sizing:

#1) Analyze all user stories and identify the base or reference story. It is important for doing relative sizing. This story can be chosen from the current product backlog or the one that we have done earlier. This story should be chosen as the reference story upon agreement of all members.

#2) Pick another story from the current Product Backlog and the team members are free to discuss any questions or doubts with the Product Owner while understanding the requirements of the story. Product Owners are responsible for clarifying all their queries and doubts.

#3) Make a list of the things to be taken care of while implementing the user story. These can be done by writing notes in the notes section of the tool or by adding bullet points on the story card. This is mostly done by Scrum Master.

#4) Stated below are a few common questions among the participants:

• Design: What is the prior and mandatory knowledge that we should have before starting to work on it?
• Coding: How much coding is required to implement this user story? Have we come across any similar user stories previously?
• Unit Testing: Are any mock objects required to do unit testing for this user story?
• Integration Testing: Does this story impact the other functionalities of the same module and other modules also?
• Acceptance Testing: What are the points to be taken care of to deliver the desired product as desired by the Customers?
• Expertise: Have any of the participants done a similar story before and are you an expert in it?

#5) Do relative sizing for the story selected. If it requires the same amount of work and effort, then assign it the same no. of points, as assigned in the reference story. If it requires more effort, assign it some higher value. If it requires less effort, assign it some lower value.

#6) Reach a consensus with all the participants to finalize the relative size for the selected user story as per the definition of done.

#7) After relative sizing of all the product backlog items have been completed, ensure that all the user stories with the same no. of points assigned to them, require the same effort and size to be consistent.

There are many techniques for doing estimations in an Agile Project. The main principles for doing estimations include Relative Estimation, discussions to get more information of items whose estimations need to be done, and ensuring the commitment of the whole team towards the tasks assigned to them.

There are mainly 7 Agile Project Estimation Techniques:

#1) Planning Poker

• In this Estimation technique, all the people who are supposed to do the estimations, sit in a round circle for the Planning Poker session.
• Each estimator has a set of Planning Poker Cards of values: 0,1,2,3,5,8,13,20,40 and 100. These values represent story points or measures that the team estimates.
• At the start of the session, the product owner or customer reads out the user story, describing all its features and requirements.
• After the story is read out, the discussions among the estimators and with the product owner/customer take place. Estimators can ask questions or clarify their doubts with the product owner.
• After the discussions, all estimators are asked to select one card to estimate a user story. If all estimators give the same value, then that becomes the final estimate.
• If values are different then the estimators giving the highest and lowest values explain their opinions and why they chose this value, until a consensus is achieved.
• Good technique when a small no. of items is to be estimated in a small team.

=> Further detailed reading on Planning Poker Estimation Technique .

#2) T-Shirt Sizes

• Just as in the case of T-shirts, we see sizes: XS (Extra Small), S (Small), M (Medium), L (Large), XL (Extra Large). A similar approach is followed here. Items are estimated in T-shirt sizes.
• This is the perfect technique to give a rough estimate of the large backlog of items.
• Useful when quick and rough estimation needs to be done. Later these sizes can be converted into no’s as per the requirement.
• A relative size (mostly Medium) is decided after mutual discussion and agreement between the team members and estimators. Then, the no’s are assigned to the items according to the relative size that is assigned to Medium size.
• Disadvantage: What seems L to someone may seem to be XL for someone.
• All estimators assign their own size to the items. After discussions and resolving the mismatches, a consensus is reached to get the final estimate.

#3) Dot Voting

• This is basically a ranking method to decide the order of the Product Backlog from the highest priority stories to the lowest priority stories. This is done to select the most important stories which should be taken forward.
• To start with this, post all the user stories along with their description on the wall or board using yellow stickies or in a way that distinguishes them for receiving the votes.
• All stakeholders are given 4 to 5 dots (mostly in the form of stickers, pens or markers can also be used to make dots).
• All the stakeholders are asked to give their votes on the user stories that they prefer.
• Product Owner orders product backlog items from the most preferred (one with most no of dots) to the least preferred (one with least no. of dots).
• This may be the case, where few stakeholders are unhappy with the order being decided. In this case, the user stories are divided into 3 groups after the discussions: high priority, low priority, and medium priority. High-priority user stories are posted on the wall to receive the votes. This will not be done until the final order is achieved with the agreement of all stakeholders.

#4) The Bucket System

• It is a good technique when a large no. of items are to be estimated by a large no. of participants. It is faster and more reasonable than Planning Poker.
• Different buckets are created with values: 0,1,2,3,4,5,8,13,20,30,50,100, 200.This can be extended if required. These buckets are nothing but cards representing values arranged sequentially on a table.
• Stories need to be placed within these where the estimator finds them suitable. All the items to be estimated are written on the cards.
• Pick an item at random and put it in bucket 8. This can only be used for reference. Pick another story at random, discuss all its features and requirements with the group, and upon consensus, place it in the appropriate bucket. Similarly, the third item is picked and placed in an appropriate bucket.
• The bucket sequence can also be changed in case the group feels the first item chosen should belong to bucket 1 instead of bucket 8.
• The divide and conquer approach follows. All the remaining items are divided among all the participants. All participants can place the item without the approval of other participants.
• The items should be placed properly. No items can be placed between the buckets.
• If a participant does not understand the product backlog item or if the other participants have finished up placing their user stories then the user stories can be transferred to the other participants.
• The final Sanity check is performed by all the participants. If any participant finds a wrong bucket assigned to an item, then they can bring it to the notice of other participants and discuss it with them. This will be done until a consensus for the whole product backlog is achieved.
• The facilitator should make a check that nobody moves the items unless a sanity check is done.
• This is also done to achieve priority order of product backlog items.

#5) Large/Uncertain/Small

• This is a rough version and is the simplification of the bucket system where there are only three sizes: Large, Small, and Uncertain.
• Participants and estimators are asked to place the items in one of the categories. First, simple user stories are chosen and placed in large and small categories. Then the complex items are taken up.
• Product Backlog is a good technique when there are comparable items in the Product Backlog.

#6) Affinity Mapping

• Good technique when the team is small and the. of backlog items is less.
• The first step is Silent Relative Sizing: On a wall, a card with ‘Smaller’ written on it, is placed on the leftmost side and the card with ‘Larger’ written on it is placed on the rightmost side. The Product Owner will provide a subset of the items to all participants. All participants are asked to size each item relative to the sizes on the cards on the wall, considering the effort required to implement them. It is the sole decision of the participant without any discussion with the other team members. The Product Owner or stakeholder will be present to clarify the doubts of the participant. Product Backlog items that are too ambiguous to be understood by the team members for estimation are placed separately. It takes 5-20 minutes.
• Editing of the wall: The team members can change the location of the items on the wall. They can discuss design and implementation requirements with the other team members. This activity can be closed when little change is happening on the wall. It takes around 20-60 minutes .
• Placing items in the correct locations: After discussions, the team places product backlog items in their relevant and appropriate positions. We can use T-shirt sizing, Fibonacci series, etc. here to relatively estimate the size of the items.
• Product Owner Challenge: The Product Owner may find some discrepancy in the estimations done by the team and need to discuss more features or the requirements for an item with the team. After discussions, final estimations are made.
• Export to Project Backlog Management Tool: To make sure the information about the final estimations is not lost, export it to a product backlog management tool.

#7) Ordering Method

• Good technique when large no. of items and small no. of people are there.
• It gives accurate relative sizes for the product backlog items.
• A scale is prepared ranging from low to high. All the items are placed randomly on it. Each participant is asked to move any one item at a time on a scale. The movement can be one up, one down, or pass the turn to another member.
• This continues until all the participants are satisfied and don’t want to move any item on the scale.
• This also gives the priority order of the Product Backlog items.

Calculating Budgets plays an important role in Agile projects. This is done to determine what the actual budget is provided, what more budget is required and how are we going to divide the budget for different product backlog items.

It uses the data collected from the previous projects and uses the mathematical formula to get the estimated budget for the current project.

Below is the sequence of steps to calculate the budget in an Agile project:

#1) List down all the requirements of the project and do the estimations for them using Planning Poker, Bucket System, Fibonacci series, etc. All team members should agree upon the estimations done for the listed requirements after a clear analysis and understanding of the user stories. Estimations are done based on the features to be implemented in a user story.

#2) Determine the duration of the iterations called Sprint and product backlog items assigned to it. It is usually 2 to 3 weeks long. The user stories are picked in a sequence starting with the user story of maximum priority, moving to lesser priority, and with the least priority user story at the end. This helps in deciding which user stories must be picked up in the first Sprint and which stories can be taken up later.

#3) Prepare a burnt-down chart to give a clear picture of how much work is left to be done versus how much time is left for the implementation. It basically gives the rate of progress of an agile team. It gives a clear picture of how the team is behaving and how it is expected to behave.

Team progress is measured in terms of Completed tasks, Remaining Effort, Ideal burndown, and Remaining Tasks as shown below:

#4) Add Additional Costs like Equipment purchase, tools, infrastructure support, getting licences the software tools to be used, Project Management Tools, Antivirus installation, and updates.

#5) Add Pre and Post Iteration Budgets. All agile members are supposed to be cross-functional, but there are limits to it. Anything done by a team member outside of his expertise is considered pre-iteration work or post-iteration work. This Pre and Post Iteration work requires an additional budget for implementation.

#6) Keeping an eye on the hidden risks. Risks in the Agile project include: Risk of the project going over budget, Absence of team members, Members do not have a clear or complete knowledge, Members do not have the required skills, deadlines have been crossed, etc,

There are many estimation templates that are prepared at different levels in the Agile development project. The sole purpose is to clearly state the estimates required for implementing a requirement or item and tracking its progress.

The main templates are as mentioned below:

1) Agile Project Plan Template:

It gives a high-level view of how much time is required to deliver the features of the requirements and what is their status. It also mentions the person responsible for a specific task.

(Note: Click on any image for an enlarged view)

2) Agile Release Plan Template:

It gives release details of the tasks corresponding to the requirements, along with their status and Sprint in which they need to be executed.

3) Agile Product Backlog Template:

It describes the complete product backlog defined for the project. It gives details of tasks in Sprint along with status, priority, story points, and whether they are assigned to a Sprint or if there are additional tasks like defects, etc.

4) Agile Sprint Backlog Template:

It gives a description of the user stories mentioned in the backlog of a particular Sprint. It gives the total story points assigned to a user story and how these are broken into different tasks. It also gives the status of the corresponding tasks and what is the work carried out on a daily basis for the corresponding tasks.

5) Agile Test Plan Template:

It breaks the whole test scenario into sub-scenarios. It gives details of the sub-scenarios like Implementation date, Expected Result, Actual Result, Status, etc.

It also mentions the Project Name, Compatible browser, Version of the Application under test, Test Case ID for a selected scenario, Written-By, Tested By, Description, etc.

6) Agile User Story Template:

It gives the details specific to the analysis of the user story like What are the roles required for specific functionality to be tested, what is the pre-requirement (environment set up and links enabled), and what is the expected outcome?

7) Agile Road Map Template:

It gives a direction to the project in the company, on a short-term and long-term basis. It helps in setting expectations within the company. and an overview of where the project is heading.

In an Agile Project, estimations are done at 3 levels as mentioned below:

• Project/Proposal Level: Total functional size of the whole application is estimated using the Quick Function Point Analysis (QFPA) method when only high-level requirements are available.
• Release Level: Story points are assigned to the user stories which help in determining the no. of releases planned within the project and the no. of user stories to be taken in the release and sprint.
• Sprint Level: Estimated hours are assigned to the tasks of the user stories within a sprint. This is done to ensure the commitment of the development to deliver user stories within a sprint.

S1, S2,S3,S4,S5,S6 are the sprints.

#1) Proposal or Project Level Estimation

It is a very high-level estimation for the project. It focuses on the total no of requirements in the Product Backlog item. Function Points are used to estimate the size of the software/project before a detailed description of the functional requirements is documented.

Function points are the universally accepted way to calculate the size of the software. It focuses on the functionalities found in software projects. A function point is a metric that converts the requirements or user stories into a number.

During the initial stages of the project, it is recommended to adopt Quick Function Point Analysis (QFPA) method.

The Quick Function Point Analysis method is a unique approach for estimating FP when only high-level requirements are available.

How do I calculate the Total Functional size?

• Understand all the functionalities of an application with the help of domain experts.
• Identify and list all the possible functionalities of an application.
• Data storage functions are classified into Internal Logic Files (data stored internally within the application) and External Interface Files (data used for reference purposes only).
• Transaction functions are classified into External Inputs (data coming from external sources to application), External Outputs (derived data goes from application to outside), and External Inquiries (data retrieved from one or more External Inputs and External outputs).
• Calculate FP size for each function by calculating its average complexity.
• Sum up the FP size of all the functions to get the Total Functional Size of the application.
• At least two people with expertise in FP analysis should calculate independently, match results and resolve the differences.

Example of Project-Level Estimation:

Below is the list of requirements for a project, as in the Product Backlog:

• Users should be able to log in to the website by providing their username and password.
• Post a successful login, the user should be taken to the main page with right and left panes defined.
• Users should have the option to log out from the Application.
• A valid user has the option to change their password by providing their current credentials.

The team used a Quick FP estimation to estimate the project size.

The following is where the analysis is done:

• The data storage function here is storing the User Credentials to log in and change the password.
• Since the credentials are stored within the application boundary, they are stored in ILFs (Internal Logical Files).
• User login and display on the main page.
• User logs out and displays the logout screen.
• Ability to change the password.

Below are the steps executed to estimate the project size using Quick Function Point Analysis:

STEP #1: List down all the Data Functions

UFP (Unadjusted Function Point) is taken from the Caper Jones Table.

STEP #2: List down all the Transaction Functions

STEP #3: Deriving the estimated project size in Function Points

UFP = Data FP + Transaction FP

UFP=10 + 12 = 22 UFP

FP = UFP * VFP = 22 * 1 = 22 FP (Assuming VFP (Value Adjustment Factor=1)

Productivity = 16 FP/month (Normal Standard)

Effort = FP/Productivity = 22/16-person month = 1.37 person month

#2) Release Level Estimation

Release level estimations are done during the Release planning. This is the next activity after Project level estimation. The prioritized requirements are taken from the Product Backlog which is in the form of User Stories.

The user stories are estimated in terms of story points during the Release plan which focuses on estimating the size of the software to be delivered for that release. In this way, the of releases and total no of story points in each release is planned.

A story point basically represents the relative effort required to implement a feature or the functionality, when compared to the other features. It is basically for sizing the Product Backlog items.

Story point estimation is done on the basis of:

• The complexity of the feature is to be implemented.
• Experience and technical skills of all the members.

S1,S2,S3,S4,S5 are sprints.

Steps for assigning story points to a user story:

• All the team members gather around a table going through the user stories present in the Sprint Backlog.
• The meaning of one story point and corresponding effort is decided.
• One of the team members reads out a user story and then asks the team members to assign the relative story points.
• If there is a significant difference between the story points assigned by the team members then they give an explanation for story points that they have assigned, thereby reaching a consensus at the end.
• The process is repeated 3-4 times until there is no major difference between the estimations given by the team members.
• The sizing of the stories helps in determining how many stories will be taken within a sprint and released.

Example of Release Level Estimation:

This involves creating a prioritized list of User Stories called Product Backlogs. Product Owner creates Product Backlogs and provides business value for each of the items listed in it.

You can use the below methods for Story Points Estimations:

• Numeric Sizing: 1 through 10
• T-Shirt Sizing: Each requirement is classified as Extra Small (XS), Small (S), Medium (M), Large (L), Extra Large (XL).
• Fibonacci Series: Estimation done through Fibonacci Sequence (1,2,3,5,8,13,21,34,….)

Estimation of the above user stories through the Fibonacci sequence:

#3) Sprint Level Estimation

Sprint level estimations are done during Sprint Planning. The highest priority product backlog items are taken and divided into different tasks like Detailing, Design, Analysis, Development, Create Test Cases, Execute Test Cases, User Acceptance Testing, etc.

Tasks are estimated in terms of estimated hours i.e. time required to complete that task for the corresponding user story. The Bottom-Up Approach is used for the Task estimations where the business requirements are broken down into low-level activities and each activity is assigned estimated hours.

The purpose of the estimates is to know how many user stories the development team can commit to Sprint. Developers must be comfortable with the commitment and Product Owners must be confident that the team will deliver on the commitment.

S teps for assigning estimated hours to the tasks:

• Team members pick up user stories. Then, they are asked to estimate the actual effort, in terms of hours or days, for the tasks corresponding to the user story.
• If there is a disagreement among the team members in these estimates, then they discuss it and come to a consensus.
• If any task is of more than six hours, it is split into smaller tasks.
• If there are two or more tasks with estimated hours less than two, then they are combined to form a new task.

Example of Sprint Level Estimation:

There are two parts of the Sprint Planning meeting:

• First Part: Focus is on clarifying the requirements for User Stories, selected from the Product Backlog.
• Second Part: Focus is on breaking the requirements into tasks and estimating the hours required to complete them. All the tasks that were necessary to make the Product Backlog item deliverable should be included. The tasks should be small. Ideally, a tasking effort should not be of more than six hours.

The estimations in the Agile project play an important role in ensuring proper direction, planning, and management. It provides steps on how to take up the project in the future.

Techniques to estimate story points like Planning poker, Bucket System, etc. make use of cards or dots that have values or numbers printed on them and then assign these nos. to the user stories for relative size estimation.

The sole purpose is to set the items in a prioritized order from maximum priority to minimum priority. The relative sizes estimated for the product backlog items help in estimating or calculating the budget required for the project.

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13 thoughts on “Agile Estimation Techniques: A True Estimation in an Agile Project”

Good elaboration of Agile….Nice and useful for future exploration.

Can you perhaps point to where and how we can access the templates as well?

Almost everything about agile estimations is covered in this article. For all practical purposes – challenges and questions that might arise are all answered. Definitely an experienced and knowledgeable author – many thanks for putting this together and sharing in such open forum.

Very much descriptive. Seems realistic. Thanks for sharing such a vital documentation.

Thank you for the detailed explanation .Agile Estimation Techniques explained very well.

Thanks for this excellent details on Agile Estimation. The detail explanation with examples provides a great understanding on Agile estimate. It is ready reckoner for refreshing our knowledge on Agile estimation.

Very much elaborative along with the examples. Clarified all of the confusions.

Very neat and much elaborated article. very much helpful. thanks for putting effort on this.

Great Article. However some points are not clear. At project level we are estimating using FP and then at release level we use the story points and then again at sprint level we uses hour based estimation. Then what is the use of story points? Now suppose we have a sprint of 2 weeks and we have done the story point estimation which is relative. Now based on story points how I should decide how much stories can be covered in 2 week of sprint. Assume that this is a first sprint of the project and not history data is available.

Very well explained. Thanks for putting effort on this article.

NIce overview!

very good article to know everything about agile.

You’ve covered an amazing amount of techniques here and I can see and amazing amount of effort has gone into this article and the thrust is to share techniques to make the lives of others easier. It also tackles the tricky situation of utilising a framework design to support long formed teams around a product for short term work on a project which a lot of articles avoid. I have a few suggestions for changes that I think might help with the article.

Relative estimation is great at taking away complexity and speeding up what is basically a guessing process. Statistically the longer the guessing process takes the worse the results. The pointers you have put down are great to help the team get going but once the team get their confidence they should get a feel for the size of things. The role of the Scrum Master is to help the team understand this and to encourage them to get a feeling based on their experience as a team of what size things will take.

It’s good to avoid prescribing secretarial work to the Scrum Master during estimation exercises as they should be busy facilitating and hopefully asking questions of the team that will help them reflect on the decisions they’re making. Using them to document to document a list of things to be done during a user story is not the best use of their time.

The purpose of a Scrum Team is that they act as a unit with a single purpose. Breaking work down into hours and assigning it to individuals within the team breaks that construct. It’s worth reading up on this as it would remove a whole level of estimation that you’ve documented.

Release planning is an interesting concept. If the team is using Scrum for example they should be able and willing to release every iteration (1-4 weeks). I’d suggest that a focus for wider release planning is to understand any MVP that can be built to either learn about the customer needs or look to feature sets that provide the customer with a valuable proposition that they can use and will generate some ROI. Once these goals are understood the backlog can be viewed with this value perspective and sorted into an order that supports it. The team then have choices as to how to forecast the release dates. This can be as simple as average through-put or velocity. However at the start of the project both of these are unknown so detailed planning of release dates is essentially a complete guess and therefore very low quality and value. Forecasting forward to what stories will be in what sprint is not often a good use of anyone’s time.

Agile teams work together to design, develop, test and release every iteration so a separate test plan upfront may not add any value. The testing should be as reactive to value as the development work. A front loaded test plan with dates reduces the value of working in an agile way and sets false expectations.

User story one details everything that is wrong with project management in an agile project. The team is responsible for the work not individuals. The Scrum Master should be having a quiet word with the Project Manager detailed in that user story and if that doesn’t work meeting them in a dark backstreet for a knife fight.

Project level estimation using function points to detail the entire solution up front for detailed analysis to give an estimate is as far from agile as you can get. Locking down the detailed solution up front is a waterfall technique. Doing this and then going off script because we’re being agile would render this effort a complete waste.

I love the article however as above I’d advise making some changes and thinking about how “agile” some of these techniques really are. It’s a really difficult topic to cover.

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