The term estimation is the process of preparing an estimate for the time or cost required to complete an assignment. A project estimate provides business stakeholders general idea about how much time, effort, and cost will be needed to complete the project work. This value is obtained when the input data is incomplete, uncertain, or unstable.
Estimated value is considered as a reference in terms of time or budget to ensure that the progress of the project remains within the specified margin. An approximate value is, however, usable as it is derived from the best information available. Estimation helps in preparing viable project budgets and planning for the smooth execution of the project. Often, an estimate is used to align the results to the success and estimated figures.
In PM communications, indicating the type of estimates, cost, duration, and estimates provides important background to the accuracy of an estimate. When estimating project cost and time, the accuracy of the estimated results depends on various factors. These factors mainly include the availability and accuracy of the information, as well as the forecasting techniques used. Available options and cost estimates may vary by project stage. As estimates go more accurate, they ensure the projects stay on schedule without any last-minute hurdles and extra costs.
An estimate is only as good as a reliable and firm input. The accuracy of estimated figures depends on the availability of factual and reliable information. Also, the technique used for estimation influences the estimated values. External factors, such as any sudden changes in market costs or deviations from the plan, will make the forecast less accurate. As a project manager, it is important to be able to accurately account for variances. Using common terminology for estimating accuracy helps project managers and stakeholders understand the quality and reliability of cost estimates.
Project managers working on projects to the PMI standard, or those aspiring to PMP certification, usually encounter two types of cost estimates:
Definitive Estimates and ROMs are two types of estimates defined in PMI's Project Management Body of Knowledge. They differ in their levels of accuracy.
As stated in PMBOK®, 6th ed., ch. 7.2;
ROM (rough order of magnitude) with an accuracy between -25% and +75%, and
Definitive estimates with an accuracy of -5% to +10%.
The PMP certification course includes this topic as an important subject. The Definitive Estimate skill attracts the attention of aspiring PMs undergoing PMP training.
ROM estimates are prepared in the early stages of a project when no concrete information is available. On this fact, the accuracy of the estimation can vary over a wide range of -25/+75 than the ideal estimation. ROM is used in the initial stages of project planning or even before the project is implemented. This is a rough estimate, termed a “ballpark figure,” used to represent a broad target range of cost and attempts to put together a business case. This estimate is derived by management to assist in the baseline evaluation of the project. Such estimates are considered for business approval formalities, and then one proceeds to more detailed scoping.
A definitive estimate is made when there are accurate estimates at the work package or activity level. For large and complex projects, it can be difficult to determine a firm estimate. Certain estimates are likely to deviate from reality because most factors are unpredictable and subject to certain assumptions. While PMs work on project cost estimates using a fixed estimate, a great deal of research must be done to get as few variances as possible. PMBOK also recommends practicing "rolling wave planning" for PMs to cope with change by frequently updating forecasts with greater uncertainty. With a wide range of possible outcomes, estimates of ROM tend to be inaccurate. PMs prefer to move toward more accurate estimates, ideally, fixed estimates, during a project.
Other types of forecasts, budgets, and preliminary estimates are not explicitly mentioned in the PMBOK. However, they are useful in projects when the accuracy of the estimate is somewhere between the ROM and the definitive estimate.
PMs who achieve a high level of accuracy in estimation in the project management domain are appraised more. The accuracy of an estimate can generally be achieved only when the project has been planned in detail, and relevant work information is available and reliable. Organizations use definitive estimates to baseline projects, strategically manage project phases, and report performance at each phase. For example: Before analyzing the project requirements in detail, let's generate a ROM estimate of $2M. However, after the WBS (work break structure) is developed and the information can be gathered into task-specific cost estimates for each work package, the fixed estimate will cost $1.5M. In short, definitive estimates are more accurate than approximate ones.
The process of creating a definitive estimate is naturally more detailed than a ROM estimate. In the case of a definitive estimate, the PM refers to more detailed data and confirms realistic figures related to costs and work duration. Generally, estimate claims are supported by contract documents, the scope of work is provided in the project order, and appropriate WBS is defined in the project plan. In WBS, the direct costs associated with a project, such as raw materials, installation charges, etc., are assigned and worked out based on their attributes. Also, project managers need to generate accurate estimates from fully designed plans with various scenarios that can be predicted. The PM must also consider contingency in case of market conditions change, keeping margins within limits.
A definitive estimate in project management should include a scope of work (SOW) and a list of costs that will go into the project. Organizations will not accept wide variations in the accuracy of estimates and final costs. Projected results determine the potential of the PM. Therefore, project managers need to be knowledgeable in definitive estimate techniques and manage projects with close accuracy in estimates.
A Project Management Professional (PMP) or Project Management Professional certification (PMP Certification) qualifies you to manage estimates well within an acceptable level. You will need to prepare yourself for a reputable PMP training program to take the certification exam. The most effective and recommended option to learn better is to enrol in an official PMP training program.
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