Estimating effort: Part 4 This article is the penultimate in a series of five about effort estimation. Since many people mistakenly use terms like budget and estimate as synonyms, I concentrated on definitions in the first article. Here’s a quick summary of some key definitions: Estimate. A well-informed assessment of an uncertain event. An informed assessment means that you have a basis for your estimate. Uncertain recognizes that multiple outcomes can be possible. Effort. Effort refers to the effort of a member of a project team. Effort is usually measured in terms of staff hours. Budget. Management metric that is calculated from the work estimate. In an earlier article I introduced the concept of three-point range estimations and explained how to prepare them with your team. I concluded that three-point estimates take less time than single-point estimates. This article will discuss the key outcome of estimating effort estimates and converting them into budgets. Key Outcome of Estimating. When I teach people how estimate, I emphasize the importance of a project budget that’s accurate. This means that the actual results are within an acceptable range of what the budget. The project will determine the acceptable budget accuracy.

August 19, 2022 Gilbert

It is common for New Product Development (NPD) to cost 3-4 times what was initially estimated.
If the requirements are known, agreed upon, and stable in IT,?10% may be acceptable. However, a NPD range of +300-400% might be acceptable if the project’s mission-critical.
Management may not be willing to accept an overrun for a fixed-price consulting engagement.

An estimate is considered accurate if the actual results for most work items fall within its range most of time and (b) the sum is close to the sum expected values in the range estimate. We care about the total. We don’t care about individual results, but the end in itself. Let me illustrate. Let’s say we have 100 activities in a project. Let’s keep it simple. Let’s assume that each activity has a three-point range of 20, 25, or 30 hours of effort. The budget for each activity will be 25 hours. More on that later. Thus, the budget for the entire project will be 2,500 hours. If everything goes according to plan, the majority of activities, perhaps 70%, will be completed at an actual cost within an hour to two hours of their budgeted effort. One or two activities may take up to 30 hours, while others may take 20. The project total is likely to exceed 2,500. We have a 95% chance that the project will be completed within a timeframe of?50 hours. That’s pretty good! Let’s now take another project with 100 activities. Each activity requires a range of 10, 25, and 40 hours. This project will still be budgeted for 2,500 hours, but the chance of completing it in?50 hours is only 60%. We need to be able to achieve 95% accuracy by limiting the time to?120 hours. To support our goal of accuracy, we use three-point range estimates. This encourages everyone on the team and encourages them to spend as much time as they need to complete the work item correctly. We avoid dysfunctional behavior.

Even if they don’t need it, team members might use the entire budget.
To keep the budget within reach, team members may make cuts.
Managers at all levels may waste time explaining minor deviations.
Managers might be tempted to manipulate reported actuals to make them appear “better.” ?

One more thing: There are certain circumstances where you should not.