CHAPTER 1

INTRODUCTION

In alignment with other PMI practice standards, the Practice Standard for Project Estimating provides information on the activity of project estimating. In particular, this practice standard focuses on managing the estimating process.

The audience for this practice standard includes, but is not limited to:

• Project/program/portfolio managers,
• Project team members,
• Functional managers/operational managers,
• Members of a project/program management office,
• Project sponsors and stakeholders,
• Educators and trainers of project management,
• Consultants,
• Senior management,
• Decision makers responsible for approving the estimate, and
• Individuals interested in project management.

This chapter provides an overview of this practice standard and includes the following sections:

1.1 Purpose of the Practice Standard for Project Estimating

1.2 Definition of Project Estimating

1.3 Estimating and the Project Management Practice

1.4 Relationship Between this Standard and Other PMI Standards and Knowledge Areas

1.5 Summary

1.1 Purpose of the Practice Standard for Project Estimating

The purpose of this practice standard is to:

• Provide a standard for the project management profession and other stakeholders that defines the aspects of project estimating recognized as good practices on most projects most of the time; and
• Provide a standard that is widely recognized and consistently applied.

This practice standard has a descriptive purpose rather than one used for training or educational purposes.

The Practice Standard for Project Estimating covers project estimating as it is applied to single projects. These concepts may be applicable to the estimating of programs or portfolios as well.

Chapters 6 and 7 of the PMBOK® Guide—Fourth Edition (Project Time Management and Project Cost Management) are the basis for the Practice Standard for Project Estimating. This practice standard is consistent with those chapters, emphasizing the concepts and principles relating to project estimating. It is also aligned with other PMI practice standards as described in Section 1.4.

Figure 1-1 compares the purposes of this practice standard to those of the PMBOK® Guide—Fourth Edition and textbooks, handbooks, and courses. It is recommended that the PMBOK® Guide—Fourth Edition be used in conjunction with this practice standard because there are many references to sections in the PMBOK® Guide—Fourth Edition.

This practice standard is organized in four main sections:

• Introductory material, including the purpose, principles, context of, and elaboration of project estimating processes as defined in the PMBOK® Guide—Fourth Edition.
• Principles underlying the life cycle stages of project estimating:
  • Prepare to Estimate,
  • Create Estimates,
  • Manage Estimates, and
  • Improving Estimating Process.

Each of these four stages is described in separate chapters that address the following topics: (a) inputs, (b) activities, (c) outputs, (d) key considerations, and (e) generally accepted good practices.

• Glossary of terms.
• Appendices containing references, contributors and reviewers, relationship to other PMI standards, and examples of estimating models used in different industries.

This practice standard emphasizes those principles that are fundamental to effective, comprehensive, and successful project estimating. These principles are stated at a general level for several reasons:

• While tools and techniques are constantly evolving, the principles have more stability and persistence.
• Different projects, organizations, industries, and situations will require different approaches to project estimating. In particular, project estimating is an appropriate process to apply to projects of different sizes. In practical applications, estimating is tailored to be appropriate for the project at hand. There are many specific ways of practicing project estimating that are in compliance with the principles as presented in this practice standard.
• The principles are applicable to projects carried out in a global context, reflecting the many business and organizational arrangements between participants. For example, joint ventures between commercial and national companies, government, and non-government organizations, and the cross-cultural environment often found on these project teams.

These principles can be used as a check for an organization's processes. Practitioners can establish procedures specific to their particular situation, project, or organization and then compare them with these principles, to validate them against good project estimating practice.

1.2 Definition of Project Estimating

The definition of an estimate, as defined in the PMBOK® Guide—Fourth Edition, is as follows:

Estimate—A quantitative assessment of the likely amount or outcome.

This definition is usually applied to project costs, resources, effort, and durations and is usually preceded by a modifier (i.e., preliminary, conceptual, feasibility, order-of-magnitude, definitive).

Project Estimating—The act of creating a quantitative assessment of the likely amount or outcome. It is usually applied to project costs, resources, effort, and durations.

Project estimating as described in the PMBOK® Guide, is comprised of three processes that will be elaborated within this practice standard:

• Estimate Activity Resources—The process of estimating the type and quantities of material, people, equipment, or supplies required to perform the activity.
• Estimate Activity Durations—The process of approximating the number of work periods needed to complete individual activities with estimated resources.
• Estimate Costs—The process of developing an approximation of the monetary resources needed to complete project activities.

Baseline—An approved plan for a project, plus or minus approved changes. It is compared to the actual performance to determine if performance is within acceptable variance thresholds. Generally refers to the current baseline, but may refer to the original or some other baseline. Usually used with a modifier (e.g., cost performance baseline, schedule baseline, performance measurement baseline, technical baseline).

1.3 Project Estimating and the Project Management Practice

Project estimating is vital to successful project execution as it is an integral part of project management practices. Project estimating activities are a relatively small part of the overall project plan and are performed early in the project life cycle. However, effective project estimating is a key contributor to the successful planning and delivery of project objectives. A project uses the cost, resource, and duration estimates along with the expected benefits to build the business case for the project.

There are many notable examples of where final costs or schedules were significantly different than the original estimate. These variances were caused by many reasons, but all are related to the project estimating life cycle:

• In 1988, the Boston Big Dig was estimated to be US$2.2 billion and it was delivered five years late at a cost of US$14 billion, more than six times the estimate.
• In 1996, the Bellagio Hotel was planned to be US$1.2 billion and its final cost was US$1.6 billion.
• The Denver International Airport was 16 months late and an estimated US$2.7 billion over budget.
• The Mars Science Laboratory Rover was planned to cost US$1.6 billion and the final cost, when completed, is expected to be more than US$2 billion.
• In 1914, the Panama Canal ran US$23 million under budget compared with 1907 plans.
• The Sydney Opera House was originally estimated at US$7 million and the final costs came in at US$102 million.

Even though estimates are developed initially at the onset of a project, it is important to think of estimating as a continuous activity throughout the project life cycle. The initial estimates are used to baseline the project resources, schedule, and cost. These estimates are then compared to the project benefit stream in order to determine an early view of the feasibility of the project. As the project progresses and more information is known, the estimates are continually refined and subsequently become more accurate. This is consistent with the project concept of progressive elaboration According to the PMBOK® Guide—Fourth Edition:

Progressive Elaboration—Continuously improving and detailing a plan as more detailed and specific information and more accurate estimates become available through successive iterations of the planning process as the project progresses.

Progressive elaboration allows a project management team to manage to a greater level of detail as the project evolves.

Additionally, the change control process is used to manage against the baseline cost and activity duration estimates. This continual process of reforecasting, based on new information and change controls, is why estimating is not a one-time event.

With the collection of data during the project control phase, the project team will have enough information to refine the initial estimates and establish more accurate forecasts, creating more effective action plans and allowing to better understand the project trends.

1.4 Relationship Between This Standard and Other PMI Standards and Knowledge Areas

Estimating has connections to many other disciplines within project management because it is an iterative process that occurs throughout the project life cycle. Therefore, this practice standard has relationships to many other existing PMI standards, for example:

1.4.1 PMBOK® Guide—Fourth Edition

• Chapter 4 Project Integration Management—Estimating is a critical aspect of creating the project management plan and performing integrated change control.
  • Section 4.5 Perform Integrated Change Control—The process of reviewing all change requests, approving changes, and managing changes to the deliverables, organizational process assets, project documents, and the project management plan. All changes are managed against the baselines created during the planning process. Changes also require estimating of impact or revised cost, and schedule and resource estimates, which leverage the same principles of project estimating.
• Chapter 5 Project Scope Management—The project defines the activities and the size of those activities, which are estimated for resources, durations, and cost.
  • Section 5.3 Create WBS—The process of subdividing project deliverables and project work into smaller, more manageable components.
• Chapter 6 Project Time Management—Develop Schedule is a process in the Project Time Management Knowledge Area that takes place in the Planning Process Group. Schedule management is a continuous process that requires reforecasting and refinement of the activity resource and activity duration estimates throughout the project.
  • Section 6.1 Define Activities—The process of identifying the specific actions to be performed to produce the project deliverables.
  • Section 6.3 Estimate Activity Resources—The process of estimating the type and quantities of material, people, equipment, or supplies required to perform each activity.
  • Section 6.4 Estimate Activity Durations—The process of approximating the number of work periods needed to complete individual activities with the estimated resources.
  • Section 6.5 Develop Schedule—The process of decomposing deliverables into project schedule activities that are sequenced and estimated for required resource and activity durations.
• Chapter 7 Project Cost Management—Determine Budget is a process in the Project Cost Management Knowledge Area that takes place in the Planning Process Group. Project Cost Management is a continuous activity which requires reforecasting and refinement of the cost estimates throughout the project.
  • Section 7.1 Estimate Costs—The process of developing an approximation of the monetary resources needed to complete project activities.
  • Section 7.2 Determine Budget—The process of aggregating the estimated cost of individual activities or work packages to establish an authorized cost baseline.
• Chapter 8 Project Quality Management—Quality is embedded across the estimating life cycle including the incorporation of quality requirements, the continual monitoring of estimates, and taking lessons learned back into the estimating model.
• Chapter 9 Project Human Resource Management—Estimated activity durations may change as a result of the competency level of the project team members and availability of, or competition for, scarce project human resources. Cost estimates should also include possible human resource reward and recognition bonuses.
• Chapter 10 Project Communications Management—Because there are many assumptions in creating an estimate, differing levels of information and confidence, as well as ever-changing forecasts, communications management is a critical component of managing estimates and expectations.
  • Section 10.4 Manage Stakeholders Expectations—The process of communicating and working with stakeholders to meet their needs and addressing issues as they occur.

    This applies to assumptions of estimates and stakeholder management around expectations based on the stage of the project.

• Chapter 11 Project Risk Management—Estimates are created based on an incomplete set of information, so there is always inherent risk involved that requires management. The impact and likelihood of each anticipated event are estimated in the risk registry.
  • Section 11.1 Plan Risk Management—The process of defining how to conduct risk management activities for a project. Specifically for estimating, the confidence levels required for a specific project need to be included in this planning information.
  • Section 11.2 Identify Risks—The process of determining which risks may affect the project and documenting their characteristics.

    Cost estimates and activity duration estimates are inputs into the risk register, based upon assumptions made, amount of information available when the estimates were created, and the degree of confidence in the estimate projections. This process also includes determining the risk tolerance of the project stakeholders, such as the sponsor and customers.

  • Section 11.4 Perform Quantitative Risk Analysis—The process of numerically analyzing the effect of identified risks on overall project objectives.
  • Section 11.5 Plan Risk Responses—The size of the contingency buffers (e.g., time and cost needed) to be estimated and included in the plans.

    Cost and activity duration estimates are inputs into the quantification of the risk impacts on the project objectives. Risk mitigation often results in additional work and additional cost to be included as part of the estimate.

• Chapter 12 Project Procurement Management—Procurement management includes acquisition of services or products that include resource, duration, cost, and quality implications.
  • Section 12.1 Plan Procurements—The process of documenting project purchasing decisions, specifying the approach, and identifying potential sellers.

    Cost estimates and activity resource requirements are inputs to the procurement approach and are used to evaluate the reasonableness of bids. The project estimate becomes the project budget after the contract negotiations.

1.4.2 Practice Standard for Earned Value Management [2]

Managing earned value starts with creating estimates for specific increments of work. Earned value is also a diligent way of monitoring and verifying the project actuals and forecast and to compare to the project estimates.

1.4.3 Practice Standard for Work Breakdown Structures [3]

The WBS is used to identify project scope elements (deliverables within phases). These are in turn (starting with work packages—the lowest level of WBS decomposition) used (decomposed) to create activities and milestones that are intended for the project schedule as part of the schedule development process. The WBS also establishes essential relationships between key assumptions for scope, scale, and performance requirements at all levels that can be used to support the various estimating methods (as demonstrated in Section 4.3).

1.4.4 Practice Standard for Scheduling [4]

The schedule is created based on an activity list derived from the work packages in the work breakdown structure.

1.4.5 Practice Standard for Project Risk Management [5]

Estimates are based on assumptions that have risks embedded in them and which need to be managed.

1.4.6 The Standard for Program Management [6]

Sections 3.4 and 3.6 highlight program management processes related to program estimating. Risk mitigation often results in additional work and additional cost, which needs to be included as part of the estimate.

1.4.7 The Standard for Portfolio Management [7]

Section 3 highlights portfolio management processes related to project estimating.

1.5 Summary

The Practice Standard for Project Estimating provides a standard for project management practitioners and other stakeholders that covers the aspects of project estimating which are recognized as good practice on most projects most of the time. This practice standard focuses on estimating activity resources, activity durations, and cost. Project estimating is important because of the many direct linkages to the other aspects of project management.

The principles for the management of project estimating described in this practice standard should be applied based on the specifics of a project. Experience indicates that project success may be directly related to the appropriate application of project estimating principles throughout the project life cycle.