Making “Ballparks in Elevators”

Maybe it's their authority, or maybe it's that you're off guard, but whenever a high‐level manager or customer catches you in an elevator, hallway, or break room and asks for an estimate, you inevitably respond with an optimistic, seat‐of‐the‐pants guess that you regret the moment it escapes your mouth. The problem is compounded if that manager happens to be on the way to a meeting where your “estimate” will be the topic of discussion. The trouble here is obvious: It's impossible to consider all the details required for an accurate estimate when you're riding between the fourth and tenth floors. But the question is how to avoid this optimistic guessing. Here are a few suggestions:

• Assume a thoughtful, concerned expression and respond to the manager, “There are a lot of factors that will impact the effort required.” Then list a few of these factors and add, “I wouldn't want to mislead you by offering a guess on that.”
• Offer to get a sheet of paper and write down exactly what the manager is requesting. At the same time, start listing the questions that need to be answered before a useful estimate can be produced. If the manager has a hard time being specific about what he or she wants—and you can produce several questions he or she can't answer—this should help the manager to understand that there are too many unknowns to make a responsible estimate.
• If all this maneuvering fails and the manager or customer continues to press you, it's time for the art of “ballparking.” There can be three possible responses when using this technique: (1) Respond with the best guess you've got, while trying to factor in everything that could make it wrong. This response is appropriate for people who can be trusted not to use this figure against you later on. (2) Take your very best guess and double it. Then double it again. This is obviously not a rational way to make estimates, but then again, the manager or customer is hardly being rational by asking you for an estimate in the elevator. (3) Refuse to give an estimate without further specifications and planning time.

Estimating Without Complete Specifications

This is the type of mistake that a contractor might make if asked to estimate a construction project without a blueprint. Realistically, developers and contractors rarely make this mistake more than once. On the other hand, new product development, process improvement, and information systems projects seem to make this mistake regularly. Someone has an idea, the idea is approved, with a budget and a deadline, and off they go! They don't seem concerned that the specifics of implementing the idea won't be known until they are halfway through the project. The allure of this mistake is that it seems as if team members are adopting good business practices; after all, they do have a budget and schedule attached to the new initiative. But without complete specifications, it isn't clear what the project will be producing, so there is no basis for an accurate estimate.

One thing that new product development, process improvement, and information systems project all have in common is that they are solving a problem first, then creating the solution. Even software projects using agile methods need to be careful about jumping into a new project without a clear vision of what they'll be producing. All these projects should start with a business case that includes estimates. The mistake is putting too much confidence in the initial estimate when there are more assumptions than facts.

Confusing an Estimate with a Bid

Bids and estimates are not the same thing. An estimate is a projection of how much and how long a project will take, while a bid is the schedule and budget a subcontractor offers to deliver the project. The bid will quite likely be made up of estimates, but it will also include profit margins for the subcontractor. The important distinction is that a bid is calculated to be both attractive to the customer and profitable to the bidder, while an estimate is a prediction of what it will really take to deliver. The best bidders—the ones who make both themselves and their customers happy—are also good estimators.

Padding the Estimate

There are many legitimate reasons for adding time or money to an estimate. Contingency funds may be added for risks identified during the risk management process. Extra time is usually added to allow for inevitable delays due to illness or vacations. But padding the estimate is different. Adding time and money to the estimate solely for the purpose of bringing the project in early and under budget is neither legitimate nor productive. The best strategy is to offer honest, detailed estimates. Then, if they are cut, you can use the actual performance data during the project to fight for acceptance of the original estimate. Eventually, this kind of straight dealing will gain you a reputation as an honest estimator who delivers on promises.

Table 12.1 shows how adding to the cost and schedule just to be safe is counterproductive in two ways. First, a valuable project may not be approved because the artificially high estimate makes it look like a bad investment. Second, if the project is approved with an inflated budget, this means it is taking money away from other potentially valuable projects.

Have the Right People Make the Estimates

Three factors define who the right people are:

1. The estimators must be experienced with the work they are estimating. No matter which techniques are used, estimating is always based on an understanding of the work to be done.
2. The people who will actually perform the work should also be involved in estimating it. They will have the best grasp of their own limitations. They will know, for example, just how much time their schedule will allow them to work on this project; they will also know whether they will need a steep learning curve before they are productive. Most important, when people make an estimate for their own work, they are usually more motivated to achieve it than when the estimate comes from the outside.
3. The estimators must understand the goals and techniques of estimating. Even when people understand the task at hand, they should not be allowed to estimate their own work until they learn both how to estimate and the goal of estimating, which is to produce accurate estimates that will come true, not optimistic projections of the best possible performance.

Base the Estimate on Experience

Even though no two projects are alike, there are often enough similarities that performance data from past projects are useful in estimating future ones. Professional estimators constantly use new performance data to refine their estimating models. Building this type of database is beyond the scope of the individual project manager; the organization must take responsibility for it. With this kind of database, project estimates can become more and more accurate. Without it, every project team must start from scratch and rely solely on each member's memories and gut feelings. Past performance data will make every estimating technique in this chapter more accurate.

Don't Negotiate the Estimate—Negotiate the Equilibrium

There are effective ways of countering attempts to meddle with an estimate. Consider the following scenario.

A project estimate has been developed by experienced estimators using past performance data from similar projects and employing sound estimating techniques. The project manager brings the estimate to management or customers and they begin to whittle away at the schedule and budget. (Or perhaps they may even take out a cleaver and whack away a big part of both.) At first the project manager stands her ground, but under continuing pressure she begins to give up cost and schedule, slowly letting the finish date move earlier and the budget get smaller.

Stop! This estimate was built from the product specifications, and it represents a realistic balance of cost, schedule, and scope. Dickering over cost or schedule alone throws the entire estimate out of equilibrium. While no estimate will go unchallenged, the proper defense is to demonstrate how the estimate is tied to the product specification and work breakdown structure. When estimates are developed correctly, they can be reduced only by changing the product or the productivity of the workers.

Three Levels of Accuracy

Everyone wants accurate estimates, but accuracy costs money. It makes sense, therefore, to use different estimating techniques for the different decision points in a project. For example, initial evaluation of a project idea shouldn't take as much time and effort (or money) as the detailed planning necessary for formal project approval. Let's look at three levels of accuracy at different stages in a project.

Phased Estimating

Phased estimating is a favorite among project managers because it requires cost and schedule commitments for only one phase of the project at a time. The phased estimating approach recognizes that it is impractical to demand a complete estimate at the beginning of the product life cycle. Instead, it breaks down the full product life cycle into phases, each of which is considered a project (see Figure 12.1). If you recall from Chapter 4, the product development life cycle describes the work required to create a new product, while the project life cycle focuses on managing the work. A number of projects can be involved in the development of a new product.

Phased estimating revisits the original business case as each phase ends and asks executive management to renew authorization for the project using updated estimates.

There is an enormous amount of uncertainty at the beginning of every development life cycle, but this uncertainty is reduced as the project progresses and more information is gathered. This presents a dilemma, because the customer, more than any other stakeholder, wants an accurate time and cost estimate for the complete development life cycle. This demand is easy to understand because the customer is trying to make an investment decision. The problem is that there is so much uncertainty when the product development effort is first considered that an accurate cost and schedule projection is impossible to produce.

The phased estimating approach recognizes this impossibility and instead breaks down the full product life cycle into phases, each of which is considered a project. Here is what this process looks like:

• The first phase is initiated with an order‐of‐magnitude estimate for the full development life cycle combined with a detailed estimate for the first phase. This detailed estimate is considered a commitment by the project team; this commitment signals an end to the uncertainty that surrounds a new project. By agreeing to a detailed plan with a fixed completion date, the team becomes more focused and productive.
• At the end of the first phase, a new authorization for the second phase starts this cycle once more. A new order‐of‐magnitude estimate is developed for the remainder of the product life cycle, together with a detailed estimate for the second phase. The new order‐of‐magnitude estimate will be much more accurate than the previous one because so much has been learned from the first development phase. This cycle of phase authorization will be repeated at each phase gate, and each time the order‐of‐magnitude estimate will become more accurate.

Apportioning

Also known as top‐down estimating, apportioning begins with a total project estimate, then assigns a percentage of that total to each of the phases and tasks of the project. The work breakdown structure provides the framework for top‐down estimating (as shown in Figure 12.2). Making useful top‐down estimates relies on some big assumptions, among them:

• Since apportioning is based on a formula derived from historical data of other, similar projects, the historic projects must be very similar to the project at hand for the formula to be accurate.
• Since apportioning divides a total project estimate into smaller pieces, it will be accurate only if the overall estimate is accurate.

Although apportioning is rarely as accurate as a bottom‐up estimate, it is an appropriate technique for selecting which projects to pursue. Despite its wide accuracy variance, it allows a project selection committee to approximate the length of project phases; this information then helps the committee decide which projects can be initiated and executed during a given budget period (see Table 12.2).

Apportioning is a valuable technique when used in conjunction with phased estimating. During phase reviews, the formula for apportioning can use the figures from the actual cost/effort of completed phases to increase the accuracy of the order‐of‐magnitude estimate (see Figure 12.3). For instance, if the original top‐down estimate dictated a phase‐one cost of $75,000, and the actual phase‐one cost was $60,000, this means that the overall project estimate should be reduced by 20 percent. Again, notice the need for an accurate apportioning formula.

Parametric Estimates

As the name implies, the parametric technique seeks a basic unit of work to act as a multiplier to size the entire project. The golden rules of estimating really apply with this technique: It is always based on historical data, and the estimator must develop a solid parametric formula. To see how parametric estimating works, consider the following examples:

• A cycling group in Dallas, Texas, was planning a cross‐country bicycle trip, starting in Seattle, Washington, and ending in Miami, Florida. Based on their experience riding together every Saturday for 2 months, they figured they could average 80 miles per day comfortably. A road atlas put the total trip distance at 3,334 miles. Dividing 3,334 by 80, they estimated the total trip would last 42 days. At this point, the only parameter was this normal daily rate of 80 miles. But when one of the riders pointed out that all their practice rides had been on relatively flat terrain in dry weather, they made changes to their model. They reduced their average daily mileage to 30 for the mountainous parts of their route (the route had about 200 miles of mountain crossing), and they added 10 percent for weather delays. This changed the formula from one to three parameters: normal daily rate, mountain rate, and weather factor. The new parametric formula looked like this:
  
• A manufacturing company needs to have its 340‐page user manual localized into several languages. Based on past localization projects, the staff has created a parametric estimating model. The basic unit of work is a page. On average, 15 pages per day can be localized into the target languages. This parameter assumes two people working together on every target language. If the number of people is increased or decreased, the parameter changes. But if they add a new language and therefore new members to the team, the parameter of 15 pages a day is probably too optimistic for the first document.
  
• To estimate the carpet allowance on a house remodel, the project manager figured a cost of $5 per yard for purchasing the carpet and $4 per yard to install it, or $9 total cost. Then he measured the length and width of all the rooms, calculated the area in square yards, and multiplied by $9. Construction projects are full of parametric estimates of this kind.
• On a defense program to build a new jet fighter, the total number of engineering drawings required was estimated from a conceptual model of the proposed aircraft. Thousands of drawings would be created from this model, and, based on past experience, the staff estimated that the average drawing would take 200 engineering hours. With the drawing as the basic unit of work, this simple parametric model allowed them to estimate the total engineering effort. By dividing the total number of hours by the number of engineers they assigned to the project, they set the high‐level schedule. Obviously, this was not sufficient detail for managing all the work, but because their parametric model allowed them to accurately estimate both the number of drawings and the average time per drawing, at least the engineering phase was accurately sized.

Three lessons can be distilled from these examples:

1. While it's possible to use parametric models to create either project‐level or task‐level estimates, the estimates will be more accurate at the lower level. Nevertheless, high‐level parametric estimates make excellent order‐of‐magnitude estimates and are accurate enough for the process of project selection.
2. When building detailed estimates, greater accuracy is achieved by first estimating the low‐level tasks (work packages) using parametric models, then combining all these work package estimates to build the project or phase estimate. It is useful to employ parametric modeling at all decision points (phase gates) in the phased estimating approach, both to create the high‐level estimate and to ensure the next phase commitment.
3. The variables in the parametric formula almost always require detailed product specifications. The more accurate the specifications, the more accurate the model. For example, the translation project required a completed user guide in the original language. Construction projects require blueprints. Both of these examples make one important point: Parametric estimating is usually applied to the construction phase of a product life cycle.

Bottom‐Up Estimating

Bottom‐up estimating requires the most effort, but it is also the most accurate. As the name implies, all the detailed tasks are estimated and then combined, or rolled up (see Figure 12.4). Bottom‐up estimating is another name for the planning model presented in Chapters 9 and 10 (see Figure 9.1 in Chapter 9). The final component of that model, building a project budget and cash flow, is described at the end of this chapter.

Within the planning model, step three calls for estimating work packages. (Recall that work packages are the lowest‐level tasks on the project.) The accuracy of the entire model is dependent on the accuracy of these work package estimates. (Recall from Chapter 9 the rules for work package size and from Chapter 10 the many variables that affect work package estimates.)

If bottom‐up estimating is so accurate, why isn't it always used? It would seem the accuracy justifies the additional time to build the schedule. The answer is that at the very beginning of a product development life cycle, there just isn't enough information to develop a detailed bottom‐up estimate for the entire life cycle. So bottom‐up estimating works only to build the detailed phase estimates.

BUILDING THE DETAILED BUDGET ESTIMATE

Project budget estimates can be “ballparked,” calculated with parametric formulas, and determined through apportioning. While these high‐level estimates are useful in the process of selecting projects, they are not accurate enough for managing a project. Once the project is approved, there is a need for a detailed, accurate cost estimate.

The detailed cost estimate becomes the standard for keeping costs in line. Everyone—customer, management, project manager, and team—is better served when a cost target is realistically calculated from a detailed plan. The team understands how the goal was created, and customers and management can be more confident that the project will stay within budget. Forecasting cash flow enables the project's funding to be planned and available when needed. And finally, during the course of the project, this detailed cost information will help in controlling the project, monitoring the progress, identifying problems, and finding solutions.

T‐Shirt Size	Extra‐Small (XS)	Small (S)	Medium (M)	Large (L)	Extra‐Large (XL)
Fibonacci Number	1	2	3	5	8

Sources of Data for the Detailed Budget

The actual calculation of a budget is pretty straightforward; it simply involves adding up figures. Just about any spreadsheet program is a good tool for the total budget calculation. What isn't easy is creating the numbers that go into the overall calculation. The following categories are the basis for the budget calculation. (Keep in mind that these are high‐level categories. Depending on the size and nature of any project, some categories may be eliminated or may need to be broken down to be more specific.)

External Labor and Equipment Costs

It's possible to use the same approach in estimating external labor and equipment costs as in estimating internal labor and equipment. The only differences will stem from the type of contract negotiated with the external contractor or vendor. Under a cost‐plus contract, the labor and equipment rates are written into the contract, and the vendor bills the project for the amount of labor, equipment, and materials supplied to the project. In this case, either the project manager or the vendor can estimate the work and arrive at the total cost by using the same bottom‐up method described for internal costs. In the case of a fixed bid, however, the vendor will estimate the total cost of labor and equipment for its part of the project and will be held to this figure (that's why it's called a fixed bid). In this latter case, the vendor has performed the necessary estimating; all that's needed is to add this estimate into the total labor and equipment costs. (See Chapter 8 for more on the difference between fixed bids and cost‐plus contracts and their impact on estimating accuracy.)

FAST FOUNDATION IN PROJECT MANAGEMENT

A thorough project plan is the foundation of a strong project. Download a Planning Checklist to guide your team and yourself to ensure that you've covered all the bases.

The planning checklist is available for download at www.VersatileCompany.com/FastForwardPM. As you and your colleagues use this checklist, you'll find new items to add, customizing it to better fit your projects.

PMP Exam Prep Questions

1. The project manager is creating an estimate for building a warehouse and distribution center. It is a project similar to those he executes about three times a year. He is using the rule of thumb of $100 per square foot to calculate the estimate. What type of estimate is this?
   1. Parametric
   2. Analogous
   3. Gut feel
   4. Bottom‐up
2. The construction team is building a new addition to a distribution warehouse. According to the site manager, a key to success will be to have an extremely accurate estimate of the resource needs for the project, especially because the company is resource constrained. Which type of duration estimating approach is the most accurate?
   1. Parametric estimating
   2. Bottom‐up estimating
   3. Analogous estimating
   4. Fast tracking
3. The management team is calculating the cost range for a project to develop a product that targets an unfamiliar market. What is the key principle that governs the cost range tolerance?
   1. The less known, the wider the range
   2. The more known, the wider the range
   3. The earlier in the project, the narrower the range
   4. −50 percent to +50 percent
4. To ensure that all the project work is considered, the project manager and his team create a bottom‐up estimate. Of the following, which is not an advantage of creating such an estimate?
   1. The estimate provides team buy‐in since the team is involved in its creation.
   2. The estimate takes a great amount of time to create.
   3. The estimate provides supporting detail.
   4. The estimate has a greater degree of accuracy than other estimates because of the detail.

Answers to these questions can be found at www.VersatileCompany.com/FastForwardPM.