Project Estimating Guide: Estimation Best Practices

Intro to Project Estimation

According to PwC, the number one reason projects are unsuccessful or fail is because of poor estimates in the planning phase. Afterall, the project estimate sets the pace and goals for the project to come in terms of resources, costs and budgets, and scheduling. It is important for project estimates to be realistic and updated throughout the initial planning stages of the project and its lifecycle. Estimates often start out very rough, but as more details and information are made available, they are updated to reflect the project’s scope of work.

Key Questions Project Estimates Should Answer:

  • What is the work to be estimated?
  • When will the work be accomplished?
  • Who will do the project’s work?
  • Are there any assumptions to guide the estimating? 
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During the early projects stages, like the Initiation Phase, little information is known in regards to what is necessary to complete the project. Often ball-park estimates or Rough Order of Magnitude estimates (ROM estimates) are used for these early estimates and their variance can be greater than +/-100% from the actual effort required to successfully deliver the project. ROM estimates with a variance of -25% to +75% are common.

To help determine an accurate schedule, budget and understand the material and resources needed to complete a project, it is important to create a work breakdown structure (WBS) of the project. PMI’s Project Management Body of Knowledge (PMBOK) defines a work breakdown structure as “a deliverable-oriented hierarchical decomposition of the work to be executed by the project team.” A WBS defines and organizes the entire scope of a project’s work to be completed in a manner that visibly shows how the work related to individual tasks as well as to the project’s deliverables and milestones. This tool helps project teams gather and roll-up estimating data and information so that they can create the project’s timeline, budget, and resource and material requirements.

More detailed information about the project’s scope of work becomes available as the project progresses, allowing changes to be made to the initial estimate and the perceptions around the project’s needs. As the project estimate is revised throughout its lifecycle, changes to the timeline and documentation may also be necessary. It is important to keep project estimates up-to-date and to communicate major changes so that all stakeholders have visibility into the project’s progress and status.

The Estimating Process

In order to have a successful project that is delivered within the estimated schedule, budget and quality set by the project management plan, accuracy and reasonability are critical. Many factors go into creating a realistic project estimate. Risks, resource availability, team capability, environmental factors, and stakeholder and sponsors’ priorities can all influence how a project’s estimate is determined.

The following are six estimating techniques that are most commonly used to create an initial “rough” project estimate.

Project Estimation Techniques

  • Top-Down Estimating – A technique in which the total cost of a project is estimated by (often roughly) the duration of major deliverables.
  • Bottom-Up Estimating – A technique in which each individual task that makes up the project’s deliverables are estimated.
  • Analogous Estimating – A technique in which former projects are used to estimate how long a current project will take or how much it will cost.
  • Parametric Estimating – A technique in which cost and duration are estimated by using the relationship between variables, i.e. identifying the unit cost or duration and the number of units required for the project or project task.
  • Three-Point Estimating – A technique (also referred to as PERT) that uses a formula (Estimate = [Optimistic + [4*Most Likely] + Pessimistic] / 6) to determine the weighted average estimate.
  • What-If Analysis – A technique in which project factors are selectively changed within the project’s schedule (i.e., resources, scope, and quality) to determine what effects those changes may have on the project’s outcome.
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Building a Project Work Breakdown Structure (WBS)

As mentioned above, a WBS defines and visually organizes 100 percent of a project’s scope based upon the activities, tasks and resources required.

Steps to Create a WBS:

  1. Break down the scope and work deliverables into schedule activities to define planned work.
  2. Organize schedule activities in the order in which they will occur.
  3. Break down the activities further into the actual tasks required to complete each activity.
  4. Order the tasks in the sequence in which they will need to be performed.
  5. Identify the resources needed to complete the work.
  6. Establish an agreement on how to calculate the timeline by duration, work effort, or both, with the project team.
    1. Duration – The amount of time it takes to complete a specific task taking into consideration other commitments (e.g., other work assignments, vacations, etc.)
    2. Work Effort – The amount of time it takes to complete a specific task only, without factoring in other commitments or interruptions (i.e., from start to finish without taking into account other work, meetings, etc.)
  7. Establish an agreement with the team on a common unit of measurement for estimating (hours or days) and a standard work day’s hours (typically 6.5 hours).
  8. Estimate the level of effort (hours) required to complete the work using available resources.
  9. Build a project schedule. It is important that any changes or adjustments to the order of activities also account for resource and material availability. Any adjustments or changes left unaccounted in the WBS could result in an inaccurately estimated project schedule.
  10. Manage and control the project schedule by identifying and monitoring factors that could influence schedule changes.
To create an ‘as accurate as possible’ estimate, various data and information sources are used– including subject matter experts familiar with the work of the project, historical data from similar past projects, project scope, resource availability and resource requirements, scheduled activities, outside dependences, and more.

6 Work Breakdown Structure Best Practices

The following are recommended best practices for WBS development:

  1. Develop WBS Jointly – The WBS should be drafted jointly by the project manager, the project team and stakeholders. Collaboration here is key!
  2. Product Elements Only – Do not include any elements that are not product related. Work breakdown structures address system requirements, not system functions or costs.
  3. Do Not Use Acronyms – Always use actual system names and nomenclature to avoid confusion.
  4. Continually Review – Review the WBS in meetings and look for any changes, delays and opportunities that may have impacted the critical path or the overall WBS.
  5. Make Updates – As the project environment changes, change requests should be made to reflect any changes to the WBS.
  6. Review – Review the completed WBS with the customer prior to creating the project schedule.

Because estimates will always involve guessing and making assumptions, it is imperative to utilize multiple sources for obtaining and creating a project estimate and using more than one of the project estimating techniques previously mentioned.

Incorporating Risk into Project Estimates

Intentionally under-reporting on costs in order to get project approval is frowned upon and often ensures projects will not be delivered within budget. However, overpadding a project’s timeline or budget to avoid criticism for being incorrect is also an offense. There is certainly room to pad for risks in estimating; the practice accounts for contingencies. In project management and project estimating, contingency is used to account for potential risks that may or may not occur and change the project’s estimated timeline or budget.

Detailed risk assessments are normally completed after an initial WBS has been built, but common project risks like those linked to the project team and resources, risks relating to the project’s scope, and business environment / operating environment risks should be considered in the initial estimate.

5 Project Estimation Best Practices:

The following are best recommended practices for producing accurate project estimates:

  1. Set Expectations – Estimate expectations should be set based on the information that is available to make those estimates. Project estimates are less accurate at the beginning of a project when there is less information available; as more information becomes available, estimates become more accurate.
  2. Multiple Estimates – For the best possible overall project estimate, use multiple estimating techniques and varying sources for each estimate.
  3. History – Maintain and analyze the historical accuracy of related estimates, past organization projects, and similar projects to help create more accurate future estimates. This also allows for project benchmarking, in which an organization continuously improves their project management practices by comparing their project with others in their portfolio or similar projects outside of their organization. Information obtained from benchmarking can help improve project processes.
  4. Review – Have multiple people review the estimate. The more sets of eyes and perspectives, the better.
  5. Document – Document all project assumptions and the estimating techniques used to derive the project estimates.

Technology & Quantity Takeoff

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Step 1 of creating a WBS heavily involves conducting a quantity takeoff. Quantity takeoff, also called an estimating takeoff or quantity surveying, refers to estimating materials needed to complete the project. It requires reviewing the project plans and taking off information related to what physical materials the architects, engineers, or draftsmen specify they need to assemble the project. Quantity takeoffs do not account for other project needs like project labor, overhead, permitting, insurance, equipment, or incidentals. Quantity takeoffs isolate material requirements and render that information into cost-based estimates.

A major part of producing an accurate estimate is centered around quantity takeoffs and drawings. This process used to be incredibly manual, though today, project estimators can use digital takeoff programs like 2D drawing software to identify and calculate quantity takeoff from construction plans and drawings and/or utilize 3D models of projects to save immense time and provide more accuracy. 

Advanced processes like 5D Building Information Modeling (BIM) have also significantly improved project estimation accuracy. 5D BIM is 5-dimensional building information modeling, which refers to the smart-linking of individual 3D components or assemblies with time and schedule constraints (which makes it 4D BIM), and then also linking it with cost-related information (making it 5D BIM). 5D BIM models enable users to visualize construction progress and its related costs over time.

Benefits of Using Project Estimation Software

Many leading organizations are taking advantage of project estimation software to replace time-consuming, manual tasks in the estimating process. The use of project estimating software results in many project benefits, including improved estimate accuracy, standardization, collaboration and more.

Speed Up Creation of Conceptual & Detailed Estimates

How many man-hours does it take an project organization to produce an average estimate including all versions and revisions? What does it cost that organization to estimate an average project? What is their bid-to-win ratio? Perhaps they have passed up the opportunity to bid on a project due to time constraints and may have lost a significant opportunity?

Saving time in project estimating affords project organizations more time for countless other responsibilities. Depending upon current processes, the time spent estimating a project can be cut in half with a good commercial estimating software, allowing organizations to bid on more projects and take more time on the front-end to ensure the projects that they are awarded come in on-time and within budget.

Increase Project Estimate Accuracy and Consistency

An estimate’s accuracy can be significantly increased by using industry standard databases and by capturing and using a project organization’s historical data to produce new estimates. Cost models that contain metrics based on previous projects and smart assemblies that prompt the estimator for dimensional information, materials to be used, and the methods of placing materials will eliminate omissions and provide an audit trail of the assumptions that were made to determine construction cost. Assemblies can generate a great amount of estimate detail in seconds and this detail can be summarized into unit cost for review and presentation. They also ensure consistency in their calculations.

Standardized Process with Audit Trail

Standardization of the estimating process allows managers to move from one office to another and evaluate estimates created by others with full knowledge of the process used in its creation and the logic that led to the price. It is important to maintain an audit log of users’ actions during the estimate creation which may include change descriptions, date/time stamps, data entry

or document movement, and identification of the user making the change to help managers understand every step that led to the estimate. It is also important to track project estimate versions and revisions, so that comparison reports can be printed to reflect assumptions that are made as the plan and scope move from the “drawing on the napkin” to detailed construction documents.

Capture Enterprise Knowledge & Share Best Practices

Many project organizations have teams of people with great project knowledge and experience, however, these employees will not be there forever, sometimes they are only working on a specific project. Estimating software helps to capture what is in these knowledgeable project professionals’ minds in a database that contains unit man-hours, productivities, and unit pricing based on experience. Build smart assemblies based on known metrics, so that new engineers and estimators can leverage this knowledge and create accurate estimates from day one. Doing so brings great value to project organizations and enables them to maintain confidence in their estimates regardless of who helps produce them.

Good Estimates Lead to Winning Presentations

Few things build confidence in the mind of the client more than the presentation of an estimate derived from a commercial software database. Project estimating software can slice and dice the estimate using summary and detailed data that is captured in WBS codes, group codes, and sort fields allowing users to quickly pivot data for reporting based on CSI, master format, uniformat, phase, area, and/or other breakout required by the client. Comparison reports provide the ability to see different versions, revisions, and estimate alternates at a glance. Most commercial estimating software will interface with commercial report writers to provide dynamic sales presentations that win business.

Promote Collaboration and Eliminate Data Silos

The American Institute of Architects (AIA) promotes integrated project delivery (IPD) which “involves a collaborative alliance of people, systems, business structures and practices into a process that harnesses the talents and insights of all participants to optimize project results, increase value to the owner, reduce waste, and maximize efficiency through all phases of design, fabrication, and construction.” 

Engineering and Virtual Design & Construction (VDC) departments need to interact with the estimating team. The estimating department needs to collaborate with the project controls team to promote the use of cross-functional, integrated project teams using 3D, collaborative environments to shrink the cost and protracted length of total project life cycles. This methodology offers design, estimating, planning and execution teams the ability to explore and visually simulate many designs. The result is a better understanding of the time and cost associated with the overall project delivery.

With poor or inadequate project estimates accounting for the largest cause of projects failing, it is more important than ever for project organizations to have well-defined project management processes in place and to implement project software solutions that can help them deliver their projects on-time and within budget.

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