When you're preparing to start a new project, you'll need to figure out how much it will cost and how long it will take to complete it on schedule. Producing an accurate estimate of the total cost for your entire project is a stressful process. As the project progresses, you will have more information for estimating cost for completing the project - but how do you generate accurate estimates in those initial stages, with limited data?
One technique you can use to deal with this issue is an estimating process called analogous estimating. In this article, we'll discuss what analogous estimation is, the different methods, and how they can help you in project planning.
Analogous estimation is a technique for estimating costs for your current projects and future projects based on a similar past project. Analogous estimating is one of the most detailed and accurate ways to estimate the cost data for a given project, so that you can set up an accurate cost baseline, without entering into the world of statistical models.
The Project Management Institute defines analogous estimating as using the values of parameters from a previous, similar project as the basis for estimating the same parameter or measure for a current project. Project parameters that can be estimated through the analogous estimating technique include factors such as scope, cost, budget, and project duration.
Simply put, this strategy analyzes data from similar past projects to get a cost estimate for your current, comparable project.
Analogous estimation is also known as a top-down estimating technique because it looks at the overall project first. This is different from bottom-up estimating, where you work out each individual activity first and build up your cost estimate from there.
For instance, suppose a customer has asked you to create marketing video content for their new shawl line. This is a brand-new product that has never been released before, so the best way to start planning your project budget is by searching for a similar completed project.
If you discover a similar job was completed three months ago using a different product at a cost of $8,000, you may estimate that the current project will cost around $8,000.
Analogous estimation relies on expert judgment, or a good knowledge of the projects, to assess whether the past data you use is comparable to your current project. If you can identify broad parallels between the current work and the previous project, you can generate an analogous estimate of the cost, time, and other aspects of what you are trying to achieve.
Like any other way to estimate cost, time, or resources, an analogous estimation technique has several benefits and drawbacks.
Analogous estimating works by identifying and accessing data from past and ongoing projects. For example, this can involve data for each team member's weekly work hours, the costs involved, and the timings for each stage of a previous project.
Usually, historical information is drawn from the project accounts, but how well the final estimate fits your project depends on the project manager's and team's experience to ensure the two projects are comparable.
Sometimes, your new project may not be anything like what you are using as your base for the estimate, but you and your team can identify common themes such as existing skills and resource costs that can be applied, even if you don't have the exact information you need. Look for similar modules or activities to get a base for your estimation of overall resource needs, costs, and timeframe.
The exact steps you go through in producing an analogous estimate depend whether you have information from a similar past project, or whether you'll have to take a mix-and-match approach.
When you have access to data from a previous project that is reasonably similar to your new project, you can use this information to estimate the cost and duration of your current plan:
However, if your current task is in a new field or involves new aspects, then a rough estimate based on a single past project may not hit the mark. In that case, a more accurate technique is to consider your project at the module or task level, and look for similar activities in previous projects:
As with other estimating techniques, there are a number of values that you can produce using analogous estimating. These are single-point estimates, ratio estimates, and three-point estimates.
A single-point estimate consists of a single absolute value, e.g. overall cost.
Armand has recently been promoted to head of sales for a skincare brand. They want to advertise their new ingredient moisturizer with a one-minute video marketing campaign.
Armand searches the company's project accounting software for prior campaign data to determine the cost and length of the current project. Armand discovers a moisturizer campaign was produced very recently, which involved a two-minute marketing video. He can use this historical data to create an analogous estimate for his overall budget.
A ratio estimate is when you apply a factor to historical data to get a more accurate estimate for the current project. By accounting for inflation cost for materials since the last project, or adjusting the estimate from historical data by a flat-rate percent to account for differences in project scope, you would be creating a ratio estimate.
You are creating a project estimation for a social media campaign. You have found data in your company accounts relating to an equivalent project from three years ago. However, you are aware that your staff costs have increased by 5% over the last three years. When estimating labor costs, you would apply an additional 5% to the figures you retrieved from the historical project, to produce a more accurate estimate.
Three-point estimating produces a range of possible values rather than a single number, so that you don't just have a ball-park figure, but an idea of best-case and worst-case scenarios.
To do this, you start by generating three separate estimates: optimistic estimates, pessimistic estimates, and most likely estimates. Your calculation is then finalized using triangular or Pert Distribution to provide the final result.
You are unable to find a perfect match to your current project plan in your previous data, but you have managed to identify three projects that are similar:
Although none of these projects matches yours closely enough to be used as a model, you can say from this information that:
You can then create a 'most likely' estimate, based on the average of these projects or whichever reflects your current plans most closely. For this project, you decide the Prime Project is the closest match:
If you are looking to refine your estimate further, these values can then be used in a more statistical approach, to work out the distribution, standard deviations and likelihood of the estimate being accurate.
A range estimation can be useful for a new project, but it is also necessary to carefully understand the data you are using for each of your ranges. If any figure is too far removed from the reality of your project plans, it might skew the ratio to the extent that your estimate becomes wildly inaccurate.
Analogous estimating is used to create a "generic" estimate for a project based on the numbers from a previous project. This involves details of the duration, budget, cost, and scope of similar projects.
Parametric estimating, on the other hand, uses activity unit rates to calculate the amount of money and resources needed, as well as duration estimates. Each unit needs to be clearly identified so that costs, time, and resources can be accurately defined.
Parametric estimation uses clearly defined parameters such as similar components in materials, cost of premises, and staff costs, in order to provide the data needed to calculate an estimate for the new project.
Parametric estimates involve statistical calculations and are more complex than analogous estimates. This quantitative assessment technique can produce higher accuracy but may be more time-consuming and is only suitable for projects that fulfill certain criteria.
It can be difficult to decide on the best way to estimate project budgets. Most of the time, you need an accurate, simple technique that doesn't take a long time. There will be times when project managers must quickly estimate the cost and length of a new project, because executives need to know whether the initiative is worthwhile.
Often, neither the project manager nor anyone else in the business has ever worked on a project like the one being proposed. It can be a challenge to know where to start to quantify all the elements of the new undertaking.
In such cases, the best solution is an analogous estimation. It isn't perfect, but it is clearly based on historical data and is a relatively simple technique. When you have minimal information about your current project, analogous estimating can be your best option for developing a rough first estimate.
However, if your project fits the criteria for a parametric estimate, or another statistical method, then you may want to pursue this when you have time. It will help you refine your project cost estimate, ensure you didn't miss anything with the analogous approach, and give you added certainty that your project cost baseline is accurate.
There are various methods and techniques available to project managers when it comes to estimating costs. The analogous estimating process is a popular choice for new projects where an estimate needs to be obtained fairly quickly and there is no existing data from this specific project to extrapolate from. The analogous estimation method does not necessitate a lot of resources: it only requires a tiny amount of data, and can result in reasonably credible estimations.
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