Estimating Techniques

Cost and budgetary concerns are major elements of project planning, and as a Data Analyst, you have an important role to play in this area.

An integral part of project planning and research is estimating. Estimating is a field where there is not sufficient information available, or variable information that creates a risk to the project. If costs are unknown, then there is a risk the project could exceed the budget. Therefore, there are estimating techniques that reduce such risks.

• Comparative estimating uses comparable data that we can scale up or down
• Bottom-up estimating starts from the component cost and works its way up
• Parametric estimating is mainly used to estimate production costs
• Then there is a favourite one, especially for software development: PERT, or 'three points' estimating

PERT Estimating

Use the PERT estimating formula to calculate an estimate for the following scenario:

To add new functionality to the company website, we have been given estimates of one day (best case scenario), 2.5 days (most likely) and 4 days (worst case scenario).

According to the PERT technique, how long should we estimate for the functionality to be delivered?

Answer: 2.5 days.

Variance Estimating

Image: Variance estimates become more accurate with greater knowledge, narrowing the gap between high and low estimates.

Using the variance technique, we can calculate an upper and lower variance and budget this in our project budget. This allows for project sponsors to know the minimal and maximum costs.

There are typically 4 types of costs that can vary: costs of materials, how much material is needed, costs of labour and the efficiency of labour. Those are re-estimated at specific intervals during the project life cycle to see if the project is on track with costs. For example, one month delay on building a new factory could mean more material needed for the build, and labourers being less efficient or simply taking more time. That combination can have a significant impact on project budgets.

Calculating variances

These are the formulae to calculate the difference between a budgeted (standard) cost and the incurred cost.

Direct material price variance

• (actual quantity purchased x actual rate) – (actual quantity purchased x standard rate)

Direct material quantity variance

• (actual quantity used x standard rate cost) – (standard quantity allowed x standard rate cost)

Direct labour rate variance

• (actual hours worked x actual hours rate) – (actual hours worked x standard hourly rate)

Direct labour efficiency variance

• (actual hours worked x standard rate) – (standard hours allowed x standard hourly rate)