Project Estimation and Budgeting

Summary

This best practice offers an overview of project estimation methods and techniques, including the various levels and types of estimates, and considerations for each.

 
Progressive Levels of Project Estimates

Project estimates are required at various points in a project’s lifecycle, from initial conception to budget approval to baseline acceptance, and finally for ongoing change requests. As a project progresses and more details are known, the estimates become more accurate.

When a project is first requested, generally an Order-of-Magnitude estimate is given. This is typically a top-down estimate that, according to Project Management Institute standards, should be anywhere from -25% to +75% in terms of accuracy (though an initial estimate range of +/- 50% is most often seen in practice).

Sometimes, this Order-of-Magnitude estimate is also used for the business case for project approval, whereas some organizations choose to have a more intensive business case preparation effort and aim for what is called a Budget Estimate (generally +/- 25% accuracy). Other organizations reserve the more accurate Budget Estimate for phase-level estimates when approving by phase.

Last, the Definitive /Baseline Estimate, which is a bottom-up estimate rolled up from the individual project task estimates, should aim for +/- 10% accuracy. A snapshot is then taken of this (i.e., the baseline) and used for ongoing comparison of actuals to tell whether the project is on budget.

Sometimes, this Baseline Estimate falls outside the threshold of the approved business case or budget. If that is the case, then the difference must be justified and brought forward for approval.

The key point is that, as more is known about the project and its tasks, and the further you get into the project, the greater the accuracy of estimates.