How to Generate good Range Estimates

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At a recent Project Budgeting and Cost Management Conference, we at present a paper / workshop titled ‘The Value of Range Estimation’. It dug into the concept but most importantly the methods behind range estimation. Please feel free to make contact to with the subject line ‘Value of Range Estimation’ and we happily send you a copy of the slides. Read further for more insights and thoughts into the thoughts process behind the how to generate good Range Estimates. Firstly, there are essentially three techniques that are relevant to understanding estimates:

  1. Scenario Analysis or Project Range Estimates is to understand  the basis of the estimate and not challenging the number but challenging the basis of the estimate
  2. What if / Risk Analysis where very often the three major sources of risk in a project are estimation, scope of work and stakeholder dependency
  3. Better Scope of Work which can be thought of if the scope is defined better, it allows the project to get away from number confusion

The method that is open for discussion here is the scenario analysis / range estimation method.

Step 1: – Perform an impact analysis which can be used to either heighten concerns about a project’s outcome by focusing on possible project conditions such as: –

  • Scope of Work
  • Time / Project Duration
  • Cost / Budget
  • Customer Expectation

This allows the project to understand what the focus should be and how this focus can be translated into impact / scenario statements

Step 2: – Perform Scenario Analysing using five key point. The objective here is to understand the scenarios that can drive risk and change in the project and translate this into an objective number

  • Decide on the key question to be answered by the analysis
  • Identify trends and driving forces to find key uncertainties.
  • Reduce the forces to a minimum
  • Define the scenarios
  • Identify the extremes of the possible outcomes of the two driving forces

The outcome here should be a range of possible project events that have a probability of occurring.

Step 3: – Convert the Scenarios to the three most basic numeric values than exist of range estimates:

  • Optimistic value or best case
  • Most Likely value
  • Pessimistic value or worst case

This is where the numbers can begin appear and where people becoming interesting in the range. However, without step 1 and step 2, this step can be very misleading.

Step 4: – Develop the risk model which  involves estimating the potential impacts of risk on the project and then applying those impacts to the schedule or to the budget. Based on the previous scenarios, a range of duration and cost uncertainty is determined for each project task. Risk events that could disrupt the project should also anticipated as well as each risk event’s likelihood and potential impact on project cost and duration.

Step 5: – Interpret the results. Based on the analysis, the project team can make changes to the schedule to reduce or eliminate risk where possible, and take steps to mitigate adverse risk impacts that do occur. As successive changes are made to the project plan, a new risk analysis can be run to assess the effects of each change.

The results of each analysis can be plotted on a common graph for easy comparison. Best of luck for all ye range estimators out there and do feel free to make contact to with the subject line ‘Value of Range Estimation’ and we happily send you a copy of the slides.

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