Parametric estimating can seem daunting to anyone planning to start a career in Project Management. As the name implies, it is an estimation process used to determine the expected cost of a project. It is a prerequisite for anyone planning to sit for a PMP® examination. So without further delay, let’s jump right in to discuss parametric estimating and how you can use it.
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Parametric estimating is a quantitative approach towards project estimation that uses the statistical relationship between historical data to establish other tentative variables. It is a technique used to calculate the expected cost and time required to implement and complete a project.
Parametric estimating is inevitable for every project manager to use for cost estimation. The reason being, it is an established tool under the cost estimate process in PMI. While it is a widely implemented technique by project managers, its form differs for different projects. It requires you to do your homework on your ongoing projects and match it with previous project information. However, depending on how detailed and reliable the initial data is, it can deliver a high level of accuracy.
Parametric Estimating versus Other Project Estimating Techniques
Estimation is the process of determining the project’s cost and effort. Apart from Parametric Estimating, there are four other types of cost estimating techniques, these are:
Analogous Method: This method uses values and parameters from previous projects to estimate the cost or duration of the current project. Although it uses similar work, deviations might happen because of varying circumstances. Thus the analogous method is thought to be not so accurate as the rest of the estimating techniques.
Bottom-Up Method: In this method, you estimate components of work individually. Then all the individual costs are summarized or rolled up into an overall project estimate. The more extended and accurate the individualistic activities are, the more the accuracy of this method.
Top-Down Estimating: As you can tell by the name, it is an inverse method of bottom-up estimating. This method uses the overall estimating first and later divides it into individual tasks. However, it has a high level of risk for being inaccurate.
Three-Point Estimating: This method uses three estimates pessimistic, optimistic, and most likely values for estimating an overall medium cost. This method reduces the risks of inaccuracy by considering various possibilities and incorporating marginal safety.
Over time these estimating techniques might be needed for project estimation. With that said, Parametric Estimating lands on the middle ground, as it delivers a balance between button-up and analogous. Instead of estimating the entire task, it concentrates on parts that carry out eighty percent of the work. Since there is less unpredictability, the method is more simplistic and takes less time to approach the total cost and effort.
When to Use Parametric Estimating
Parametric Estimating is used at the early design stages to get an overview of the total cost. The idea is for you to understand the overall cost of the product (based on weight, measurements, etc.). Once you get the overview, you can evaluate the expected time and resources needed to execute the project.
The estimation is implemented based on two conditions. The first one being, when you have the historical information from similar work, so you can use it for modeling. The second one being, when the modeling is scalable, meaning when the framework remains the same even if the unit or work increases.
Keep in mind that the data collected should be precise, such as methodology and hours required, etc. Once the conditions are all met, working out the parameters is no rocket science.
How to Use Parametric Estimating
The process is further divided into the following parts for your convenience to understand the process better.
Determining the parts
First, you need to establish the units of work that are applicable for estimation. At the very beginning, divide your work into sections for a definite level of accuracy. You might be able to estimate the entire project at once, but some would need work at granular levels. You can use WBS or (Work Breakdown Structure) here to select the scope of your estimation.
Next, you need to determine if the parameters and time or cost are co-related. Unless there is an interconnection between the values and parameters, you cannot use this technique. Lastly, to determine the parts, see if there is historical information for your estimation process.
Apart from that, determining the scope of calculations is one of the primary tasks for a project manager. Here, you need to identify the baseline estimates and the critical cost drivers to fill in the information gap.
Researching the Data
Now that you have determined the applicable part of your project for estimation, you need to gather historical information. Simply put, you need to accumulate relevant data from previous projects that you can potentially use for your task.
You can gather information using public statistics and the internal cost or resource database of your company.
Detecting the Parameters
Here is where the work is going to be divided based on the complexity of the project. After identifying the parameters, these correlations will lead to further calculations if you’re using a model.
Parametric estimating involves project managers doing expert guessing, which means they would have to make assumptions. Based on the intricacy of your project, the estimation process will vary. In the case of small projects, expert guessing will suffice. However, in terms of an extended project, you will need to perform the following two steps.
Identify the Data that Advances Cost or Duration
Before you perform this process, keep in mind that this is only required if there is a need to develop a model later. In this process, you will have to use software or artificial intelligence. This step is to identify the complex database. So you need to be efficient in special software to perform this step.
The correlation of the parameters that you identified previously now needs to get evaluated to determine the patterns. Once you finish this step, you will have the parameters appropriate for model estimation.
Create a Model
This type of process takes statistical and data analysis expertise. Be aware that these processes take a lot of time and resources. So be mindful of balancing this process with potential benefits and the stakeholders.
The parameters that you earlier recognized now need to be backed up by historical information from past projects. Lastly, you will need to create a model based on the parameters to determine the required cost and duration of the project. Remember that this is an advanced step that needs to be performed based on your project complications.
Calculating Parametric Estimating
Parametric Estimating Formula
In simple terms, parametric estimating is a cost management technique where multiplication happens between the unit rate and the number of units.
It consists of only one parameter and the linear relationship of parameters with cost and duration. The formula is:
E_parametric = A_old / P_old x P_curr
E_parametric= parametric estimate
A_old= historic amount of cost or duration
P_old= historic value of the parameter
P_curr= value of the parameter in the current project
Software Used for Parametric Estimating
Project managers can choose from a wide range of apps and software built for parametric estimation.
One of them being Excel. The app or software you use will depend widely on the complexity and expected price of the project. However, you can use excel to calculate both simple and intricate projects. It is because excel is used to plot the values on two axes and work in an orderly manner. Furthermore, the calculations also become easier using the formulas in the app.
Apart from that, Costimator and COCOMO are two applications used by software and manufacturing project managers, respectively. Project managers around the globe use these software applications for quicker cost estimates.
Examples of Parametric Estimating
Following are examples of parametric estimating. Note that the following calculations are not accurate and only demonstrated to help you understand better.
Kylie Cosmetics has recently decided to expand its office space. A team of professionals went to the new office building to calculate the cost estimates.
The team first starts by gathering the information on costs and duration of historical cases. Then they measured the square foot area of the building and did the parametric assessment using every square ft of the building and cost for it. The cost of the estimating had amounted to $500 per parameter unit. Since the new building has an area of 3000 square ft, the calculations for parametric estimation will be,
Estimated construction cost (ECC) = $500×3000 square ft = $1500.
Suppose you are a tutor of a fifth-grader. And you teach her five subjects. You teach one chapter from each subject every day. For each hour you teach, you get $10. You have a fixed salary but not a fixed duration of time required to teach one subject.
But based on historical data, it takes 30 minutes to teach one chapter of one subject.
So to teach five chapters, it takes 30*5= 150 minutes.
So, for 2 hours and 30 minutes, you get $25 each day.
Pros and Cons of Parametric Estimating
Parametric Estimation is the least complex estimating process among others, with the most accurate results for estimating cost and time. If that doesn’t sail your boat, getting the stakeholder’s approval and support is easier for this estimation process because of its accuracy.
Once the model gets prepared, the same model gets reused as historical data in future projects. As the models get reused, the accuracy and quality of data get better. On top of that, manual adjustments are easy to make between present and historical data. With the adjustments made with the reuse of the project, the model quality improves for future implementations.
For starters, parametric estimating is costly and time-consuming since collecting the data used for historical information requires time. Not just that, building a model based on a complex project takes time, energy, and resources.
Without the availability of historical information and scalability, it’s not possible to perform this estimation.
Apart from that, point estimation is not possible in this technique. Since parametric only uses 80% of the work, the rest uses other determining techniques. That creates an issue with the reliability of the data since some parts are from different methods.
The accuracy of historical information is also an area of concern since the project estimation heavily depends on its accuracy. In such a scenario, the historical information obtained and the previous models need to be free from all errors.
Parametric Estimating in Project Management
Project management responsibilities include estimating the total cost and time required to perform a project. A project management professional is someone who shuffles through different projects simultaneously while meeting their expected results and deadlines in time.
Whether or not someone is a project manager, everyone comes across estimations at least once in their life. However, estimating is an inseparable part for PMP® professionals, so any candidate willing to sit for the exam must learn all the necessary steps required for parametric estimation.
While it is okay to feel overwhelmed by the complexity of each project, with practice and experience, it will get easier. Remember, if you want that dream job in project management, sitting for PMP® is a must.
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With accurate historical data and resources, parametric estimating can show you exact results for cost estimation. So, regardless of the complexity of some projects, almost every project manager can benefit from implementing this estimation technique.
That said, which estimating process do you think works the best in your opinion?