The Analogous Estimating Technique

One of the most common methods of estimating project costs enables you to take advantage of the similarities between a current project and projects that have been performed in the past. This technique is called analogous estimating.

An analogy is a set of comparisons you draw between two things with similar characteristics. Analogous estimating is also known as "top-down" estimating because you apply the total costs from a previous project in order to estimate the total costs of a new one. Just keep breaking the budget down according to the new work breakdown structure (WBS).

The main benefit of using the analogous estimating technique is that it is less costly than other estimating techniques. The down side of using this technique is that it is also generally less accurate.

You may be wondering, "If analogous estimating is not considered to be accurate, why would I use this technique?" However, before you disregard analogous estimating altogether, you should be aware of the circumstances under which it is most reliable. It is particularly beneficial when the following conditions are present.

1. The new and previous projects are similar
There are two situations in which analogous estimating is used. One is when your project is similar to other, previous projects. The more similar the projects are, the more accurate the estimates will be. You also can base estimates on a similar project when you don't have detailed information about a new project. More details are provided below.

• Are they similar? To determine the degree of similarity between the past and current projects, examine the scope and purpose of the former project to ensure the projects are alike in fact, and not just in appearance.
• Not enough detail. Sometimes important costing information becomes available only after a project has begun. A similar project's budget will provide a general baseline to go by.

2. The individuals preparing the estimates have the necessary expertise
Knowledge about, and experience with, the subject matter determines whether the individuals preparing the estimates have the needed expertise. You may want to hire one or more external experts to help with cost estimating.

3. The estimating team has access to adequate information about the previous project
If your current project lends itself to the analogous estimating technique, you'll want to furnish your cost estimating team with everything they will need to produce accurate results. Listed below are some types of information they should have on hand when they are developing cost estimates using analogous estimating.

• Scope statements. The team will not know whether two projects are in fact similar unless it can compare descriptions of the project and product scopes.
• Work breakdown structure. The work breakdown structure from the previous project is also necessary to ensure that similar processes and steps will be followed in the current project. Differences in the two projects could affect the accuracy of cost estimates.
• Performance reports. Actual costs are the most important information from the old project. Your team will use them to determine which of the previous estimates were accurate. It should use the actual costs to revise any inaccurate estimates before copying them into the new project.

Remember the analogous estimating technique as a less costly way of estimating project costs when your team has the needed information and expertise to effectively compare the current project to previous, similar projects.

Potential Risks to Cost Estimation

When developing your project cost estimates, do you take potential risks into consideration? Risks are uncertain occurrences that can affect the outcome of a project.

Since they can have a significant effect on project costs, risks are an important input when developing your project cost estimates. Risks can be divided into two types: internal and external.

• Internal risks are occurrences within the company that can affect the project cost. These can include labor shortages, poor planning, or low productivity.
• External risks are generally outside influences that the company can do little to control. These can include supply delays, material costs, or natural disasters.

Identifying risks as either internal or external is a very basic way to organize them. Project managers who are developing cost estimates must specifically identify as many project risks as possible to plan for their effects on project costs. Internal and external risks can be separated into the following five categories.

1. Predictable risks
Predictable risks are manageable by the project team, but their extent and direction is uncertain. These risks can include market shifts, late shipments, cost and availability of materials, currency changes, inflation, and taxation.

2. Unpredictable risks
Unpredictable risks are unforeseeable and are beyond the control or influence of the project team. Unpredictable risks include vandalism, sabotage, natural hazards or disasters, and surprise actions taken by governments.

3. Technical risks
Technical risks are associated with the use and application of technology. Some of these risks can be controlled by the project team. Technical risks can include changes in technology, technical performance, and software design.

4. Non-technical risks
Non-technical risks are other events that can affect costs but are not directly related to technology. Human resource issues, schedule delays, inadequate planning, and management difficulties are all non-technical risks.

5. Legal risks
Legal risks relate to or are concerned with the law. Legal risks that could affect project costs include licenses, patent rights, contracts, and lawsuits.

Identifying and planning for potential project risks is an important input to cost estimating. Including risks will help project teams develop accurate cost estimates and keep their projects on track.

Historical Information Sources for Cost Estimating

Have you ever made an important project decision based on a similar situation in the past? Historical information and estimating publications are important inputs to cost estimating because they serve as benchmarks.

In project management, historical information is information about previous projects that can be used to help with a current project. Four sources of historical information a project management team can use for cost-estimating purposes are discussed below.

1. Project files
In all likelihood, your current projects are not that different from projects your company has done in the past. Each of these finalized projects should have a file, whether it is a "hard copy" file in a cabinet somewhere, or an electronic file.

You should consider both similarities and differences between past and current projects when consulting closed-out project files. One way to do this is to carefully compare the project scope statements.

An essential part of project management is keeping complete files of all planning inputs, work results, performance reports, and correspondence. If external organizations also worked on a project, you could obtain copies of their records for the project as well.

The documents most relevant to cost estimating are previous cost estimates, budgets, reports on cost performance that include actual costs, and documents that show the rationale behind revised cost estimates and budget changes.

Knowing how useful project files are to future projects should motivate you to keep every output your project management process generates. For example, you could implement a system for document retention within your project team, make sure that all stakeholders know that you want to keep all documentation in a central project file, set up a shared directory on your company's computer network where documents can be stored and backed up, and keep records of the reasons for cost variances, even when it causes embarrassment for the cost estimators.

2. Project team knowledge
The knowledge of your project team members is another form of historical information. Employees with experience and maturity are a great asset when it comes to cost estimating. They can draw on their experiences when cost estimating, since they likely will recall cost information about the various projects on which they have worked.

3. Commercial cost-estimating databases
Commercial databases are another source of historical information from which you can obtain cost information about previous projects. Publicly-owned corporations are required to make such information available. Other companies charge fees for access to databases that compile this information.

If you find a number of projects similar to yours in a database, compare them to your project and make adjustments for differences. You should be able to arrive at fairly accurate cost estimates for your project. Remember that certain factors, such as inflation, need to be considered when basing current cost estimates on former projects.

4. Estimating publications
Estimating publications are similar to commercial databases, as they contain commercially available analyses of raw data that can be used to prepare estimates. These publications help team members who are preparing cost estimates customize general information to their specific project. This streamlines the cost estimating process and increases efficiency.

Estimating publications can include such resources as computer software programs, industry-specific case studies, and periodical articles. These resources can provide you with useful project data in a reasonably short amount of time.

Of the four sources discussed above, project files contain the most reliable cost information. Project team recollections are useful, but they are generally far less reliable than documented results. Historical information and estimating publications are a great starting point for cost estimating. Remember to use the cost estimates that were proven accurate so you can avoid making the same errors again.