# PPM and Project Estimation - Part I

By now, we know that the first objective of any IT project portfolio management (PPM) practice must be to determine which projects are the “right” projects for a company to invest in.

To accomplish this objective, a successful PPM practice is comprised of several lower-level evaluation and analytical disciplines. One of which is an effective project estimation method.

A company’s IT department is required to provide estimates to the business units whenever the business units request services from IT. These estimates occur several times in the life of a project.

Specifically, project estimation should occur at four phases in the project lifecycle as follows:

Collectively, these estimates should work in a cumulative fashion, building on one another and providing more accurate estimates at each phase.

Picture a funnel with the large end on the left-hand side and the small end on the right-hand side. If you were to place a stick down the center of the funnel you would have space between the stick and the edges of the funnel both above and below the stick.

Imagine the stick (going straight through the center) as your estimate and the space above and below the stick as the wiggle-room associated to the estimate. The edges of the funnel then, represent the variance levels applied to the wiggle-room.

At the left-hand side (i.e., the widest opening) the wiggle-room is largest. This is synonymous to the order of magnitude estimate that comes out of the screening phase, which has the largest tolerance for error.

The right-hand side opening of the funnel (i.e., the smallest opening) is synonymous to the implementation estimate that comes out of the technical design phase.

To help make things clearer, let me summarize the estimate types and appropriate variance levels for each:

**Screening/Order of Magnitude Estimate:** This high-level estimate, sometimes called a “ballpark estimate” is based on high-level objectives and major deliverables usually described in a paragraph or two supplied by the business on a project request form.

Most order-of-magnitude (OOM) estimates have a range of variance from –20% all the way to +80%. Like I said, lots of wiggle room.

Your IT department shouldn't invest too much time in creating these initial estimates and the customer shouldn't place too much confidence in the accuracy of the OOM estimate.

Unfortunately, a breakdown in expectations can easily occur when it comes to OOM estimates because the IT organization tries to make it as accurate as possible and provides estimates in numbers such as 3,244 project hours or $123,456. These kinds of numbers promote accuracy to the business customer and thus set expectations inappropriately.

Instead, all OOM estimated values should be rounded to appropriate levels to illustrate their ballpark-like accuracy. Using the previous examples, I would recommend that you round 3,244 to 3,500 and $123,456 to $125,000 or possible $150,000 to ensure the appropriate expectations are set.

** Business Case/Budgetary Estimate:** This estimate is produced after the scope of the project has been refined to satisfy the level of detail required by a thorough business case analysis.

By this time alternatives such as build-versus-buy are starting to come into the picture. The budgetary estimate is most often going to be produced using comparative estimating techniques—taking budget lessons learned from a similar project or similar vendor installation experiences and applying them to the current project.

The PPM process uses this estimate to do just at its name implies: establish a funding budget for the project once selected and prioritized.

With a budgetary estimate, we start at the top and work our way down into the project details. Like the OOM, this estimate should include conditions, a range of variance, and any assumptions that went into your calculations.

A business case/budgetary estimate is slightly more accurate than an OOM estimate and should be relatively quick to produce. I recommend a range of variance on the budgetary estimate from –15% to +40%.

** Functional Design Estimate:** This estimate follows the general design activities of a project, which may include an Alternatives Study if you are pursuing a packaged solution.

At this point you should now understand the functions that the system will provide and the estimating process becomes more accurate. There has been enough information defined for the solution that a bottom-up or parametric estimating approach can now be applied for calculating a relatively accurate estimate.

Parametric estimating is the use of independent variables to predict the cost of a project. At this stage, these independent variables may be functional specifications, system features, or some other descriptive functional element that is used to define the scope of the deliverables at an early stage when there is a lack of detailed technical specification information.

A popular parametric estimating technique that delivers perhaps the greatest accuracy and flexibility is the International Function Point Users Group (IFPUG) Function Point methodology.

A functional design estimate is more accurate than a budgetary estimate and I recommend a range of variance on the budgetary estimate from –10% to +20%.

** Technical Design/Implementation Estimate:** At this stage the technical design of the solution has been defined and you will have decided on development specifics, such as the computer language to use for implementation, the number of application panels, and the precise database structures.

The implementation estimate is the most accurate of the estimate types, but takes the most time to create. An implementation estimate requires a detailed work breakdown structure (WBS) that specifies a deliverables-oriented decomposition of the project scope.

Again, you should consider using a bottom-up or parametric estimating approach, such as the IFPUG Function Point methodology, for creating the implementation estimate. Your estimates are now at their most accurate levels and should be able to fall within a -5% to +10% range.

** Project Estimation within PPM **

Because there should be a well coordinated hand-off between your PPM practice and your PMO processes (See my other article Aligning PPM and PMO for Project Success for details.), the transition from PPM estimates and PMO estimates must also be coordinated.

Both the OOM estimate and the budgetary estimate occur early in project planning and must be well integrated into your PPM processes. The functional estimate and the implementation estimate occur once a project team is assembled and is owned by the PMO processes.

Next month I’ll show you how the OOM and budgetary estimates are utilized in the PPM process and practical techniques to use for consistent and efficient estimations.

* Jeff Monteforte is president of Exential, a Cleveland, OH.-based information strategy consulting firm, which specializes in IT governance, information security and business intelligence solutions. He can be reached at jmonteforte@exentialonline.com.*