Time and cost estimates are vital aspects of project planning. When you have reliable estimates, you can create a realistic budget and project timeline. On the other hand, wrong time or budget estimations can affect your entire project, leading to dissatisfied clients or stakeholders.
So how do you get accurate estimates?
Parametric estimating is one of the most reliable tools project managers, and their teams use to calculate time and cost estimates.
In this article, we define parametric estimating, explain how to use parametric estimating, provide examples, and list some advantages and disadvantages of the method.
What is Parametric Testing?
Parametric testing is an estimating tool used by project managers to evaluate essential factors of a project, such as the total time, cost, or resources it takes to complete tasks.
In parametric testing, project managers or team members use historical and statistical data, market information, and experience to inform their calculations based on the relationship between variables.
Project teams might combine parametric estimates alongside other estimation techniques or on their own. They can also use this tool to evaluate an entire project or a chosen segment.
The parametric method consists of:
- Task or part: The project manager breaks down the project plan into sections or steps, such as worksite prep, installation, and testing.
- Parameter: This is the unit that the project manager wants to measure, such as the number of endpoints or the size of an office building.
- Cost per parameter unit: This is the cost to complete the task based on averages of historical, statistical, industry, or market data.
- Time per parameter unit: This is the average time spent to complete an activity. This time is based on past project data.
- Parameter value: This is the number of parameter units for calculation purposes.
The basic formula for calculating parametric estimates is:
Cost/Time per Parameter x Parameter Value = Estimated Project Cost/ Time
Why is Parametric Testing Important?
Parametric testing provides the project team with high accuracy of estimates because they are grounded in data the team already knows to be true.
This estimating method is helpful during the scope management or planning phases and helps come up with reliable cost and time estimates for the project before it kicks off. Managers can also use it mid-project whenever changes require an updated estimate.
Once you create a parametric testing formula, you can use it as a template to model future project plans.
The 3 Major Estimating Techniques
There are three primary estimating techniques that use historical data to construct estimates. However, he processes they each use to perform the calculations are very different. Let’s look at each method:
1. Analogous estimating
Analogous estimating typically involves making a judgment call based on project similarities. This testing technique arrives at an estimate by relying on the values of parameters, such as scope, duration, cost, and budget, or measures of scale, such as complexity, size, and weight, from a similar project.
In this technique, the project manager breaks down the project into tasks or deliverables and matches them with actual similar tasks completed in past projects. Analogous estimating, in this case, assumes that the current project will also be influenced by the specific circumstances of those past projects.
2. Parametric estimating
Parametric estimating relies on historical data and other variables to calculate cost, budget, and duration estimates.
In this testing technique, the project manager breaks down the project into sub-components (usually a deliverable) and matches them with the appropriate equation to obtain the estimates. While the project manager can derive the equations from past projects, they can’t use the specific circumstances of these projects to create the equations for current projects.
3. Bottom-up estimating
Bottom-up estimating is a method of calculating a component of work i.e. work packages which are the lowest and most detailed level of a work breakdown structure (WBS).
Project managers use this technique to estimate the cost or duration of individual work packages or activities with the most excellent level of specified detail. Project managers then aggregate the individual detailed cost or duration estimates to get a total estimate for the entire project.
The complexity and size of the individual activity or work package will typically influence the accuracy of the bottom-up estimating technique.
Parametric Method Examples
Let’s look at a few examples to help create a clearer picture of the parametric estimating technique and how you can apply it to your projects.
You have a project that involves laying 2000 meters of fiber optic. Your network engineer has in the past laid 25 meters of fiber optic cable per hour, on average. So to lay 2000 meters, they’ll take:
2,000 / 25 = 80 hours of work
However, this estimate doesn’t include travel time to the site or breaks between work. To cater to these variables in your current project, you can assign a couple of network engineers to get the cable laid faster.
Lets say your project is to install accounting software on 105 desktops for your client. You may have a fixed price for the software but need to estimate the time duration and installation cost.
Based on past projects, you know that it takes 30 minutes per desktop. So, your estimate will be:
105 devices x 30 minutes = 3,150 minutes or 52 hours, 30 minutes.
However, the assumption here is that one person did the work in the previous project whose estimation of 30 minutes per desktop you used. But, in the current project, you have three technicians doing the installation. Therefore, the work will take three times less time to complete.
You’re the project manager for a fundraising campaign and want to raise $20,000. In a previous similar campaign, it took eight weeks to raise $10,000. The campaign was using just one fundraising channel. This time, you want to raise $20,000 using multiple fundraising channels.
So if you were to go by past data, it would take 16 weeks to raise $20,000. However, the current project timeline will be shorter than 16 weeks since you have multiple fundraising channels.
Advantages of Parametric Testing
Parametric testing in project management can help you make essential estimates for projects. Some benefits of the method include:
Most project managers use parametric estimating due to its accuracy. Managers often incorporate years of historical data to arrive at the best answer. This type of testing is more reliable than analogous and bottom-up estimating techniques because it considers many factors, making it flexible yet precise. You can adjust your calculations with every new project for a learning curve or regression analysis.
Parametric estimating is efficient and faster than other estimating methods. This technique reduces the need to operate on a granular level. Often, parametric estimates focus on primary tasks and overall parameters rather than laying out individual aspects of a project.
Replicate repetitive processes
If your projects usually involve similar activities, such as installing software, you can use parametric estimating to calculate your task-level costs or time quickly. Once you have a formula, input the variables from a new project and get an estimate instantaneously. Furthermore, you can use project management software to simplify this process by giving you quick access to previous project data such as timesheets and financial reports.
Better resource planning
Use parametric estimating in the early phases of scope management to determine the feasibility of your project. When you do this, you’ll achieve efficient resource planning and management as you have reliable cost and time estimates for the entire project.
Disadvantages of Parametric Testing
As with all project management techniques, parametric testing comes with a few disadvantages:
It’s not as straightforward as it seems
The basic formula Cost (or Time) per Parameter x Parameter Value = Estimated Project Cost (or Time) might seem straightforward, but not always the case. For instance, in our second example, the three technicians might get exhausted and need a break after laying fiber every three hours. One might lay faster than the others due to having more experience. One of them could be a new hire still learning the ropes and doing the job slower. All these are variables you may not have factored in your estimate.
Parametric estimating can be time-consuming and costly, mainly when used for a complex project.
Data may be unavailable or difficult to get
Historical data may be unavailable or quality low, as external data can be skewed and difficult to verify. Without accurate data, you may not have accurate estimates.
To negate these disadvantages, combine it with other estimating techniques such as bottom-up and Takt time.
How to Perform Parametric Estimating in Project Management
To use parametric estimating in project management, start by breaking your project plan into sections. Sections can include ideation, market research, business strategy, prototyping, market entry plans, and commercialization.
Next, establish parameters, i.e., the unit of work or resources required for each section. Parameters can include labor, supplies, equipment, and more.
Once you’ve established your parameters, look at previous projects and collect useful historical data that relates to your parameters. For example, what equipment was used in a past similar project? How many team members made up a past project?
Using the historical data you’ve collected, calculate each unit of work’s cost or/and duration. After costing:
- Map out correlations between data obtained and the current parameter values you set.
- Make inferences and get expert opinions on the different variables before creating your estimates. You can use the Delphi technique to collect views from experts.
Use Mission Control to Improve Your Parametric Estimating in Project Management
Parametric estimating may be time-consuming, but it can improve your workflow, streamline the cost and time estimation process, and ensure project profitability.
Mission Control makes it easy for you to collect historical data from past projects because every data related to your projects is stored within the software.
Project managers can look at timesheets within the software to estimate how long it takes for team members to complete a task and plan future projects with reliable estimates on the team, resources, and finances. Using Chatter Feed, you can further communicate and share these numbers with the appropriate team members and stakeholders.
Once your parametric testing model is created, you can save the template in Mission Control and use it repeatedly for future projects.
Ready to get started? Contact us today for a demo of how Mission Control can help you create better estimates for your projects.