Use Estimates To Communicate Risk As Well As Effort, Cost, and Schedule

Estimating is one of the most difficult and error prone tasks facing project managers. Project managers are often required to develop estimates quickly with very incomplete information. Since budgets, staffing, and even the strategic direction of a project are driven by the estimating process, problems with estimates can have severe consequences.

When you have done your best with the information available, but the information available is inadequate for a reliable estimate, communicate the risk inherent in the estimate. Communicating risk with an estimate is a surprisingly easy, yet powerful, way to convey significant valuable information to management. There are two ways to communicate risk with an estimate:

  • Include all key assumptions with the estimate.
  • Present the estimate as a range -- pessimistic, most likely, and optimistic.


Key Assumptions

Bad estimates are often the result of the estimator making bad assumptions. Moreover, even good estimates can be rendered obsolete if the underlying assumptions later prove to be invalid. Key areas to consider include:

  • What is being estimated (include list of deliverables).
  • What is not being estimated.
  • Resource requirements.
  • Responsibilities with target dates.
  • Environmental assumptions.

Risk will be related to two factors:

  • Assumptions that have a high probability of not being valid.
  • Assumptions that, if invalid, can cause significant estimating variances.

Present Estimate as a Range

Presenting estimates as a range also communicates risk. Mosaic recommends three estimates -- optimistic, most likely, and pessimistic. (Note: Do not use the terms "worst case" or "best case.") Consider the following effort estimates which illustrates how communicating a range of estimates conveys significant additional information.

Work Hour Estimate Comment
10,000 work hours There is no way to judge the risks or reliability of the estimate
optimistic: 9,900 hours
most likely: 10,000 hours
pessimistic: 10,100 hours		 The estimator implies a precision that is not possible. Therefore the estimate is not reliable.
optimistic: 8,000 hours
most likely: 10,000 hours
pessimistic: 13,000 hours		 This may be a reasonable estimate of the effort.
optimistic: 8,000 hours
most likely: 10,000 hours
pessimistic: 50,000 hours		 The estimator implies such a wide range that the factors behind the "pessimistic" estimate need to be explored before proceeding.

Each of these estimates has the same "most likely" estimate of effort, yet each estimate conveys very different information about the risk associated with the estimate.

Summary

Risk should always be communicated with an estimate. Risk information is important to management and it can be easily communicated with an estimate.

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©2001 Mosaic, Inc.