Use three-point estimates to make contingency reserves more accurate

Duration and cost estimates can be greatly improved by incorporating uncertainty and risks. Unfortunately, some project managers simply pick an arbitrary percentage when allocating contingency reserves (e.g., 10% or 25% of the total duration or cost).

For each project activity, ask your team members to provide three estimates: most likely (t_M), optimistic (t_O) and pessimistic (T_M). You can do this for duration only, cost only or both. Use PERT analysis to calculate the expected value (t_E) using the formula t_E = (t_O + 4t_M + t_P) / 6. Calculate the standard deviation (t_S) = (t_P – t_O) / 6.

Manage your project based on t_E. Your contingency reserve should be +/- 3t_S. In doing so, statistically, there is a 99.73% probability that the duration or cost will fall within t_E +/- 3t_S.

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Tags: estimating, three-point estimates

This entry was posted on 7 April 2009 at 08:45 and is filed under Project Management. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.