Project managers know that uncertainty is an ever-present challenge. To overcome this and make informed decisions, they rely on techniques like three-point estimating. This project estimation approach considers three scenarios, best case, worst case, and most likely, to evaluate probabilities and manage risks.
By analyzing optimistic, pessimistic, and most likely estimates, project managers gain a comprehensive view even with limited information. Three-point estimates enable embracing uncertainty through data-driven decisions for project success.
This article provides an overview of this powerful technique, including its formulas, proper usage, and comparison to similar methods. Whether you’re an intermediate project manager or a PMP exam candidate, this will help you to enhance your estimation skills.
What is Three-Point Estimating in Project Management?
Three-point estimating is a project management technique used to forecast the likely duration or cost of project activities. It entails developing three estimates:
- Optimistic Estimate (O): The best-case scenario where everything proceeds smoothly.
- Pessimistic Estimate (P): The worst-case scenario considering potential risks and challenges.
- Most Likely Estimate (M): The expected scenario, a realistic middle ground between best and worst case.
By incorporating multiple scenarios, three-point estimates provide a comprehensive range of possibilities which is more accurate than reliance on a single estimate. This allows project managers to better evaluate uncertainties and probabilities.
Three-point estimating enables data-driven decisions even with limited upfront information and is invaluable for risk analysis and expectation setting. While it requires some additional effort compared to single-point estimates, the payoff in terms of improved planning and decision-making makes it an essential technique for many projects.
Three-Point Estimate Formula in Project Management
To derive a most likely estimate from the three scenarios, there are two common options used as a three-point estimate formula. These are:
Triangular Distribution
This straightforward formula takes the average of the three estimates:
E = (O + M + P) / 3
Where:
- E = Expected duration/cost
- O = Optimistic estimate
- M = Most likely estimate
- P = Pessimistic estimate
PERT Distribution
PERT (Program Evaluation and Review Technique) applies weighted averages, emphasizing the most likely scenario:
E = (O + 4M + P) / 6
By multiplying the most likely estimate by 4, PERT distribution fits a normal distribution curve. This assumes outcomes close to the most likely estimate are more probable.
Choices between these formulas are based on factors like available data, uncertainty levels, and personal preference. The PERT model is often preferred for its risk analysis capabilities.
Whichever formula you use, the result represents the most realistic predicted value for the activity, incorporating a spectrum of possibilities. This data then informs resource allocation, scheduling, budgeting, and more.
How to Calculate a Three-Point Estimate
Follow these steps to calculate a three-point estimate:
1. Identify the activity to estimate.
2. Determine the three scenarios:
- Optimistic (O) – best case
- Pessimistic (P) – worst case
- Most likely (M) – expected case
3. Select a formula:
- Triangular: (O + M + P) / 3
- PERT: (O + 4M + P) / 6
4. Calculate using the chosen formula.
5. Analyze the resulting estimate against the possible range.
6. Document the optimistic, pessimistic, and most likely estimates along with the final figure.
7. Track actuals against estimates to refine over time.
With practice, coming up with the three estimates gets easier. Leverage historical data and subject matter experts to inform your scenarios. Revisit and update estimates as the project evolves.
How to Use Three-Point Estimation in Project Management
Follow these steps to implement three-point estimating effectively:
1. Break Down the Project
First, break down the overall project into smaller activities using a work breakdown structure (WBS). This makes estimating more manageable.
2. Estimate Each Activity
Next, develop optimistic, pessimistic, and most likely estimates for each activity’s duration or cost. Once again, leverage historical data, subject matter experts, and project specifics.
3. Calculate Expected Values
Then, plug the three estimates into a formula like PERT or triangular distribution to calculate expected values.
4. Develop the Schedule
With expected durations, build out a project schedule showing activity sequences, dependencies, and timelines. A PERT chart is very useful here.
5. Manage Uncertainties
Use the range between optimistic and pessimistic estimates to identify risks and uncertainties. Then create contingency plans and consider tradeoffs.
6. Refine Estimates
As the project progresses, compare estimates to actuals. Identify gaps, learn from them, and refine your estimating process.
When to Use Three-Point Estimation in Project Management
Three-point estimating is most applicable when:
1. High Uncertainty
Use three-point estimates for activities with considerable uncertainties or risks as the range of estimates accounts for variability.
2. Early Project Stages
In early phases with minimal data, these estimates provide an initial forecast to guide planning. You then refine them later as more data emerges.
3. Long Duration Activities
For activities spanning multiple phases, three-point estimates help visualize how risks may manifest over time.
4. Complex Projects
For complex projects with many interdependencies, these estimates aid dependency analysis and critical path identification.
5. Multiple Estimators
When multiple experts provide estimates, it captures an array of perspectives on risks and acceptable outcomes.
6. Fixed Budgets/Deadlines
If budgets or deadlines are fixed, three-point estimates help assess feasibility and plan contingencies.
7. Aggressive Schedules
When pushing aggressive timelines, use three-point estimates to evaluate the likelihood and impact of delays.
While useful in many situations, three-point estimates involve more effort than single estimates. Ensure the project complexity and uncertainty justify the approach.
Pros and Cons of Three-Point Estimating
Three-point estimating provides project managers with a more comprehensive view of potential outcomes compared to single-point estimates. However, it also has some limitations to consider.
The key benefits of using three-point estimates include:
1. More Accurate Estimates
By taking an optimistic, pessimistic, and most likely estimate into account, you can get a better sense of the range of possible durations and costs. This additional context results in estimates that tend to be more realistic and accurate.
2. Better Risk Identification
The gap between the optimistic and pessimistic case highlights risks and uncertainties that may impact the project. This allows you to proactively plan risk mitigation strategies as a Project Manager.
3. Informed Decision-making
With the best and worst case scenarios in mind, you can make more informed resource allocation decisions, adjust timelines, and plan contingencies where needed in your role as a Project Manager.
3. Stakeholder Alignment
Presenting the three estimate scenarios helps align stakeholder expectations about possible outcomes rather than providing a single estimate. This transparency helps manage expectations.
4. Continuous Improvement
Tracking actuals against the three estimate points allows you as a Project Manager to improve your estimating skills over time by identifying gaps and refining the process.
However, there are also some potential limitations to consider:
1. Higher upfront effort
Determining three estimates requires more time compared to a single estimate. The extra effort may not be warranted for simpler projects.
2. Cognitive biases
Project Managers may default to optimism or pessimism based on past experiences rather than evaluating each case independently.
3. Volatile estimates
As new information emerges, the three estimates may need frequent updating which can be disruptive.
4. False precision
The appearance of precision from detailed estimates may not reflect true uncertainty.
5. Stakeholder challenges
Some stakeholders may be resistant to range estimates and prefer definitive timelines/budgets.
Overall, three-point estimating delivers substantial benefits but also requires effort and stakeholder buy-in. For complex projects, the pros generally outweigh the cons.
Three-Point Estimating Example
Let’s walk through an example of using three-point estimating for a project management scenario.
Suppose you are leading the development of a new mobile app. One task is designing and building the backend database. Your team provides the following duration estimates:
- Optimistic: 4 weeks
- Most likely: 6 weeks
- Pessimistic: 10 weeks
You decide to use the PERT formula to determine the expected duration:
E = (O + 4M + P) / 6
Plugging in the estimates:
E = (4 + 46 + 10) / 6
E = 34 / 6
E = 5.67 weeks
The PERT estimate comes out to nearly 6 weeks. This factors in your team’s best and worst case scenarios while ultimately landing close to the most likely estimate of 6 weeks.
You would document all three original estimates, along with the PERT calculation. This data helps create your baseline project schedule, looking at how the database task fits with other activities.
The 3-week range from best to worst case makes risks tangible. For example, you decide to mitigate by prioritizing database design reviews and reserving a contingency budget for potential third-party integration issues.
As the task progresses, you track actual duration against the PERT estimate and underlying scenarios. If the pessimistic case starts materializing, proactive risk response becomes paramount.
This example demonstrates how three-point estimating brings uncertainties to light. It provides the context needed to plan, manage, and respond to project risks based on data-driven analysis rather than guesswork.
3-Point Estimating vs Triangular Distribution
Three-point estimating and triangular distribution are two similar techniques for developing project estimates using optimistic, most likely, and pessimistic scenarios.
However, there are some key differences between the two approaches that you should understand.
1. Calculation Methods
Firstly, the calculation method differs. Three-point estimating applies weighted formulas like PERT to emphasize the most likely scenario. It uses probability distributions to determine the appropriate weighting.
In contrast, triangular distribution simply takes the average of the three raw estimates.
2. Shape of Estimate Range
Secondly, the shape of the estimate range varies. Triangular distribution forms a triangle shape, with the peak at the most likely estimate and a linear falloff to the outliers.
However, three-point estimating with PERT follows a bell curve shape, with more weight concentrated around the most likely estimate.
3. Spread of Estimates
Additionally, the spread of estimates tends to be wider with triangular distribution since it gives equal weighting to the outliers. Three-point estimating constrains the range around the most likely case.
4. Risk Assessment
When it comes to risk assessment, three-point estimating enables more detailed quantitative analysis based on the estimate distribution. Triangular distribution is less precise for assessing project uncertainties and risks probabilistically.
5. Data Requirements
The data requirements also impact technique selection. PERT relies on rich historical data to determine appropriate weightings while triangular distribution can be used even with limited data or pure expert judgment.
6. Ease of Use
Finally, the triangular distribution provides simpler upfront calculations. Three-point estimating requires additional steps to shape the curve and analyze risks based on the range.
Difference Between 3 Point Estimate and PERT
Three-point estimating and PERT are often used interchangeably, but they have distinct meanings in project management.
While PERT relies on three-point estimates as inputs, it is important to understand the key differences between these two techniques.
1. Estimating Approach
Three-point estimating refers to the overall technique of developing optimistic, most likely, and pessimistic estimates. PERT is a specific weighted formula used to calculate an expected outcome from those three estimate points.
2. Required Inputs
Three-point estimating requires defining the three scenarios for each activity being estimated. PERT relies not only on the three estimates, but also on historical data to determine the appropriate probability weightings.
3. Application
Three-point estimates can be analyzed using different methods such as PERT distribution, triangular distribution, etc. PERT is applied after the three-point estimates have already been established for an activity.
4. Outcomes
Three-point estimating results in a range of possible duration or cost outcomes bounded by optimistic and pessimistic cases. PERT calculates a single expected value from the three estimate points based on probabilistic weights.
5. Usage
Three-point estimating is a broad project management technique used for planning purposes and risk analysis. PERT is most applicable to large, complex projects with many interdependent activities and significant uncertainties.
6. Focus
Three-point estimating concentrates on developing individual activity estimates. PERT focuses on analyzing the overall project network and critical path.
In summary, three-point estimating is the essential process of defining three scenarios, while PERT is a specific weighted formula that leverages those estimates to determine project timelines probabilistically.
Three-Point Estimating PMP Exam Tips
For PMP exam success, keep these three-point estimating tips in mind:
- Know the key terms like optimistic, pessimistic, and most likely estimates.
- Understand how to apply PERT and triangular distribution formulas.
- Recognize when to use three-point estimates for complex projects with uncertainty.
- Be able to compare three-point and single-point estimating approaches.
- Identify the inputs, tools, and outputs of the estimate activity process.
- Review examples of three-point estimates for sample project scenarios.
- Know the benefits of three-point estimating, like improved accuracy and risk insight.
- Consider how to present multiple estimates to stakeholders during expectation setting.
Conclusion
As seen, three-point estimating is an invaluable project management technique for developing activity duration and cost forecasts. By incorporating optimistic, most likely, and pessimistic scenarios, it provides far greater insight compared to single-point estimates.
Although it requires more upfront effort, the enhanced risk analysis and data-driven decision-making abilities make three-point estimating well worth it for project managers.
Take time to build expertise with this method so you can reap the benefits of superior planning and execution. Your project performance and confidence as a project leader will improve as you master three-point estimating.
FAQs
Why is The Three-Point Time Estimating Technique a Good Way To Determine a Confidence Rating For Your Time Estimates?
The three-point estimating technique provides a range of duration scenarios – optimistic, pessimistic, and most likely. This range helps determine the confidence level of the overall time estimate based on potential risks and uncertainties.