Parametric Estimating for the PMP Exam

Parametric estimating is a guaranteed inclusion on the PMP Exam.  This article is assured to give you at least one point (but more likely four or five).

Parametric estimating is a project estimation technique whereby a unit rate is used and multiplied by the number of units.  For example:

• A house building project is estimated at $120 per square foot
• A contractor must bid at least $5,000 per day
• A engineer requires a fee of $10,000 per drawing

You can recognize a parametric estimate by its parametric value (unit rate), shown in bold, above.

Accuracy

Parametric estimates are generally considered quite accurate because the parametric value is often based on similar projects or taken from industry publications that are quite reliable.  However, the overall estimate is only as reliable as the parametric value.

The accuracy of parametric estimate is average of the accuracy levels of the unit cost and the number of units.  For example, in a house building project:

• The parametric value is $120 per square foot – plus or minus 10%
• Quantity is 2,000 square feet – plus or minus 0%
• Therefore the estimate is $240,000 plus or minus 5% (average of 10% and 0%).

Also, the accuracy of a parametric estimate can be greatly skewed if the number of units is very large or very small.  For example, consider the following two estimates:

1. Estimate 1:  $2/unit x 1,000,000 units
2. Estimate 2:  $2,000/unit x 1,000 units

Although the estimates are the same, a small error in the parametric value in the first estimate can be greatly exaggerated into a large error in the final estimate. Put another way, it is much easier to be wrong by 10% on a small parametric value (like $2) than it is on a large one ($2,000) and it multiplies into many units.

Source

You can obtain the parametric value from one of three possible sources.

1. Previous projects (internal):  Actual costs from projects that have been completed by the organization can be consulted to determine the parametric rates.  This is particularly useful because it takes into account the organization’s internal processes and efficiency levels.
2. Previous projects (external):  Actual cost information from other projects can be helpful if the information is known.  The drawback is that you often don’t know the underlying variables, that is, the issues that happened or caused the actual cost to be what is was.  For example, a state government might share bid information from previous paving projects.
3. Industry publications:  These tend to be very reliable as they are an average over many projects.  For example, construction equipment rates are usually published by the industry trade organization.

Adjustments

It would be great if a parametric value could be applied to your project universally without any other factors to account for, but this is rarely the case.  Adjustment of the parametric value are necessary due to a variety of reasons:

1. Number of units (economies of scale).  The more units are required, the cheaper the unit price might be.
2. Quality level.  The units might be of a different quality level than the parametric value.
3. Material types.  The units are made of a different material.
4. Environmental conditions.  The units are affected by external environmental conditions.
5. Resource availability.  The units have more or less availability than the parametric value.

Other Project Estimation Techniques

Parametric Estimating is one of three project estimating techniques for the PMP exam.  The other two are:

• Analogous Estimating:  The process of estimating a task from analogous, similar projects.
• Three Point Estimating:  The process of determining a final estimate from optimistic, pessimistic, and most likely values.

These estimation techniques apply at the task level.  To roll the individual task level estimates into an overall estimate, the following techniques apply.

• Top Down Estimating:  The process of choosing an overall project estimate first, and then apportioning it to each individual task.
• Bottom Up Estimating:  The process of determining the task level estimates first, and then rolling them up into an overall project estimate.

It is important to differentiate between task level estimating and project level budgeting (top down or bottom up estimating).  In fact, the PMBOK has two separate processes for these two things: Estimate Costs and Determine Budget.  I say this because it has often been (mistakenly) written that Analogous and Top Down Estimating are the same thing.  Although I can understand why there would be confusion over this, Analogous Estimates are performed at the task level, just like Parametric Estimates.  On the other hand, Top Down and Bottom Up estimating are performed on the project level.

Conclusion

The PMP exam is virtually guaranteed to have one, if not 3-5 questions on estimating.

• Parametric = Unit Value.
• Analogous = “Analogy” to a similar project.

Good luck on the exam, and let me know in the comments if you have anything to add.