parametric estimation

Parametric estimation is a quantitative technique. You can use this to estimate project cost, project schedule, or resource requirements.

This provides a reliable prediction.

However, you will need mathematical data from a similar past project. In the case of large amounts of data with mathematical correlations, you can use the info from your organizational process assets and use the parametric estimation to calculate the cost. 

For example, let us say the client wants to build a three-story villa and asks you to provide them with a cost estimate. 

Your organization has completed many similar projects in the last few years. So, you can estimate the costs per square foot by examining in-house data of costs and durations required by the previous projects.

Now let’s dig into this cost estimation technique.

Parametric Estimation

This is a quantitative estimation technique that provides mathematical equations to find estimations. Parametric estimating uses the historical information of past projects but considers scale differences by identifying unit/cost durations and comparing them to the current project. 

These estimates are reliable only if a statistical relationship exists between the variables. However, these need to be estimated on a scale for all user stories or elements which takes time. 

Activity costs can be determined by multiplying the work with the cost of the same work previously in the past. 

Parametric Estimation Examples

For example, it may take laborers two hours to dig a five-foot-deep ditch that is five feet long. Using that same resource, it will take four hours to dig a 10-foot-long ditch of the same depth. 

Now you can use the above information on your project like this:

If the labor rate for this resource is 30 USD per hour, the labor cost for a 10-foot ditch is 120.00 SUD (30 USD * 4 hours).

Things like environmental or technical complexity or project risk may also need to be factored into the overall estimate.

Consider the villa construction example.

During the initial evaluation, the construction company will use the parametric estimation technique to calculate the cost based on square feet. For this exact type of building, the cost was 200 USD per SQ FT in the past (plus or minus 10%). 

The current building will occupy 3,000 SQ FT (plus or minus 0%). 

So, the estimated construction cost will be 200 USD * 3,000 = 60,000 USD (plus or minus 5% which is average of 10% and 0%).

Parametric estimates require a careful review when the number of units is too small or large. 

Consider this from the above example: 

  • If SQ FT cost is 2 USD, then estimated construction cost will be: 
    • 2 USD * 3,000 = 6000 USD.
  • If SQ FT cost is 2,000 USD, then estimated construction cost will be: 
    • 2,000 USD * 3,000 = 6,000,000 USD.

Even a small error in the parametric value would lead to a large error in the final estimate, and so extra carefulness is necessary.

Parametric Estimation Features

  • More rigorous data is required than analogous estimation.
  • Mathematical equations based on expertise, research, and industry-specific historical data; e.g., cost per square meter in construction projects.
  • Statistical relationships between historical data and other variables (e.g. square meters in construction) are used to calculate the estimate.
  • Estimations through parametric estimation techniques are better documented

Advantages of the Parametric Estimation Technique

  • More accurate and reliable than analogous estimates and simple to perform.
  • Very useful accurate data is available.
  • Supported by senior management because of its accuracy.
  • Estimates can be used for one project and replicated for other projects.
  • Estimators trust this method and can calculate the capacity of labor or equipment according to the organizational environment.

Disadvantages of the Parametric Estimation Technique

  • Requires a great deal of time, effort, and cost.
  • There must be similarities among projects and tasks to benchmark and produce estimates.
  • It is difficult to account for environmental, political, and cultural differences.
  • Estimating Every cost or project event based on parametric benchmarks is difficult.

Conclusion

Parametric estimation is a reliable technique that provides you with cost or schedule estimates using data from past projects. Its accuracy depends on the quality of data and the environment.

Please note that, if you are preparing for the PMP certification exam, this is an important topic and you may see a few questions in the exam from this parametric estimation technique.

How is parametric estimation helpful in cost or schedule estimation on your project? Please share with us through the comments section.