Three-point estimation is a robust technique that offers a nuanced approach to cost estimation by considering the best, worst, and most likely scenarios. Rooted in the PERT (Program Evaluation and Review Technique) methodology, it provides a comprehensive view of potential cost outcomes.

Essential Details:

  • The Three Estimates:
    • Optimistic (Cost-O): The best-case scenario.
    • Pessimistic (Cost-P): The worst-case scenario.
    • Most Likely (Cost-ML): The most probable outcome.
  • Expected Cost Calculation: Using the PERT methodology, the expected cost (Cost-E) is derived as: Cost−E=(Cost−O+4×Cost−ML+Cost−P)​/6
  • Variability & Standard Deviation: The potential variability in the estimate is gauged using the standard deviation (Cost-SD): Cost−SD=(Cost−P−Cost−O)​/6
  • Confidence Levels: Based on statistical norms:
    • 50% confidence that actual cost will be ≤ Cost-E.
    • 75% confidence that the actual cost will be ≤ Cost-E + Cost-SD.
    • 95% confidence that the actual cost will be ≤ Cost-E + 2 × Cost-SD.
    • 99.5% confidence that the actual cost will be ≤ Cost-E + 3 × Cost-SD.
  • Project Size & Validity: For the statistical assumptions to hold true, the project should encompass around 20-30 activities estimated using this method. Additionally, the estimates should be statistically unbiased.
  • Aggregating Estimates: Sum up all the Cost-E values for individual activities to get the total expected cost for an entire project. The overall standard deviation is derived by squaring individual Cost-SD values, summing them, and then extracting the square root.

Crucial Aspects:

  • Transparency & Flexibility: By using three-point estimation, project managers acknowledge the inherent uncertainties in estimation, fostering a culture of vigilance and adaptability.
  • Common Pitfalls: Estimators often lean towards optimism, which can skew results. Additionally, factors like multitasking can reduce the actual utilization of resources, impacting the final costs.

Wrap-Up:

Three-point estimation is a dynamic tool that offers a holistic perspective on cost estimation. It comprehensively explains potential cost outcomes by factoring in the best, worst, and most likely scenarios. While it offers a structured approach, it must be aware of its assumptions and limitations, ensuring that estimates remain grounded in reality.