Parametric Estimating in Project Management

Parametric estimating can be a great option when you need an accurate, efficient, and objective project estimate.  

This blog will help you understand parametric estimating, teach you how to use it for your own projects, and provide some real-world examples.

Ready to get granular?

Here goes.

Credit: FreePik

What is Parametric Estimating?

Let’s start with the parametric estimating definition: parametric estimating in project management is a technique used to estimate the cost, time, or resources required for a project using historical data and statistical comparisons. 

The parametric estimating formula is made based on a unit rate (e.g., cost per square foot) that is scaled to the project in question using the following formula:

E_parametric = A_old / P old x P curr

E_parametric = parametric estimate

A_old = historical amount of cost or time

P_old = historical value of the parameter

P_curr = value of the parameter in the current project

Parametric estimation is commonly used to estimate marketing campaign budgets, construction costs, software development timelines, and manufacturing costs.

Analogous vs Parametric Estimating

Analogous estimating starts in the same way as parametric estimating, by finding historical projects similar to the current project. However, parametric estimating then goes on to use statistics and variables to come up with a highly accurate estimate. In contrast, an analogous estimate is made simply by comparing amounts and costs and coming up with a broad estimate. All in all, when comparing parametric vs analogous estimating, parametric works best with projects with well-defined variables and produces more reliable results. Analogous estimating, on the other hand, works best when limited data is available and/or a quick decision is needed.

What are the advantages of Parametric Estimating?

Accurate: Since statistical calculations (as mentioned above) are involved, parametric estimating provides an accurate estimate when reliable data is used. 

Scalable: Even if a current project has many differences to a historical project in terms of scope/size/cost, as long as the relevant variables exist in the historical project, a parametric estimate can be made. This means that parametric estimating is very scalable and you simply need to adjust parameters to make an estimate.

Objectivity: With parametric estimating, there’s no need to worry about people making biased estimates, as the calculation is made purely with data-driven calculations. As long as the person making the estimate has the right data, they’ll come to the same conclusion as the next person.

Credible: The accuracy of parametric estimating lends it credibility, which makes it more likely for stakeholders to accept budget proposals and agree to the project in general.

Repeatable: Once you’ve created one parametric estimate, you can reuse it for similar projects in the future. Furthermore, the quality and accuracy of the data improve with every project, as the calculation is fine-tuned each time.

What are the disadvantages of Parametric Estimating?

Data-dependent: Since parametric estimating relies heavily on historical data, the main disadvantage is that you'll end up with inaccurate estimates if you don’t have accurate or complete data.

Complex: Parametric estimating is more difficult than other estimating methods, like analogous estimating, in that you need to use statistical methods and make detailed calculations, especially for new or unique projects.

Credit: FreePik

Over-simplification: Parametric estimating relies on the relationship between variables in different projects to create an accurate estimate. Different factors like inflation and new technology can affect the relationship between these variables, causing inaccurate measurements.

Time-consuming and costly: Many resources are needed for parametric estimating, especially the first time. Obtaining historical data and building a model takes time and effort, which, of course, translates into a cost.

When to use Parametric Estimating

Not all projects were created equal, and not all projects should be estimated using the parametric method. So, let’s define which types of projects can be successfully estimated with this technique and when you’re better off using a different method.

When accuracy is necessary: Parametric estimating is great for reliable estimates. When you’re looking to base initial budgets and schedules on your estimate, you need it to be accurate. Also, when stakeholders want precise estimates before they buy into the project, this method is the way forward.

For large or complex projects: Parametric estimating can work very well, especially in industries like construction or manufacturing, where there are standard unit rates.

When historical data is available: Parametric estimating only works when comparable historical data is available, as this is the entire method's basis.

When values are quantifiable: Since the formula for parametric estimating relies on quantifiable data, such as hours or dollars, you need to have quantifiable data for it to work.

How to use parametric estimating

Parametric estimating involves:

1. Identifying relevant parameters:
As mentioned above, parametric estimating values must be quantifiable. The first step, therefore, is to determine quantifiable values, such as labor hours and material quantities.

2. Gathering historical data:
Search your company’s records for past projects similar to the project you would like to estimate. Your estimate's accuracy depends on the historical data's accuracy, so check that the values make sense before using it. Collect data from historical projects, such as cost per unit, time per unit, etc.

3. Entering the data into the parametric formula: Using the formula E_parametric = A_old / P old x P curr, enter your data, being mindful of the following:

• Consistency: Input your data in consistent units to avoid conversion errors. For example, ensure all cost values are in dollars and all time is in hours.

• Adjustments: You will likely need to accommodate adjustments like geographic differences and changing labor rates in your calculation.

4. Analyzing the estimate: Before you use the estimate to make decisions about your project, it’s important to analyze it and ensure that it is reasonable. Here are some tips for verifying your estimate:

• Compare your results with historical projects; if they seem out of range, it’s worth repeating the calculation.
• Have an experienced team member review your calculations - they may catch an error you overlooked.
• Think about uncertainties, risks, and potential scope changes. If there is a wide margin for any of these factors, consider making an average so the estimate won’t be too far out.

5. Documenting assumptions: You and your team must remain aware of the assumptions you made in the estimate. Therefore, you should document any assumptions, such as unit costs, environmental conditions, or inflation rates. 

6. Planning your projects: Now that you’ve got your estimate, it’s time to plan your project. You can use your parametric estimate to:

• Determine the project budget
• Define resources and schedules
• Identify risks or potential delays

Example of parametric estimating

Here are two real-world scenarios to help you understand how parametric estimating works in real life.

Scenario 1: Estimating the cost of building a house.

• Historical data shows that it costs $100 per square foot to build a house in a particular region.
• The project is estimated to be 2,000 square feet.
• Using the formula: Estimate = (Cost per square foot) × (Area of the house).
• Estimate = $100 × 2,000 = $200,000.
• This estimate can then be adjusted for factors like location, design complexity, or material quality.

Scenario 2: Software Development:

• A previous software project took 3 hours to develop a single feature.
• The current project requires 10 similar features.
• Using the parametric formula: Estimate = (Time per feature) × (Number of features).
• Estimate = 3 hours × 10 = 30 hours.

How can Workamjig help you with parametric estimating?

Workamajig is project management software designed specifically for creative teams. It makes parametric estimating very easy, eliminating complexity and helping you arrive at quick, accurate estimates.

Here’s how we help:

Historical data storage: Workamajig stores data from past projects, which means all your data is in one place, and you can easily apply filters to find the most relevant data.

Automated estimates: Workamajig can automatically generate estimates based on past performance data. This removes human error and saves you time.

Resource and budget allocation: Once you have your estimate, Workamajig’s resourcing and budgeting tools can help you create schedules and budgets that integrate with your estimate.

Real-time adjustments: Workamajig users can make real-time adjustments to their estimates as variables change during the project. This means that team members can all be updated with the click of a button, and there is no confusion about the latest estimates.

Reporting: Workamajig’s in-depth reporting tools can generate reports that analyze budgets and productivity throughout the project, which helps you refine the estimate as you go along.

Collaboration: Multiple team members can help with and approve estimates within Workamajig’s collaboration tools, increasing the reliability of the estimate.

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