The best budgets love cheaper chips...

I recently had a random conversation with a great person at a client site. We’d finished a meeting early and were having a general discussion about business start-ups and the set-up and running of a website. He’d used the expression: “it’s only chips”, when referring to website costs, as these are minimal compared to many other business expenses. This stimulated my thinking and resulted in this blog on estimation.

Whilst website set-up and running costs were tiny in comparison to some of the other costs I’ve incurred since starting-up, they were still a cost to my business and as in the world of projects, lots of little costs can add up to quite a large number. Getting estimates wrong on lots of smaller items can significantly inflate your budget!

In projects, it is very important to have robust estimates for all known costs to enable you to build a strong budget and there are many ways to attain an estimate.

NOTE: Whilst budgets include many different things such as the costs of people / resources, equipment, infrastructure, systems and materials, don’t forget to also include an element of contingency cost to cover project risks.

The main methods of estimation that I use are as follows:

• Analogous

• Parametric

• 3-point

• Bottom-up

Analogous estimation:

Sometimes called top-down estimation, this method uses known information from similar projects completed in the past combined with the knowledge and experience within the team to predict what the likely costs will be. It’s a very fast and inexpensive way of getting some basic numbers together, however, also less accurate than other methods.

Example: On a previous office refit project, hardware costs were £300k. For a new / similar office installation, hardware costs are estimated to be £300k.

Parametric estimation:

Like the above method, this uses information from other projects and the knowledge and experience within the team but also statistical comparisons to gain an estimate. This is a more accurate method than above.

Example: On a previous project the cost was £2k per square metre for a facility measuring 250 square metres. The total cost was £2000/sq.m x 250m = £500k. To construct a similar facility measuring 1000 square metres, the cost is estimated as £2000/sq.m x 1000m = £2m.

3-point estimation:

This method uses a formula combining the worst-case (highest) cost, the best-case (lowest) cost and the most likely cost. Best, worst and most likely costs are established as in analogous / parametric estimating. The most likely cost is established using historical data and the knowledge and experience within the team. This method is more favoured because it’s far more accurate than the above methods. The formula is as follows:

Estimate = (best case cost + (4 x most likely cost) + worst case cost) / 6

Example: On a previous project, total costs were £9m. The worst-case estimate has been established at £25m and the best-case at £10m. The most likely cost is £15m. The estimated total cost is therefore calculated as follows:

Estimate = (£10m + (4 x £15m) + £25m) / 6 = £15.83m

NOTE: In the above example, there is a wide gap between the estimate of £15.83m and the worst-case cost of £25m. In this case, I’d recommend doing further detailed work to gain a much more accurate estimate. This leads me nicely onto the last method.

Bottom-up estimation:

One of the most accurate but time-consuming and potentially more expensive methods is bottom-up estimation. Each single element of the cost is broken down to the greatest level of detail and then all the elements are added together to provide a robust estimate.

Example: We need to equip an office space. We establish the actual cost of each piece of infrastructure, labour, materials and hardware (PC’s, cabling, servers, containment etc) and any other required items. We then add a contingency budget to cover the risks. All the items are accurately costed and added together to give a total budget estimate.

Summary

There are many different methods of gaining an estimate. To gain an initial estimate at the start of a project and / or if you are low on resources, you may choose to use a less time-consuming and less costly method such as analogous or parametric estimation.

Where there is a critical need for detailed and accurate costs, then you will need to deploy a more thorough method such as 3-point and bottom-up estimation.

Back to the “it’s only chips” comment. Some costs may be so insignificant in relation to your overall budget that you don’t need to worry about them. It really depends on what you’re purchasing, how much budget you have and what level of uncertainty you are facing. You must assess your situation and deploy whichever of the above estimation methods is most appropriate.

I originally didn’t know much about creating websites and the associated costs. Many websites claim they are free to develop and to run, but when you look into it, this will usually be in a limited format with unwanted ads etc. Costs may include website running costs (if you don’t want ads and want your own personalised domain name), domain hosting, purchasing personalised domain names, different DNS options, setting up personal mailboxes and other add-ons that the companies try to up-sell in the buying process (and afterwards!).

Individually, the costs were “only chips” but added together over a long time-frame, the costs add up to some quite large numbers.

On the other-hand, in the case of a random takeaway dinner, then - it's only chips, plus fish, mushy peas, curry sauce...

The best budgets do love cheaper chips.

I hope that this has been an interesting and useful read. Please feel free to contact me to see how I can help your business approach change.