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# Rough order-of-magnitude (ROM) estimate

Reserve analysis: Reserve analysis is an umbrella term for a number of methods used to determine the size of contingency reserves, which are budgetary allocations for the incidence of known risks. One outcome of reserve analysis is a technique called padding, which involves increasing the budgeted cost for each scheduled activity beyond the actual expected cost by a fixed percentage. Critical path activities may have larger percentages assigned as padding. The Project Management Institute (PMI) also suggests other methods for managing contingency reserves, including the use of zero-duration activities that run in tandem with scheduled activities and the use of buffer activities that contain both time and cost contingency reserves.

Resource costing: Resource costing is a simple mathematical method to compute the costs of hiring resources for a project. It is easily done by multiplying the hourly cost of hiring a resource by the number of projected employment hours.

Three-point estimating: Three-point estimating has roots in a statistical method called the Program Analysis and Review Technique (PERT), which is used to analyze activity, project costs, or durations by determining optimistic, pessimistic, and most likely estimates for each activity. Three-point estimating uses a variety of weighted formula methods to compute expected costs/durations from optimistic, pessimistic, and most likely costs/durations. One commonly used formula for creating estimates is:

Expected value = [Optimistic estimate + Pessimistic estimate + (4 x Most likely estimate)] ÷  6

The standard deviation is also calculated to create confidence intervals for estimates:

Standard deviation = (Pessimistic estimate – Optimistic estimate) ÷ 6

Three-point estimating can construct probability distributions of estimates in a number of fields. In project cost estimating, estimators may create a three-point estimate of cost using optimistic, pessimistic, and most likely costs. Alternatively, for projects that measure deliverables in units of time with fixed costs, estimators may use expected durations as the number of units and determine costs via parametric estimates. However, remember that three-point estimates are only as good as their initial optimistic, pessimistic, and most likely estimates – if these are not accurate, the expected values are useless.