Three-Point Cost Estimating
Three-point cost estimating improves the accuracy of single-point estimates by considering estimation uncertainty and risk through optimistic, most likely, and pessimistic cost values.
Explanation
Three-point estimating uses three values to define an approximate range for an activity cost: the most likely cost (cM), the optimistic cost (cO), and the pessimistic cost (cP). Two common formulas are used to calculate the expected cost.
The triangular distribution formula is: cE = (cO + cM + cP) / 3. The beta (PERT) distribution formula is: cE = (cO + 4cM + cP) / 6. The beta distribution weights the most likely estimate more heavily, making it more commonly used in practice and on the exam.
Three-point estimating also allows calculation of standard deviation, which quantifies the uncertainty of the estimate. For the beta distribution, standard deviation = (cP - cO) / 6. This technique originated from the Program Evaluation and Review Technique (PERT) and is useful when there is uncertainty about the cost of an activity.
Key Points
- •Uses optimistic (cO), most likely (cM), and pessimistic (cP) values
- •Triangular distribution: cE = (cO + cM + cP) / 3
- •Beta/PERT distribution: cE = (cO + 4cM + cP) / 6
- •Standard deviation = (cP - cO) / 6 for beta distribution
Exam Tip
Know both formulas. The beta/PERT distribution (cO + 4cM + cP) / 6 is used more frequently on the exam. Also memorize the standard deviation formula: (cP - cO) / 6.
Frequently Asked Questions
Related Topics
Estimate Costs
Estimate Costs is the process of developing an approximate monetary assessment of the resources needed to complete project activities.
Reserve Analysis
Reserve analysis is a technique used to determine the amount of contingency and management reserves needed for a project to account for cost uncertainty and risk.
Contingency Reserves
Contingency reserves are budget amounts allocated within the cost baseline to address identified risks that have been accepted and for which contingent or mitigating responses have been developed.
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