What is IT project valuation (estimation) and what are the popular methods?

The importance of estimation in project management

Despite its uncertainty, estimation plays an important role in IT project management. It helps in:

• Planning and scheduling: Defining the timeframe of the project and its various phases or iterations.
• Scope management: A better understanding of the complexity and labor intensity of individual scope elements.
• Resource allocation: Planning the availability of team members and other resources needed to complete tasks.
• Decision-making: Evaluating the feasibility of a project, comparing different options and prioritizing the tasks with the highest value to effort.
• Communicating with stakeholders: Managing expectations regarding project timelines and costs.

Estimation challenges

Estimating work in IT projects is difficult due to many factors, such as incomplete or changing requirements, technical complexity, unforeseen problems, differences in the productivity of individual team members or dependence on external factors. Therefore, it is important to approach estimations with humility, treat them as forecasts and update them regularly as work progresses and new knowledge is gained.

Popular estimation methods in agile approaches (Agile)

Agile methodologies, where the emphasis is on adaptability and working in short iterations, use specific estimation techniques, often based on relative complexity estimation rather than precise time prediction:

• Story Points: an abstract unit of measurement used to estimate the relative complexity, effort and uncertainty involved in completing a given backlog item (e.g., a user story). Instead of estimating time in hours, the team compares tasks to each other and assigns points to them (e.g., using a modified Fibonacci sequence: 1, 2, 3, 5, 8, 13…). Story Points help in planning sprints and measuring the team’s speed (velocity).
• Planning Poker (Planning Poker): A team estimation technique using Story Points. Each team member selects a card with a point value corresponding to their assessment of the complexity of the task. The cards are uncovered at the same time, and differences in the ratings are discussed until the team comes to a consensus. This promotes discussion and shared understanding of the task.
• T-shirt Sizing: A relational estimation technique where tasks are assigned to size categories (e.g. XS, S, M, L, XL) instead of points. Useful for quick, high-level evaluation of large backlog items.
• Estimation by analogy: Comparing a new task to similar tasks performed in the past and assigning it a similar estimate.

Estimation methods in traditional approaches

More traditional project management approaches (e.g., Waterfall) often use other methods, more focused on time and cost estimation:

• Expert estimation: Relying on the opinion and experience of experts in the field.
• Parametric estimation: Using mathematical models and historical data to predict time or cost based on specific project parameters.
• Bottom-up (Bottom-up) estimation: Dividing a project into small tasks, estimating each task separately, and then summing the estimates to get an overall estimate.
• Three-point estimation (Three-point estimation): Determine three values for each task: optimistic (O), pessimistic (P) and most likely (M), and then calculate a weighted estimate (e.g., using the PERT formula: (O + 4M + P) / 6).

Estimation as a continuous process

Regardless of the method used, it is important to consider estimation as an ongoing process. As the project progresses, new knowledge is gained and changes occur, estimates should be reviewed and updated regularly. Transparent communication about the assumptions and uncertainties associated with estimations is key in working with stakeholders.

Summary

IT project pricing (estimation) is an indispensable, albeit difficult, part of project management. It helps with planning, decision-making and managing expectations. In agile approaches, relative complexity estimation techniques such as Story Points and Planning Poker are popular, while traditional approaches are more likely to use methods based on time and cost estimation. The key is to treat estimation as a forecast and to continually refine it based on experience gained.