When the Project Manager is in the planning process group, most of his/her time will be used up in estimating resources, time required to complete the project, the cost, risk planning, procurement planning, etc. The estimation can be done using different techniques like analogous, parametric, three point estimation, expert judgement etc. Let us first take up the difference between analogous estimation and parametric estimation.
Analogous Estimation vs. Parametric Estimation
Analogous estimations are made based on the time or cost taken by similar older projects. Thus, these estimations are based on the experience of the team or the history of the project. The one disadvantage of this method is that the estimation may not always be accurate.
For example, the developmental cost of an online booking application took about 1 month. You plan on developing a similar application. It can thus be assumed that the analogous estimation is 1 month.Parametric Estimation
Parametric estimation is done on a per unit basis and uses the relation between variables to arrive at the cost or the duration. Compared to the analogous estimation, parametric estimation stands to be more accurate. But the measurement must be scalable in order to achieve the accuracy.
For example, if it takes 1 day to produce 10 pieces of content, how mangy days will it take to produce 100 pieces of content?
Estimate Vs Budget
We have differentiated between the two kinds of estimation. Now let us shift to estimate and budget.
Estimation is the likelihood of the duration or the cost in terms of quantitative numbers to complete the project. But can we achieve the project with estimation? The answer is not really. So this ambiguity leads to adding a buffer called the estimate.
Estimate is an approximate figure to arrive at the duration, cost, effort, and resources to complete the project.
Budget is approved estimate after the addition of reserve.
Contingency reserve vs Management reserveWe just talked about the reserve.
PMP has two kinds of reserves - Contingency reserve and Management reserve.
Contingency reserve is the amount of duration or the cost added based on the unknown but potentially identified risk. This will be added usually by the Project Manager after the estimation.
Contingency Reserve is also called "known-unknown".
Management Reserve is the amount of duration or the cost added based on the unknown risks that are not visible. This will be added by the Sponsor or the PMO office. For a project manager to use this reserve, it needs to be approved by the sponsor/PMO.
Management reserve is called “unknown”. The technique of using the Management Reserve and Contingency reserve is called the Reserve Analysis.