A Small Business Guide to Three-Point Estimating

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Predicting the future is maddeningly difficult and yet essential for any business manager. Failing to accurately predict future costs, revenue, timelines, projects, turnover, or anything else essential to your business will have major ripple effects.

That’s where three-point estimating comes in. Managers have used this technique to come up with better estimates about future outcomes by taking best-case and worst-case scenarios, combining them with the most likely scenario, and using that to determine what they should plan for.

This estimating technique is a vital part of project cycle management, so if you’ve been frustrated with your own planning processes, you should explore it as a way to get a handle on your business. Here’s what you must know about three-point estimating and how to implement it.


Overview: What is three-point estimating?

Three-point estimating is a management technique to determine the probable outcomes of future events based on available information. The term refers to the three-points it measures: the best-case estimate, the most likely estimate, and the worst-case estimate. The formula attempts to determine the likelihood of reality matching up with each estimate.

This technique is used in information systems and management applications. Its usefulness is limited by the fact that information on future events is scarce, but it provides managers with some insight about how they should approach planning for a project or mapping out a project budget.

Three-point estimating vs. triangular distribution: What’s the difference?

Triangular distribution is essentially one of two types of three-point estimate techniques used in project risk management, with the other being beta distribution. The triangular distribution version of three-point estimating takes a simple average of the three estimates and displays these estimates on a chart that forms a triangle.

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In beta distribution, three-point estimating uses a weighted average, with more weight given to the most likely scenario rather than treating each outcome as equally likely. This chart resembles a bell-shaped curve.

Triangular distribution is a better option if you have limited information and want to make a quick, straightforward calculation to aid in your decision-making. However, if you have access to enough information that you can weigh certain scenarios as more likely or less likely, the beta version is better since it will yield a more accurate result.


How to calculate the three-point estimate

Calculating a three-point estimate using the triangular distribution model is straightforward. You take the optimistic estimate (O), the pessimistic estimate (P), and the most likely estimate (M), add them together, and then divide by three. Put in a simple format, the equation looks like this:

E = (O + P + M) ÷ 3


3 benefits of using three-point estimating

So why use three-point estimating in your business? It’s a time-tested technique managers have been using for a while now, and there are three main reasons why.

1. Better estimates

It’s tough to predict the future, but managers are increasingly using efficiency techniques like this — as well as others, such as the weighted average cost method — to identify risks and come up with more accurate estimates.

By being more focused on likely future outcomes, managers are able to cut down on risk, conduct better forecasting, and more efficiently allocate capital. This technique helps them understand where value exists and plan accordingly.

2. Less excessive optimism

Being overly optimistic when it comes to budgets and project planning is lethal to a business. A three-point estimate ensures that managers minimize exposure to loss, and it lessens the risk of wasted resources. It also refines the focus of the resources you have on hand, especially valuable human resources. With this method, a business manager can provide stakeholders with a more accurate picture of the business.

3. Better teamwork

When putting together a project management plan, laying the foundation for good teamwork is essential, and it’s hard to foster that when project estimates are off. With three-point estimating, managers are equipped with a clearer vision for the team, which helps them mobilize employees to identify risk and provide them with clearer tasks. The team is better prepared to have the flexibility to respond to risks.

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Example of a three-point estimate

Let’s go through a hypothetical example to help you grasp how this estimate would look in the real world. In our scenario, a building contractor has been making detailed plans for an upcoming project, including mocking up a PERT chart and creating a work breakdown structure.

The contractor knows that, while the company aimed to complete 32 renovations last year, it struggled to complete 25. Before finalizing plans, the contractor uses a three-point estimate to guide planning for resources, budget, and revenue.

The contractor places the optimistic scenario at 40 renovations based on an analysis of what would happen if everything went right in terms of hiring, bidding on jobs, and how quickly projects are completed. The contractor also determines, based on examining past performance, that the fewest renovations done in recent years is 22, and therefore places that as the pessimistic estimate.

While the company only achieved 25 renovations last year, the contractor believes that, based on the analysis of available resources and personnel, this is an unusually low figure and that 30 renovations is the most common scenario. Using the formula, the contractor determines that the company should plan for 31 renovations this year (40 + 22 + 30 = 30.67, rounded up to 31).


Use software to improve your estimates

The great thing about today’s software tools is that they have powerful number-crunching capabilities and can produce customized reports that tell you everything you must know about your business. Project management software is capable of gathering data automatically and producing the insights you need to get your business on track.

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In addition, these platforms have lots of other features to help you run projects more efficiently. Here are the top three options as reviewed by The Blueprint:

monday.com

monday.com is our top-rated software option due to the fact that it’s easy and intuitive and loaded with functions and features in a way that’s not intimidating to relative novices. You may have to pay more for certain features, but this is a good option for those looking for a simple and effective project management platform.

monday.com’s dashboard showing color-coded project steps.

monday.com allows users to better visualize projects. Source: monday.com software.

Podio

Podio is also a strong contender due to its good team communication system and how easy it is to customize for your business. While the setup is somewhat intimidating, and the user interface could be more intuitive, this is a trusted platform for managing projects.

Podio’s dashboard showing recent steps taken on a project.

Podio enables users to see the latest activity on a project. Source: Podio software.

Trello

Trello has a great visual style, allowing users to drag and drop tasks down the pipeline as a project progresses. Its kanban-based architecture is intuitive and familiar to anyone who has been in project management. While it’s a bit lighter on features than other offerings, Trello will get the job done — plus there’s a free option.

Trello’s dashboard graphically shows what phase a project is in.

Trello organizes project tasks into columns based on how far that task has progressed. Source: Trello software.


Revitalize your estimating process

Three-point estimating is one way to improve how you make predictions and estimates for your business, but you can choose from a multitude of tried-and-true techniques, such as bottom-up estimating, top-down estimating, analogous estimation, and parametric estimation.

Research these techniques to determine which ones make sense for your business and then overhaul your current procedures. The sooner you establish a solid estimating process for your business, the sooner you will enjoy having projects that finish on time and within budget.

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View more information: https://www.fool.com/the-blueprint/three-point-estimating/

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