Three-Point Estimation: A Complete Guide

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In a contract business, there are thousands of things to tackle every day, yet the most difficult part will be having accurate estimates. For an accurate estimate, a contractor has to pay attention to every detail.

However, there are successful contract businesses in the existing industries that know how to make an accurate estimate. But do you know what’s the one common factor of a successful contract business? They have adopted a three-point estimation technique for estimation.

If you are reading this blog, you are curious and want to learn about three-point estimation. Well, we are more than happy to enlighten you with the three-point estimation techniques and also discuss the benefits and formulas with examples in detail.

Let’s first start with the definition of the three-point estimation

What is a Three-Point Estimation?

As a project manager, it is essential to know about the three-point estimates because it helps you to get estimates that match reality. The three-point estimate allows you to know the probable outcome of available information on future events.

A company can figure out the estimation of time and cost by using a three-point estimation.

The term classified into three-point estimation is:

O – O indicates an optimistic estimate, also known as a best-case scenario. The value you get when you assume that everything will go well and the chances of facing hurdles are less. Optimistic estimate means when everything goes right.

P – P indicates a pessimistic estimate, also known as a worst-case scenario. The value you get when you assume that nothing goes as planned and the outcome will be more negative than expected.

M – M indicates the most likely estimate. It falls between optimistic and pessimistic, where you have determined a middle ground and expect not entire things will go right or wrong. The value means comes between two extremes.

By summing all three-point calculates we get calculated estimates, also known as standard deviation. We will learn more about this calculation and formula in this blog ahead.

The three-point estimate will help you to bring the estimate which is nearest to reality. Also, adopting an estimate generator can help you to get the most accurate estimate within a few clicks. The estimating technique is crucial to project management as it allows to plan more efficiently.

Do you know there are two types of three-point estimates? One is triangular distribution and beta distribution. Both of them help to get insightful guidance.

Example of Three-Point Estimates

Let us understand three-point estimates in a simpler manner with a hypothetical example. For instance, you own construction business and you do 12 hours of work daily.

Now, you have planned to expand because you have started getting more contracts. You are planning to do 14 hours of work to complete more tasks, that is your optimistic estimate (O).

One day, while you are finishing your task and out of nowhere it started raining; so, you have to stop working until it stops raining. Now, that is a pessimistic estimate (P), a worst-case scenario, and a negative outcome.

You are having a normal day and successfully achieving your target by finishing 12 hours working, well that is most likely an estimate (M). It indicates that there are chances of everything going well like normal and nothing goes wrong.

Reliable estimation is essential for the project development team to plan future and present outcomes. With three-point estimates you can get average outcomes, it is called standard deviation.

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The Formula of Three-Point Estimating

Project managers uses three-point estimate formulas to calculate the most likely estimate. To calculate three-point estimating: estimate (E), optimistic estimate (O), Pessimistic estimate (P), and Most Likely estimate (M).

The equations of triangular distribution look like this:

equation one

Beta Distribution and PERT

The Project Evaluation and Review Technique (PERT) is based on beta distribution. PERT estimate is the approximation of the beta distribution equation.

The equation of beta distribution is divided by 6, so you know what will the expanded point of estimation. The formula for beta distribution is:

equation two

The concept of three-point estimating originated from the Program Evaluation and Review Technique and was initially developed by the US Navy. The formula of PERT is based on probability statistics and theory.

The final outcome will give you a final estimate and provide you with the value for your project estimates.

That was the method and formula on how to calculate three-point estimation; now let’s jump to the benefits and see how three-point estimating helps to shape the business.

Benefits of the Three-Point Estimating Technique

benefits of the three-point estimating

  • Lesser Risk

    By adopting a three-point estimate, the chances of risk decrease as the technique will help you to identify the risk. The three-point estimate will assist you to provide a nearly accurate estimate and allow you to analyze and prioritize work.

    For instance, the optimistic estimates signify no risk and the most likely estimate signifies less risk.

  • Enhance Task

    The three-point estimation technique can be used to schedule tasks. The technique allows you to manage tasks more efficiently and thus increase the productivity of business work.

    And that was everything you need to know about three-point techniques. The method is quite helpful for businesses, so do not miss out. Now, let’s jump to the most frequently asked question regarding the three-point estimation.

Frequently Asked Questions
  1. How do you calculate a 3 point estimate?

    The formula to calculate a 3 point estimate is :

    • E = (O + M + P) / 3.
    • E- Estimate, O- Optimistic value, M- Most likely value, and P- Pessimistic value.

  2. What are the three phases of estimation?

    In the first initial phase, the estimation is planned, the second phase is tracking the estimate against the actual number and the third phase is scheduling the estimate in the project.


  3. What are the 3-time estimates used in PERT?
    The 3-time estimates used in PERT to obtain the weighted average are
    the Optimistic estimate (to), modal estimate ™, and pessimistic estimate (tp).

  4. Which types of estimates are used in three-point estimating?

    There are three types of estimates in three-point estimating is:

    • Optimistic estimate
    • Most-likely estimate
    • Pessimistic estimate

Conclusion

The estimates need to be as accurate as possible, thus it is essential to choose the appropriate technique. Three-point estimation technique will improve the prediction and estimation method of your business.

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Whether your business is in construction, landscaping, consulting, photography, auto repair, or the medical field, estimating takes way too long. That’s why we’re here. InvoiceOwl makes your invoicing estimating faster and simpler so you can get paid promptly and without the hassle.

Author Bio
Jeel Patel
Jeel Patel
Founder

Jeel Patel is the Founder of InvoiceOwl and is the main curator & writer of the content found on this site. With ideals of quality, commitment, and perseverance, he believes in creating lasting business relationships with the clients.

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