Three-Point Estimation: A Complete Guide

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There are lots of intricacies and perplexities while transacting business as a contractor, and it requires skill and expertise to navigate through them. However, one of the most difficult elements of running a successful business as a contractor is creating accurate estimates.

Error-free estimates are the backbone of any project you take up as a contractor, and it is crucial you master certain common estimation techniques. In this case, we’ll look at the three-point estimating system, which helps to calculate project costs based on risk analysis.

📝Key Takeaways:

  • Learn how three-point estimating can be a valuable estimating technique in your business.
  • Learn how to calculate your three-point estimates using the triangular and PERT distributions.

Most profitable businesses adopt a three-point estimation technique. In fact, it plays a critical role in the profitability prediction of any contract. Three-point estimates are super helpful in project management and allow project managers to make more-informed predictions on the outcome of their projects.

Now, you’re probably curious about three-point estimating and why you should use it for your predictions. Here’s all you need to know about the three-point estimation techniques alongside their benefits and formulas.

What Is a Three-Point Estimate?

Three-point estimating is a project estimation technique used to figure out the probable results or costs of expected events. Using three-point estimating, project managers make realistic estimates and arrive at an expected value based on the limited information derived from a thorough project evaluation.

The term “three-point” in three-point estimating stands for the three types of estimates encapsulated in this technique. They are:

O – O indicates an optimistic estimate, also known as a best-case scenario or best case estimate. This is the outcome you get when you assume that everything will go well and the chances of facing hurdles are low.

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

M – M indicates the most likely estimate. It falls between the optimistic and pessimistic estimates. It is the value you get when you have determined a middle ground and expect that some aspects of a future event will either go right or wrong.

The three-point estimate is then derived by a formula for the average activity of the estimates. We’ll learn more about this calculation and formula in the sections ahead.

Although the three-point estimation technique helps you find the most realistic estimate, it can be grueling and mentally tasking to calculate all the probabilities of an event. Fortunately, adopting an estimate generator can be a faster way to arrive at an accurate estimate on any project management task within a few clicks.

Example of Three-Point Estimates

We’ve talked about the basic concept of three-point estimates, but nothing ties an explanation together like a good-old hypothetical example.

For instance, you own a construction business and work 12 hours daily. You’re planning to expand because you’re taking more contracts. So, you plan to work 14 hours daily to complete more project tasks. That is your optimistic estimate (O).

But you know that you can’t always work for 14 uninterrupted hours. Things happen. You could get an urgent errand to attend to or have to entertain surprise guests—that kind of situation. So you estimate that on such days, you might be able to do just 10 hours of work. Now, that is a pessimistic estimate (P), a worst-case scenario, and a negative outcome.

You can also predict that you’ll have a normal day where you have a bit of both. Ideally, you’ll work for 12 hours that day. This is the Most likely estimate (M). It indicates that there are chances of everything going well, like normal, and nothing goes wrong. You can then use a three-point estimate formula to accurately predict what your actual work time will be.

Let’s look at some of these formulas below.

Three-Point Estimating Formulas

Project managers use three-point estimate formulas to determine the most probable estimate where there are a number of variables. There are many types of three-point formulas, but the most common are:

  • Triangular distribution and
  • Beta distribution (PERT)

Triangular Distribution

The triangular distribution is the easiest way to calculate the average outcome. It’s simply the mean value of the components of your three-point estimate.

three point estimating: equation one

And here’s how it’d look when we add our fictional data:

E = (14 + 10 + 12) ÷ 3
E = 12

Your ideal time range to finish all your tasks, based on the triangular distribution formula, is 12 hours.

Beta Distribution (PERT)

The Beta distribution or Project Evaluation and Review Technique (PERT) is a much more complex form of three-point estimate calculation. It is derived by applying a weighted average of the Optimistic, Pessimistic, and Most Likely estimates.

In the PERT beta distribution, the three estimates do not carry equal weights. The Most Likely point is multiplied by four times its actual value, and the whole sum of the three points is subsequently divided by six.

three point estimating: equation two

And here’s how it’d look when we add our fictional data:

E = (14 + 4(12) + 10)/6
E = 12

We’ve gone through the three-point estimation formulas; let’s look at the benefits and see how three-point estimating helps shape your business and enhance project management.

Benefits of the Three-Point Estimating Technique

The three-point estimating technique offers three important benefits to a project manager, and they are:

three point estimating: benefits of the three-point estimating

  • Lesser risk

    By using a three-point estimate on your projects, the chances of risk decrease, as it helps you plan ahead for future events. Three-point estimation also assists you in providing a nearly accurate estimate of project costs and allows you to analyze and prioritize work.

  • Enhance task scheduling

    Task estimates are critical for the success of any project, and the PERT technique can be used to estimate the time it’ll take an individual to complete a given task. Project estimates also ensure you manage individual tasks more efficiently and increase your productivity.

  • Better planning

    It’s okay to wish for the best in business, but consistently expecting the best possible outcome can be dangerous for any business. There are a billion unforeseen events ready to cripple your project, and you should be prepared for them.

    A three-point estimate presents potential outcomes and their cost implications in a less biased manner and provides you with a near-accurate forecast.

    There are numerous benefits to the three-point technique, and this is only a sneak peek into the ways this method changes your program evaluation game. In short, the whole system is quite helpful for businesses and is definitely worth adopting.

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

    There are two ways to calculate a three-point estimate; triangular distribution or PERT beta distribution.

    The triangular distribution formula is:

    • E = (O + M + P) / 3.
    • E-Estimate, O-Optimistic value, M-Most likely value, and P-Pessimistic value.
      The PERT beta distribution formula is:

    • E = (O + 4M + P)/6

  2. What are the three phases of estimation?

    In the first initial phase, the estimation is planned, and data is gathered. The second phase is tracking the projected estimate against the actual result, and the third phase is adding the estimate to the project.


  3. Which three-point estimation formula is more accurate?
    Project estimators argue that PERT provides a more accurate result than the triangular distribution.

  4. Are there any cons to 3 point estimating?

    Three-point estimates will not fit all cases, and the end result is often affected by the estimator’s bias. Also, it is more suited for larger projects where no information is available regarding a number of project variables.

Conclusion

Contractors understand that estimates need to be as accurate as possible, so it is essential to choose the appropriate technique. The three-point estimate improves your prediction and estimation of large projects and makes it easier to prioritize tasks.

If you want to create professional estimates a lot faster, InvoiceOwl is your best bet. Specially built for contractors, InvoiceOwl helps you avoid the complexities of drafting a comprehensive estimate using customizable pre-defined templates.

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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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