Three-Point Cost Estimating
Three-point cost estimating improves the accuracy of single-point estimates by considering estimation uncertainty and risk through optimistic, most likely, and pessimistic cost values.
Explanation
Three-point estimating uses three values to define an approximate range for an activity cost: the most likely cost (cM), the optimistic cost (cO), and the pessimistic cost (cP). Two common formulas are used to calculate the expected cost.
The triangular distribution formula is: cE = (cO + cM + cP) / 3. The beta (PERT) distribution formula is: cE = (cO + 4cM + cP) / 6. The beta distribution weights the most likely estimate more heavily, making it more commonly used in practice and on the exam.
Three-point estimating also allows calculation of standard deviation, which quantifies the uncertainty of the estimate. For the beta distribution, standard deviation = (cP - cO) / 6. This technique originated from the Program Evaluation and Review Technique (PERT) and is useful when there is uncertainty about the cost of an activity.
Key Points
- •Uses optimistic (cO), most likely (cM), and pessimistic (cP) values
- •Triangular distribution: cE = (cO + cM + cP) / 3
- •Beta/PERT distribution: cE = (cO + 4cM + cP) / 6
- •Standard deviation = (cP - cO) / 6 for beta distribution
Exam Tip
Know both formulas. The beta/PERT distribution (cO + 4cM + cP) / 6 is used more frequently on the exam. Also memorize the standard deviation formula: (cP - cO) / 6.
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Cost Management
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