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How To Predict A Project's Future

        posted by , January 16, 2013

The future is predictable.

It's not 100% predictable. However, we do have limited powers to predict future events with a certain degree of accuracy.

Case in point, a prediction method known as reference class forecasting can be used to predict the accuracy of project estimates.

Definition: Reference Class Forecasting

Reference class forecasting predicts future outcomes based on actual historical outcomes in a reference class of similar situations.



How to Use Reference Class Forecasting For Project Estimates

People have tried to use reference class forecasting to predict everything from the stock market to customer behavior.

As it turns out, one of its most accurate applications is validating project management estimates.

It's a relatively simple procedure:

  1. Define your project in terms of a reference class. For example, ERP implementations for organizations with more than 10,000 employees.

  2. Compare your project estimates with data for actual project durations and expenditures in the same reference class.


Example: ERP Implementation (Large Organizations)

Let's say your planning a full ERP implementation and you have 22,000 employees. Your estimate comes in at $20 million and 8 months.

You can now compare your estimate with actual ERP implementations at organizations with more than 10,000 employees1.

project reference class forecasting
If your estimates are similar to the reference class — they're solid. If they're outside of the reference class there's a good probability that your estimates are off.


Inside View vs. Outside View

Your estimates are your inside view. You should always calculate your inside view first using project management best practices.

A reference class forecast provides you with an outside view of your estimates. It's one validation point for estimates.


Limitations of Reference Class Forecasting

Reference class forecasting depends on a statistically significant sample of similar projects. This data can be difficult to come by.

The quality of your reference class dictates the quality of results. Your reference class should represent political hurdles and well as technical complexity. For example, "large ERP project" is a better reference class than "projects with 1 million ~ 2 million lines of code".


Reference Class Forecasting In Practice

Reference class forecasting is gaining acceptance as way of validating the estimates of megaprojects.

In 2004, the UK government used the method to validate a £255 million estimate for the extension of a train line. The reference class forecast came in at £320 million — indicating a low estimate. The project ended up exceeding £1 billion.

Several governments in Europe have since mandated the use of reference class forecasts for large projects.


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Notes

1 These numbers aren't real. They're intended to illustrate an idea.
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