How to Account for Risk When Estimating

Jul 25, 2017 by Jared Faris

Risk is an inevitable component of every single project your team takes on. You can’t run from it. You can’t hide from it. Your best bet is to face risk head on. How? By knowing what all the possible risks are, planning for the worst, and clearly communicating project risks to the client. We’ll show you how in this article. But before we get down to brass tacks, let’s get two things straight:

1. Every risk has an owner; someone who is responsible for reconciliation if the “risk” comes to fruition. As the software development team, expect to play “the owner” more often than not. This article will help you prepare for and communicate risks to mitigate their impact on projects.

2. DON’T pad your estimates to account for risk. Honesty and transparency are the best policy. We talk about the importance of accuracy and how to produce the most accurate estimations in this article. If you pad your estimates, you take away from their accuracy, and this will cause unnecessary turbulence between your development team and the client.

To Determine Risk  —  Estimate Contingency

Contingency is how likely it is that you were “off” in your estimation based on what you know about the project, team, and team’s history of performance. In other words, contingency is your best guess at how bad (or good) your estimate is. To estimate contingency:

Step 1: Categorize Your Assumptions

Risks arise when assumptions are wrong. Ergo, to identify risks, you must first identify assumptions. Assumptions are pieces of project information that you do not know. List each assumption along with all the likely possibilities associated with them. To estimate contingency, you must also categorize your assumptions into two groups:

  1. Internal Assumptions: Based on your expertise or abilities.
    • Ex. How long does it take your team on average to build a digital grid?
  2. External Assumptions: Based on things outside your control.
    • Ex. How long will it take the client to produce information or approve project details?


      Note: It is particularly important to communicate external assumptions with clients to avoid assuming blame for factors that you have no influence over.

      Step 2: Estimate The Likelihood AND Impact of Each Assumption

      Rate each assumption based on how probable it is to occur. Additionally, estimate the likely impact each assumption will have on the project (should it play out negatively).

      At the end of step 2, you will have a roadmap of risks, their probability, and how they might impact the project. But you’re not done yet. With this information, you must do two things:

  1. Include your risk roadmap in your formalized estimate.
  2. Plan how you will handle each risk to mitigate the impact of unfavorable outcomes.

Communication Is Critical To Your Success

We’ll leave you with this final piece of sage advice — dedicate time to communicate every detail of your documented estimate, including your contingency forecast, to the client. A formalized estimate and clear communication will:

  • Reel back any unrealistic plans/requests
  • Make team needs clear to the project owner/management
  • Make business goals clear to the development team
  • Illustrate the cost of change

After you draft and communicate your estimate, continue refining it as the project takes shape and elements change. All updates to the estimate should be shared with the client. Lastly, keep an archive of your work on each estimate so you can look back, gauge your accuracy, learn from mistakes and improve your skills. Don’t expect perfection, demand improvement.



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