Project Cost Estimating
Estimation is notoriously difficult. Projects by definition are unique ventures. We do not have the luxury of “having done it before” enjoyed by our operational colleagues – something is always different. But if it were just difficult we would expect to err in both directions – we would over-estimate as much as we under-estimate. Whereas the latter is common, the former is not – except perhaps when quoting a fixed price to a client. We know that our track record is poor but it doesn’t seem to help us – we are not improving. Rather than accept inaccurate estimation as an inevitable part of project management life, the application of good practice should significantly enhance the resultant estimates. The following ideas may help:
- Check we’ve identified all the work to be done, including all those jobs we do as PM – managerial overheads.
- Ask two team members to separately produce estimates for the project. If their numbers are close, we can be more confident about their accuracy. If they differ widely, we should discuss why.
- Ask the experts for their estimates, but take into account any tendency they may have to be overly bullish (ie, an optimism bias) or too cautious. Estimates provided by those without hands-on expertise will be educated guesses at best. Ideally, the numbers will come from the team members who will be doing the actual work. After all, each person has their own work speed and people will be more motivated to make finish dates and budgets that are based on their own assessments. But watch for padding – that extra amount randomly added as a safeguard against the unknown. To pad is bad – it’s unethical and may deprive other projects of funding.
- When costing work don’t confuse elapsed time, duration and work-effort. Elapsed time includes weekends and statutory holidays, duration is measured in workdays, and work- effort is measured in person-hours or person-days. Work effort is the usual basis for costing labour.
- Check with those who have done similar projects recently, review any relevant historical data, reports, lessons learned, and consult published productivity data. However, estimates based on memory are subject to the cognitive bias of the estimator, therefore involvement of others usually helps provide some balance.
- Use normal work-package team sizes for estimates. Sometimes it’s not practicable to add more people or do a particular task with fewer people. And if a task takes one person two hours, don’t think that 120 people could do it in one minute.
- Where appropriate, conduct trials or dummy runs or build prototypes.
- Focus particularly on the more expensive tasks (Pareto Principle or 80:20 Rule) given that if we’re 10% out with a $100 task it usually doesn’t matter too much, whereas 10% out with a $100,000 task does matter. Focus our effort on the important few, rather than the trivial many.
- Adopt phased estimates (rolling wave strategy) to re-estimate in waves as our project proceeds and details become clearer. Work that is imminent is estimated in detail, while work that’s some time off is estimated at a high level. All estimates need to be re-assessed as more details become available.
- Allow for the unexpected – a contingency sum to cater for identified risks and approved scope changes, and a management reserve to allow for unidentified risks.
- Learn with experience – update our estimating database.
- Identify and allow for all factors that may affect time such as setup time, learning curves, weather, weekends, work hours, holidays, skill levels, machine variations, industrial action, sickness, fatigue, and staff turnover. Climate change means that weather and “wet days” are now less predictable.
- Find out current labour and material costs, insurance rates, interest rates and exchange rates for costing purposes.
- Assume people will be productive for no more than 80 percent of their time, and recognise that those working on multiple projects take longer to complete tasks because of the time lost switching between them. Even when people are assigned full time to our project, they will not spend all day every day working on it. Most PM software tools allow us to set up an availability profile for our resources, with task durations automatically adjusted to reflect this availability.
- Be cautious about scheduling overtime since an eight-hour day might easily become a 16-hour day depending on how project work proceeds. Working overtime is a contingency we might need to use during execution.
- Develop a spreadsheet, document estimate assumptions, and include the estimate date and its author. When generating estimates, we’ll often have to base them on assumptions, especially when requirements are not well defined. Thus, we need to record these assumptions with our estimates so that this information is available to others who might need to know how our estimates were derived or need to update our estimates.
- Strenuously resist calls to reduce our estimate without a commensurate scope reduction. If it’s proposed to reduce our budget we need to recommend how this might be achieved – perhaps by using cheaper materials or by reducing product functionality.
- Provide estimators with feedback on variance – the difference between their estimates and actual costs.
- Consider using the Delphi technique whereby we gather estimates from several experts and take an average.
- Use PERT (Programme Evaluation and Review Technique) to obtain a weighted average estimate of time or cost:
- PMs and team members should feel free to challenge estimates. If something doesn’t feel right, ask questions and offer solutions. If disparities crop up they’re probably due to different understandings of what’s required.
- Recognise Parkinson’s Law that states “Work expands to fill the time (and budget) available,” and Murphy’s Law that states “If anything can go wrong it will,” which requires we manage the risk and may include contingency money or time for known but accepted risks.
The total project budget is the baseline estimate plus the contingency reserve plus the management reserve, where the baseline is the cost of all WBS tasks including PM overheads. A quote received for any outsourced work will include a profit margin and GST. The contingency reserve is for anticipated or known risks, whereas the management reserve is an estimate for unanticipated or unknown risks and variations, but without detailed history of costs the management reserve is difficult to estimate and if established is held by the project sponsor.
There is no easy way to produce accurate cost estimates, except with experience. Remember, it’s also prudent to re-estimate periodically throughout the project, and always record the actual costs so that we and other PMs may benefit from the experience. Importantly, don’t be bullied into a budget that we cannot achieve and don’t bully team members into committing to something they cannot achieve. Seeking more funding may be perfectly valid, particularly if we agree the requirement for increased funding and the reasons for this in advance with our sponsor. Similarly, we should declare any surplus. At the start of a project it is worth identifying and agreeing what type of issues could increase expenditure beyond the budget and warrant additional funds or reduced functionality.
We should avoid giving our sponsor and other stakeholders any firm commitments about our project cost until we complete our research and calculations, and when we do, range estimates are much more realistic than are single figure estimates, that’s for example $4,750 to $5,500, or $5,000 – 5% or +10%, rather than a $5,000 single figure. The final budget is the total cost of the project, including reserves, which is the amount of funds the organisation needs to have available for our project. If that number exceeds the cost constraints imposed by the project charter, we must suggest options to our sponsor such as removing some scope or obtaining more money.
Once we’ve learned how to manage project budgets, we never sit back and expect the project to run its course as planned without interference. If we wait until someone alerts us to a problem, or suddenly it is the end of the project and we are ready to present deliverables only to find we have majorly exceeded the budget, we will be left with a very unhappy client. However, if we are able to acknowledge the problem areas that are siphoning more funds than planned, we will be in a more desirable position to keep the project budget at a manageable level. Remember – “to solve it easily, detect it early.”