Project Cost Estimate Problems and Approach to a Solution

Posted By Posted by: Laith Adel on March 15, 2017

In order to understand the cost estimates problems, we need to understand the business expectation of the project. Here are some common expectations carried by most organizations:

  • Achieve more goals, benefits and objectives that support the businesses changing strategies and tactics. And not just delivering more projects and programs.
  • Achieve more with less money and resources – even when money is not a problem.

Accurate cost estimation. This is considered the ‘baseline’ that PM is held responsible for when approving a new project.

Despite the expectation, in reality, less than a third of all projects were successfully completed on time and on a budget.

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The reality also varies between private enterprise, government enterprise and PMO consultants based on each point of view. Below some of the statistics around this topic:

Private Enterprise

Source: KPMG (New Zealand)
Results from a survey of 100 businesses across a broad cross section of industries:

  • An incredible 70% of organizations have suffered at least one project failure in the previous year!
  • More than 50% of respondents also indicated that their project failed to consistently achieve what they set out to achieve!

Source material – KPMG Project Management Survey

Government Enterprise

Source: Guardian Newspaper (UK)
Results from the investigation into government waste in the UK since the year 2008:

  • Study of government projects reveals there is £4 billion in wasted efforts as a result of failed projects that resulted to shutting down of projects
  • “Only 30% of our projects and programs are successful” – Joe Harley, programme and systems delivery officer at the Department for Work and Pensions. Successful being achieving the goals set for the projects.

PMO Consultants

Source: IBM
Results from a survey of 1,500 change management executives:
IBM survey in the success/failure rates of “change” projects finds;

  • Only 40% of projects met schedule, budget and quality goals
  • Biggest barriers to success listed fall under people factors. This includes changing mindsets and attitudes (58%); Corporate culture (49%); Lack of senior management support (32%).
  • Underestimating the project complexity is also listed as a challenging factor in 35% of projects

For source data read (pdf) – Making change work

It’s staggering to see the gap between business expectation of project outcome and the reality of how these projects are actually performing.

How is it that we keep getting project cost estimates wrong and what can be done about it?

First, let’s look at the structure of a cost estimate. The project cost estimation is inherently not accurate. There are different methods and techniques to achieve an accurate cost estimation, however, we know for a fact that cost estimation accuracy changes through the project lifecycle. A project in its initial stages will have a cost estimate that is less accurate than what it will be in the planning or execution stages. See below as an example.

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Moreover, to reach to a more accurate cost estimation organisations need to spend more effort (money). Below is an example of how the investment grows as we get to more accurate cost estimations.

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So the change or the question is, if the budget fluctuates and changes as projects progress, when then do we go to the sponsors and commit a budget amount?

This ‘normal’ and expected cost estimation challenge is reacted to in different ways:

Overestimating

Not wanting to be blamed for spending ‘more’ than the estimate, in other words, driven by the classical KPI of delivering projects within budget i.e. committing a large contingency budget in the estimation.

The risk with overestimating is underrunning the project, i.e. not being able to spend the money or utilize the resources as per the original budget, this can be looked at as a good thing in some but not all organisations.

Finishing your project with less money can be seen as an ideal situation for many project managers, but is it really?

Underestimating

Not wanting to be blamed for not spending the allocated budget, in other words, spending money is linked to delivering outcomes. This often is the case in government projects.

The risk of underestimating is it creates a culture of “use it or lose it” which encourages spending but not necessarily for the sake of fixing the project. Again some – not all – organisations look at spending the money and resources as per budget as a good thing, but is it really?

 

So how do we approach these problems with cost estimation and what is the PMO’s role in the solution?

Well, first of all, we need to do the basics:

  1. Acquire training and skilling up your PMs / BAs in cost estimation
    –  Analogous (or Parametric) estimating
    –  Bottom-up estimates
    –  Three-Point estimates (PERT)
  2. Having the right tools and techniques to get proper estimation at any given phase
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  3. Collect actual spend from ERP / Timesheets then integrate it back to the estimate

Then, we need to have a more mature approach to the challenge, and this that’s how a PMO will be very valuable and important:

  1. Accepting and embracing that project cost estimates accuracy changes (from +/- 50% to +/- 5%). Keeping this acknowledgement, aim to estimate realistically (i.e. eliminate the phobia of going ‘over’ budget)
  2. Implement on-going trade-off process (REQUEST / RELEASE) in projects within a certain portfolio*. This is done by allowing projects to go under budget and any given time, so they return the remaining budget back to the portfolio or stopping projects that are not delivering the right benefit and allowing projects to going over budget or approve new ones to the portfolio.

* A portfolio supports a changing strategy

Below is an example on allowing cost variances and using it to balance the portfolio:

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Last thought, when monitoring projects (or portfolio performance), we can compare to sets of KPIs:

  1. Actuals VS. Original Budget
  2. Actuals VS. Revised Budget (or forecast)

The two different method monitor two completely different things in the business. The first method (Actuals VS. Original Budget) monitors the [Cost Estimation] of the business. While the second monitors the [Project Cost Performance]

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