PMBOK® Guide for the Trenches, Part 3: Cost

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Categories: Project Failure


What would be your reaction if I told you there's a widely practiced profession out there that pays well, with (usually) nice working conditions, and it involves continuously providing its customers with the wrong answers?

Welcome to the wonderful world of cost estimating.

Take for instance, the original estimate for the National Ignition Facility project--it was just over US$1 billion. The final budget was US$4.2 billion. The Central Artery/Tunnel Project, also known as the "Big Dig," was originally estimated at US$2.8 billion. Through 2006, US$14.6 billion had been spent (though to be fair, this is only US$8 billion in inflation-adjusted dollars).

The original estimate for the Sydney Opera House was US$7 million. The final cost was US$102 million, more than 14 times the original estimate.

Why is estimating so tough? It's not as if estimators are dumb or poorly trained in their profession. I've earned my estimating certification, and that was one hard test--it melted my brain. I took the examination on a Friday and couldn't participate in light conversation for the following weekend.

The reason that initial cost estimates seem to so rarely align with a project's final costs has nothing to do with the work quality of the estimators. It has to do with the work quality of everybody else on the project team. You see, comparing the final costs of a project to their original estimates is a way of making the cost baseline team somehow responsible for everything that went wrong in a project.

In the case of the Sydney Opera House, bad weather, incomplete plans and drawings, and a lack of information about the material and the structure of its now-famous roof all added dramatically to the cost. The estimators didn't make those errors--other members of the project team did.

I have to laugh every time I hear a project manager lament all that's really needed is a good cost estimate--as if a sufficiently prescient estimate would work as a talisman to ward off rate variances, contingency events, poor performance and scope creep.

For those estimators who are reading this and can't believe your eyes, I figured I've spent enough ink lambasting you for hanging around projects and continually re-estimating the remaining costs as a way of providing project control capability. You deserve a break.

I'm especially interested in hearing from those estimators and project controllers who somehow find themselves the scapegoat when their original cost baseline gets blown to smithereens. 
Posted by MICHAEL HATFIELD on: March 03, 2010 01:21 PM | Permalink

Comments

GF
Well, we do not participate in multi-billion dollar projects...just a few hundred thousands and maybe a million [very rarely].

Anyway, we have a client right now that by re-designing the civil portion of the project has manage to rip return on investment...thus every issue/change order/claim presented to him for other portions of the project do not bother.

Its so funny, the attitude towards project status seems to be like this: we are doing a great job, instead of loosing 100 we are gaining 20. And everybody stands up and gives a big ovation...

G Dyer
There is a simple solution to cost over runs.

Fixed price contracts.

People are always more accurate when they are under the barrel of "eating it" if they mis-calculate.

Managers also scrutinize budgets, costs, and projected profits much more carefully.

Dan Swan
Also to be considered is the organizational structure. Planning and design are interested in providing the lowest cost for the project. In doing so, cuts are made and minimal quantities on line items are submitted. It makes them look good to present a project that fits the budget.

Once awarded, the project monitoring and controlling team find the quantities are insufficient and the some key requirements have been omitted. The organizational structure does not allow for good communication or lessons learned across teams. Efforts are being made to rectify this but they fall on deaf ears because "we have always done it this way." And yes, I am talking about a local government agency.

Jaco Duvenhage
Michael,

I think your point has again been proven in South Africa with the soccer stadiums constructed for the World Cup, as all of them has over run the budgets by more than 100% from the initial estimates. From personal experience in the consulting business, and from training courses feedback and discussions with students, one aspect is clearly the problem: Planning.

Each and every time it comes back to the same answer, planning. As an example, take the soccer city stadium in Johannesburg. At the handover the mayor confirmed the 1 Billion rand over run, and blamed it on the escalation of construction costs over the 4 year period. Now that only point the finger in one direction, bad planning, or well, maybe no planning.

Organizations need to realize the effect that quick planning will have on their bottom lines and I believe that project managers need to compile and distribute and communicate lessons learned internally and externally to their organizations to make everyone aware of the risks of poor planning.

Project managers also need to take the responsibility of informing executive members of these risks and supply then with case studies and facts, to assist them in finding solutions and allowing project teams more time to plan and develop proper support plans such as the estimate.

Srikanth
According to me just giving number $1,000000 is the cost of the project is a meaningless.

It has to be followed with the Assumptions and Constraints.

Wow, so hear is the catch...
Assumptions and Constraints can be revised on periodic intervals.
In my opinion as soon as you revise the "Assumptions and Constraints" you also need to revise the new cost.




Chris S. Adams, PMP
Thanks Mike. Nice article.

Estimators do get their share of criticism and therefore I understand the sentiments expressed. Projects should be a team effort, with everyone sharing in the credit or blame. I do not think estimators should take a position of "Not my fault, you didn't specify the materials. And we had bad weather."

Estimators should be asking the right questions to account for uncertainties (as best they can). And other team members should be considering the same questions, and volunteering information if not asked.

Naturally, there should be effective change management in place, and a regularly visited list of assumptions as another reader mentioned. Ultimately, the vision should be an end state where it can be said, "WE planned and executed well."

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