The Money Files

This article summarises four of the key terms that you'll come across when you start working with project estimates.

Bottom up estimating

This estimating term describes how you break down your project and estimate (as the name suggests) based on the smallest components.

Watch the video here: Bottom up estimating video

Parametric estimating

This term describes how you can use statistical and logical calculations to work out how long a project will take, based on what you know about the individual activities.

Watch the video here: Parametric estimating video

Analogous estimating

Analogous estimating relies on previous experience to calculate the estimate.

Watch the video here: Analogous estimating video

Three point estimating

Three point estimating is discussed in more detail in this article but the basic premise is that you use a formula to calculate your overall estimate. The formula is:

This calculation will leave you with a weighted estimate of the budget for the activity (although you could use it for scheduling time and work out your estimate in days). It will be weighted in favour of the most likely cost for that task, but it will also allow for the fact that things might go well – or not.

In this video I discuss some of the questions raised during my presentation at PMXPO this year.

For more on managing project budgets on the cheap, see this article on communicating on a budget.

At EVA20, London’s alternative project management conference which was held earlier this year, Sir Tim Laurence, Chair of the Major Projects Association, talked about the initiatives that are in place for improving major projects.

The MPA was set up 30 years ago to share experiences, knowledge and ideas about major projects – both things that were successful and ideas that had failed – with the objective of helping other project leaders to initiate and deliver better projects, avoiding the mistakes of the past.

Sir Tim talked about the four initiatives underway with the MPA at the moment.

A Procurement Routemap

The procurement routemap includes capability management and it’s aimed at setting up projects to succeed from the beginning. “No one sets out to fail on a major project,” said Sir Tim. He didn’t share the details of this but it’s a way of making sure contracts are effective and realistic enough to support major projects from the start.

Green Book Plus

The Treasury’s Green Book is the definitive guide for deciding which major projects should move forward but Sir Tim explained that it struggles with the largest initiatives. Planning and business cases need to be more realistic, more rounded and more honest. Green Book Plus is going to try to provide that framework.

This initiative supports the process of choosing which projects to do at a national level. It aims to make sure that politicians are better placed to judge which initiatives to do. Deciding on a major project, said Sir Tim, is not something that we are good at in the UK.

To give an example, there is currently an open decision on how best to extend the airport capability within London. Both Heathrow and Gatwick airports have expressed an interest at being the one that ‘wins’ the investment for expansion. In something I’ve never seen before, both airports are campaigning to the public with posters on public transport and in other ways too. This isn’t Britain’s Got Talent: the public don’t get to vote on which airport gets the extra runway. But savvy airport operators know that dangling the carrot of good jobs, infrastructure and expansion can influence the local community who in turn influence their elected representatives, who in turn… The information coming from the decision makers is not good enough, so a whole additional level of media and information has been put out there.

The Knowledge Hub  

Third, there is an initiative underway to capture key lessons. Lessons learned is something that major projects are not set up to do and the learnings are often not followed through, Sir Tim explained, citing Crossrail as an example.

We’ve tried this as a nation before. The APM’s involvement in creating the learning legacy from the 2012 Olympics was huge and hugely successful. I don’t know why that major investment in changing the culture of large projects to include the discipline of lessons learned and sharing best practice wasn’t continued after that event. If something like the good work and significant outpouring of lessons wasn’t enough to kick start a change in how we approach this area of project management, then I’m not sure that another initiative is going to have much success either.

But good luck to them, it’s certainly something that project management overall does not do well at and anything that keeps it at the forefront of people’s minds has to be a good thing.

Mentoring

A mentoring programme for senior leaders is important because often mentoring initiatives are offered at entry and mid-career points, without much support for the people at the top. Those individuals still benefit from an impartial, external point of view and the opportunity to bounce ideas around in a safe environment, which is essentially what mentoring is.

“Good judgement, good decision making, good strong, clear leadership,” summarised Sir Tim, going on to add that you can learn these skills. They are not innate and can improve with time. The benefit of developing skills like these is that we build more competent, successful leaders and share good practice. “When people are put in difficult situations the can trust their instincts and get things done,” he said.

The common theme amongst all these initiatives is that project initiation is important. Getting projects right from the start, whether that’s at the point of project selection, business case, choosing the leader or creating an environment for success based on the lessons from the past – it all makes a huge difference to the outcome. Let’s influence eventual project success by setting up projects correctly at the beginning. We can all do that, regardless of the size and scale of your project.

I’ve been going back over my notes from the PMI Global Congress EMEA which was in London earlier this year and I realised I hadn’t written anything about Olivier Lazar’s presentation on budgeting and risk. I wasn’t sure what to expect but he raised some good points about ensuring your project budget accurately reflected potential issues and gave tips on how to do that.

He talked about the project budget structure as one that acted as an early warning system, integrating cost, scope and risk.

“Everything starts with an estimate,” he said. “An estimate is a risk.”

The truth about estimating

Estimating, Olivier explained:

• Takes account of risk
• Refers to the true project scope
• Recognises uncertainty where it exists and not where it doesn’t
• Separates contingencies from the general reserve
• Defines contingency and reserves at the appropriate rate
• Identifies and counters bias
• Must be achievable.

“You fail it you have to react,” he said. “Project management is an activity of anticipation.”

Having said that, you can’t anticipate events in the future – unless your crystal ball works better than mine – but you can put mechanisms in place to maximise the opportunity to anticipate and avoid the wilful blindness that was discussed in other presentations during the conference.

Use your plan as a baseline

We all know that what you plan isn’t going to happen exactly as you had scheduled. Olivier said that we should consider the project plan as a baseline, not a map; a speedometer, not the GPS.

Usually, he went on, projects go over time and over budget because risk has not been adequately taken into account.

Therefore it’s important to plan the risk response as early as you can, because this helps you work out the cost. Risk response budgets can then be included in your budget, lowering the likelihood that you’ll go over your planned spending.

He recommended grouping risks together then identifying common response strategies, with a minimum of 3% contingency. You’ll want to increase the contingency reserves in these situations:

• High ambiguity
• Innovation
• Research and development
• Technical uncertainty

These circumstances reduce your ability to accurately identify the risk and so push the contingency up. Where you have low levels of uncertainty and ambiguity you can thoroughly identify risks (for example, in projects where you’ve done the same thing before) and thus be able to reduce the contingency reserves accordingly.

When you have identified risks (or threats) that have a high probability of occurrence, Oliver suggested integrating these fully into the project plan and identifying the opposite opportunity – the one that you could enhance or exploit.

Monitoring as you go

If 30% of your budget at completion has been used and yet 80% of your risk response budget is used up then you have a problem.

These figures show that a lot of things you thought were uncertain have actually happened – no one expects every single risk to really happen on their project because they are only risks, not certainties. If you merge your budget at completion, contingency reserves and risk budget together you might not be able to identify this situation as early. You’ll lose control and you can’t know what is happening because risk and contingency, Olivier explained, are not the same thing. Your risk and contingency budgets do not inflate your project budget (or reduce it, for that matter). They only give you more control.

If you are in this position then you need to act quickly to get your project back on track.

Review the scope statement and – while acting quickly – also take the time to react and review. Currently you are within budget so you may not have some of the triggers that you would expect, but consider this tracking your early warning sign.

Olivier concluded by saying that additional control lets you “move from panic and chaos to project management” and reiterated the idea of project management plan as the overall map for y our journey, not the step-by-step walking guide.

Have you split out risk and contingency budgets on your projects? I’d like to know what you think of this practice, so let me know in the comments.

Over the years I have interviewed some great project management experts on this blog. Today I want to round up eight of my favourite expert interviews. They are all packed with tips to help you manage the difficult times on your projects. Enjoy!

Jason Westland on budget management processes

“Projects with a high level of risk require more contingency funding. Having said that, some parts of the project may be riskier than others, so consider whether you add contingency to the overall budget pot or to particular tasks or phases. You could, of course, do both, if you are particularly risk adverse.”

Read Jason's interview.

Kevin Baker on improving project management culture

“Unified Planning takes the schedule status and the cost status at work package level and then aggregates this up to give the overall picture at total project level, that is the status for the complete aircraft development.”

Read Kevin's interview.

Wilhelm Kross on risk management

“Making trade-offs, designing short-term compromises, implementing short-term work-arounds and the like, are typical management challenges that seem to be ignored.”

Read Wilhelm's interview.

And there's another part of my conversation with him here.

Eric Winquist on reusing requirements

“Organizations that centrally manage requirements respond to change faster and catch errors earlier because they are leveraging requirements that have already been developed and tested.”

Read Eric's interview.

Chris Bell on Enterprise Risk Management

“ERM is a scalable, holistic approach to risk management that consolidates and organizes risk information from across the organization into one location so that it may be used for improved decision making. By embracing ERM and creating a risk management culture, organizations can drive business performance, innovation and growth, while protecting company reputation and shareholder value.”

Read Chris' interview.

Jon Swain on project management tools

“With everything in one place, senior management can see up-to-date project performance data across the whole organization allowing them to better manage their project portfolios. They can proactively choose which projects to select, prioritize projects particularly with competing or scarce resources, understand the interactions between projects and tie all of these decisions directly back to the company's strategy and goals.”

Read Jon's interview.

Todd Williams on cost audits

“When you are determining the cost of internal resources, you need to determine they are performing to expected goals. Are they spending time on non-project tasks or inefficiently getting toward deliverables? They may be salaried and simply billed to your project.  In this case you need to be diligent ensuring hours (which translate to money) are spent on completing their work and that these hours are in compliance with industry standards. If time gets excessive you have a problem.”

Read Todd's interview.

Rob Prinzo on securing funding for your projects

“Robust budgeting starts with comprehensive requirements. I recommend starting by making a list of all your projects, categorizing the projects based on: size, business function, type, level of funding, effort and organizational impact. Next, determine the dependencies with other projects, funding, resources and business decisions.  Once you have your list, categories and dependencies you can start to determine the projected costs for the projects.”

Read Rob's interview.