Topic 3.6: Business case: estimating cost and time

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The business case documents the rationale for a project, justifying investments of time and money in pursuit of an opportunity.

Importantly, it challenges the the sponsoring organisation to weigh the merits of doing something (from one or more project options) versus doing nothing and continuing to invest organisational resources into other activities.

By definition, a ‘business case’ that does not evaluate at least one project solution against the null option (doing nothing) is only a project charter.

Even if, as the project manager, you do not prepare the business case – in many organisations the business case is prepared by the project client or a dedicated business analyst – you should be a key contributing stakeholder in its development or able to critically interpret its findings once they land on your desk.

As you will see, the business case affords our one and only opportunity to benchmark the outcomes intended by the project, linking them to the strategic priorities of the sponsoring organisation.

Without this context, projects can often flounder or fail to meet stakeholder expectations, especially in the face of change.

Like all project documents, the quality of the business case depends upon the quality of the data that informs it; this, in turn, depends on the assumptions and estimates made by its author.

Estimation is one of the most important project management skills.

OPEN 1.7 The triple constraints

If you under-estimate the time and resources required to deliver a task or project, then (as per the triple constraints) you may have to sacrifice either scope or quality to get the project delivered.

This may be difficult to explain to stakeholders, especially if you have a fixed budget and/or delivery date.

Conversely, if you over-estimate the time or costs required, you penalise the organisation by locking away valuable resources that could be spent on other projects or operations.

Even though it might be your best intention to return unspent requirements, Parkinson’s Law suggests that you will still find a way to spend them!

Alternately, at the initiation stage, your project may be rejected on the grounds that it will take too long or be too expensive.

If you are tendering competitively for project work (even within your organisation), this means your over-estimate could cost you the job.

Deliberately over-estimating time or costs is a technique colloquially called padding, and we will discuss the strategic risks of this later in the course.

For now, though, at the business case level, we would like to be as accurate as possible in estimating the time and costs required to deliver each of our three, four or five identified options.

So how accurate do we need to be?

It is widely held that a 20 percent margin of error is acceptable at this stage; however, your organisation may have its own policy in this regard.

Plus or minus 20% means that we will tolerate our business case cost estimates being 20% ‘wrong’ either way, but any more than that is considered unreliable for decision-making.

Near enough is sometimes good enough

Now 20% seems like a big margin of error; however, keep in mind that all we are doing at the business case level is comparing options so as to arrive at a preferred project solution.

When we take this option to project planning – the next stage in the project’s life – we will revisit our cost estimates and refine them to within 10%.

However this is a much more detailed (that is, expensive to undertake) process, and more effort than it is worth for business case decision-making, as we shall see.

Note, though, that 20% margin of error is a refinement of the ±30-50% we were happy to accept at the opportunity definition / project concept canvas stage.

So how do you estimate time and costs?
  • Independent research

    A good starting point for estimation might be reviewing past project plans or databases that might provide reliable information on past time and cost performance.

     

    We can also consult a variety of other current sources, including supplier catalogues, quotes and good-old Google.

     

    By applying analogous logic, even if we cannot get accurate data on precisely what we want, we can make ‘like-for-like’ assumptions.

     

    For example: If it costs $17 for a tin of red paint, it will probably cost the same amount for a tin of blue paint (of the same quality).

  • Consensus method

    We might also consult or involve our expert stakeholders, combining their specialist knowledge to develop an agreed range of estimates.

     

    Whether researching independently or relying on consensus, we can usually be more specific by calculating the following from our list of estimates:

    • Mean (the average score)
    • Median (the ‘middle’ score)
    • Mode (the most frequently occurring score)

     

    For example: We polled our stakeholders and they arrived at the following cost estimates for a tin of paint: $10, $10, $12, $15, $18.

    • The mean (average) estimate = ($10 + $10 + $12 + $15 + $18) ÷ 5 = $65 ÷ 5 = $13
    • The median (‘middle’) estimate = $12
    • The mode (most frequently occurring) estimate = $10

     

    Old-school project managers will also refer to three-point estimating, which is a weighted average technique that originates from the PERT project methodology.

  • Parametric estimates

    Parametric estimates take uniform (or even reliable analogous) information and apply a consistent multiplier.

     

    For example: if it takes one hour to paint one room, then it should take five hours to paint five rooms of an equivalent size.

     

    More sophisticated parametric models might also apply learning curves that calculate the time gains that can be achieved when specific activities are repeated a number of times.

     

    For example: if it takes one hour to paint one room, then it should take four hours to paint five rooms of an equivalent size, because we will get better at painting over the course of the task.

  • Other statistical methods

    This is not a course in statistics; however, you should be aware that there are a range of advanced financial and statistical models that can be used to estimate cost and time.

     

    As always, you should look to engage your stakeholder community whenever you lack confidence in your own (or others’) ability to provide sufficiently reliable estimates.

     

    In fact, the margin of error we introduced in the last lesson is also known as the confidence interval.

     

    Therefore, for each estimate, you should always document how ‘confident’ you are (for example ±12%), as well as the sources you consulted and the estimation method you used.

  • Independent cost assessment

    On options where there is a high level of complexity, that are particularly specialised, or where the outputs are unique in that they can’t be templated, you may also like to consider getting an independent cost assessment.

     

    An independent cost (or time) assessment can either review and validate your existing estimates, or directly source estimates using methodologies or expertise that is not ordinarily available to you.

     

    The principal role of a quantity surveyor, for example, is to independently assess the materials, time and labour costs of construction projects.

     

    As with all estimation methods, independent assessments can be done at any time during the project’s life, but their optimum value is realised when they are conducted during the initiation or planning phases.

Estimation error is one of the biggest risks to your project, especially in the initiation and planning stages.

So what are some of the common mistakes people make when estimating, and how can we manage these risks?

Sources of error

Unclear scope / missed activities

The more detailed your scope of work, the easier it is to estimate time and resource requirements with precision. Conversely, a scope that is poorly defined or patchy reduces the quality of our estimates

Poor project record-keeping

As one very reliable source of time and cost data, past projects are usually our first point of call when estimating future work. This assumes, though, the data exists and is accurate.

Asking the wrong people

Don’t confuse people’s confidence in their own estimates with their actual ability – the two do not always align. Make sure you are consulting and appropriate weighting the estimates of experts.

Rushed estimates

Quality estimates take time to achieve. When rushed we are often forced to make assumptions in the absence of data. Each assumption will exponentially increase your margin of error.

Optimism bias

We often assume best-case scenarios when making estimates, overlooking risk factors such as the natural tendency of people to have unproductive, conflicted or down-time, the costs of scrap, rework and spoilage, and the inevitable price fluctuations of goods and services. This is why real data based on past experience should be more valued than crystal-ball gazing.

Deliberate error

Padding is the process of deliberately over-inflating estimates to manage unforeseen risk. Beyond the over-estimation risks cited above, we talk about the damaging cultural impact of padding later in this course.

Suppliers will also sometimes deliberately low-ball estimates (under-quote) to win work, charging for expensive variances later in the project when the cost of changing the supplier is seen as too prohibitive. Beware a price that is too good to be true!

Best practice

Define methods

Having a clearly defined and agreed approach to estimation ensures the consistency and reliability of estimation inputs and process (such as acceptable margins of error). This is especially important when you are relying on multiple stakeholders in this regard.

Use multiple sources

Broad stakeholder engagement is critical to estimation success. If you consult three stakeholders and get huge price or time estimation range, consult further and in more detail to reduce that confidence interval.

Clarify assumptions

If you don’t define the scope of what you are estimating, assumptions will fill the gap. Each assumption will have its own margin of error that compounds on the others. If in doubt, dig deeper and ask.

Even the simple task of Googling estimates demands a good understanding of what is needed and how it integrates into the overall project design.

Allow normal (not best case) conditions

This is where real world data on past project performance is critical. Go beyond past project plans (after all, a plan is a collection of estimates), and look at how long things actually took and how much they actually cost.

Use consistent units

Especially in international projects, make sure everyone is talking in a common currency and agreed weights and measures (for example, miles or kilometres).

Assume task independence

When considering a whole series of activities together in one estimate, you can easily underestimate the nuances of specific tasks within the set, and try to force-fit individual activities into their higher-level estimate. You will see this is especially important when we get into project planning.

Estimating is more than just a task; it is a process that involves:

Agreeing a methodology

Clearly defining the scope of what you are estimating

Assigning responsibility to the right people

Appropriately engaging stakeholders

Validating and documenting the estimate, then

Consolidating unit estimates into a whole.

Don’t skimp on this activity – you will (literally) pay for it later!

Although optimism can play havoc with estimates, it isn’t necessarily a bad thing.

The core principles of optimism bias are outlined in the following TED Talk by Tali Sharot, a cognitive neuroscientist at University College London.

We will return to bias later in the course; for now though, think about the implications of optimism generally for the management of stakeholders and projects.

Source: TedTalks