Project estimates can sometimes take on a life of their own. The budget for the new international arrivals facility being built at Seattle-Tacoma International Airport in Seattle, Washington, USA was originally estimated at US$300 million in 2013. But as the project unfolded, the estimated budget needed to complete the work swelled to US$608 million in 2015—and then to US$968 million by September 2018.
That final estimate came after port commissioners appointed an independent panel to assess the project's progress and generate a final budget and schedule estimate. Scope creep and construction costs contributed to the soaring project budget and schedule, the panel found, but estimation errors were also to blame. The findings put the final budget at more than three times the initial estimate and added three months to the project schedule—one the panel dubbed “achievable but aggressive.”
Seattle is hardly the only recent high-profile estimation error. The budget for the Mountain Valley Pipeline project spanning the U.S. states of West Virginia and Virginia now is estimated at US$4.6 billion. This is nearly US$1 billion over the original estimate, the joint venture of energy companies managing the project announced in September.
“There can be real business pressure on the project manager to make cheaper, faster estimates,” says Alfred Chiu, project manager, S&B Engineers and Constructors, Houston, Texas, USA. “And the power of positive thinking can sometimes have a very strong hold.”
—Alfred Chiu, S&B Engineers and Constructors, Houston, Texas, USA
But project managers must approach estimation with the full rigor and objectivity it deserves. This means gathering and validating the required information, testing every assumption and calculation, and fostering an environment in which honesty—not optimism—is the ideal, Mr. Chiu says. “An estimate built on garbage inputs will be garbage,” he says. “And you might not know that until you're further into the project.”
Here's how to spot—and excise—risks that could throw the project estimates off track.
1 Learn the Business Inside and Out
“Inexperienced project managers will sometimes map out a schedule or project budget without taking time to think about the processes, practicalities and risks involved,” says Laurianne van Zyl, PMP, program manager, Silver Wolf Consulting, Cape Town, South Africa. For example, on a construction project, Ms. van Zyl learned that a less-experienced project manager had estimated a project schedule, planning for steel poles to be delivered during the fifth month of execution and foundation work starting in month nine. “That doesn't make sense from an execution perspective,” she says. “Foundations require curing time, so it would be quite a while before the poles could be planted. Financially, this would mean that we'd have an asset in stores for months without being able to capitalize on it, because it wouldn't be in service. Furthermore, construction was planned to take place during the heavy rainy season, which just wasn't practical.” If the estimate had been approved as is, that lack of process knowledge would have doomed the project to schedule delays from the start.
On the flip side, Tracy Parker, PMP, IT program manager, Nvidia Corp., Santa Clara, California, USA, has learned to strengthen her project estimates by meeting with subject matter experts as early as possible. Last year, she finished a six-month, US$136,000 IT upgrade project that hit its budget and schedule estimate exactly. She credits that success to collaborating with the business systems analyst, who knew all of the ins and outs of the business and was able to answer the team's early questions about process, timing and cost. “We've established a really trusting relationship,” says Ms. Parker. “She knows the business inside and out, and the business has faith in the project team.”
2 Nail Down Scope
Having a fuzzy scope is one of the quickest ways to derail a budget or schedule estimate, says Wafi Mohtaseb, PMI-ACP, PMP, head of applications support, Kuwait Finance House, Kuwait City, Kuwait. But it's a surprisingly common misstep. “Project sponsors are eager to get started, so there's pressure to start estimating and planning without a full understanding of the scope or project objective,” he says. But trying to base an estimate on a vague or partially defined scope is akin to building a house on quicksand—it might stand for the very short term, but eventually trouble will hit.
—Wafi Mohtaseb, PMI-ACP, PMP, Kuwait Finance House, Kuwait City, Kuwait
To make sure the project scope is crisply and accurately defined, Christian Bisson, PMP, is a fan of meeting directly with the project sponsor or client. Without such engagement, project managers run the risk of having key information lost in translation or certain elements garbled as the project is relayed from department to department.
“Let's say, for example, that a sales team or marketing team are the initial contacts for a client,” says Mr. Bisson, enterprise project manager, Stradigi AI, Montreal, Quebec, Canada. “They grab notes about what the client wants and then they sit down with the team and it's a broken telephone kind of thing where they talk to the team about what they understood. You end up with a bit of a mess. But if you work with written requirements and direct communication with the client or project sponsor, you're more likely to get everything you need to make an accurate estimate.”
—Christian Bisson, PMP, Stradigi AI, Montreal, Quebec, Canada
3 Calculate Contingencies
Padding an estimate is one way to better ensure that the project comes in on schedule and under budget—but early inflation to a project estimate can also kill an initiative before it's even out of the approvals gate. To balance the real risk of soaring labor costs or weather delays, for instance, project managers must have a firm grasp on how their organization handles contingency budgets, says Ms. Parker.
At some companies, there might be a program-or portfolio-level reserve set aside to cover unforeseen risks. At others, that reserve might be assigned at the project level, based on everything from the project's scope to its risk register. In general, the more unknowns a project has, the larger the contingency likely will be, says Ms. Parker. For instance, when managing projects that involve discovery work, she knows from experience that the project budget could be 50 percent over or under her best calculations. “But if we're doing concept work, that buffer shrinks—it might be 25 percent over or under,” she says. “And if we're doing plan work, where we have fewer and fewer unknowns and risks, the budget should be plus or minus 10 percent of our true estimate.”
The type of project also can have an influence on the contingency worked into the project estimate, she says. For an IT project that her team has executed many times before—such as implementing an established technology—she might set the reserve at plus or minus 5 percent, because the team is deeply experienced with the project's execution and has a deep library of lessons learned from which to draw. “But if we're taking on a massive, nasty, hairy project that has many dark corners, your prudent reserve has got to account for what you don't know,” she says. “And that has to be reflected in the project estimate.”
Here are three immediate steps to take when an estimate goes awry:
1 Check for Updates
Before sounding the alarm with senior executives, consult with team members, says Tracy Parker, IT program manager, Nvidia Corp., Santa Clara, California, USA. Ask: What's the root issue for the budget or schedule surge? What assumptions or inputs need to be reanalyzed?
2 Troubleshoot the Estimate
When the schedule or budget isn't wildly out of whack, Ms. Parker suggests scrutinizing the forecast for wiggle room to get the estimate back on track. “Say, for example, you've allowed three weeks for performance testing. You could probably squeeze that into two. So there's a week right there. Those are the kinds of things project managers should be doing—looking for opportunities.”
3 Elevate the Concern
If there's no reworking the estimate, it's time to escalate to management. Ms. Parker says it's imperative to thoughtfully craft your narrative—and your ask—ahead of time. “Prepare your story: Here's what happened, here's why we think it happened, here's what we're going to do differently, and here's what our ask is to get us righted again.”
4 Combat Optimism Bias
Especially in a fixed-cost bidding system, project managers may feel the pressure to execute lean estimates, says Mr. Chiu. But even beyond that context, project sponsors sometimes can push project managers—overtly or subtly—to trim estimates to the bone.
To fight optimism bias, Ms. Parker bases questions on previous experience. “For example,” she says, “remember in project X, performance testing took two weeks? Why don't you think it's going to take two weeks for this project? It's exactly like that one. Why do you think we can get it done in a week? Is that an estimate that we should use from now on?” Often, when the overly optimistic project manager or project sponsor is faced with experience-based scenarios, he or she is more likely to back down from optimistic assumptions and make revisions rooted in reality.
Ms. Parker says it's also crucial to help project sponsors connect estimates to the project's risk register. Not every risk will be realized—or reflected in the project's schedule and budget estimate—but if project managers can quantify the probability of those risks, it makes it easier for optimistic sponsors to understand that at least some risk should be accounted for. “With a simple spreadsheet, you can show: These are the high-probability risks, and these are the ways we'd need to mitigate them,” she says. “That might mean hiring another person, let's say, which means you need more prudent reserve set aside. If you can demonstrate how risk connects up with estimating, you can deliver more accurate estimates from the start.” PM
—Tracy Parker, PMP, Nvidia Corp., Santa Clara, California, USA