What causes bad project estimates: time and cost.

I am preparing to speak to a Project Management group in Austin this afternoon.  My preparation included reading a few PMI articles, one of which was quite interesting to the Lean Six Sigma side of me.  What Causes Bad Estimates… and What You Can Do About It by James T. Brown.  It was found on the Project Management Institute website.

The article spoke of research that showed that 90% of all projects (out of 258) were found to have cost overruns.  The reasons for the overruns were documented as estimation issues, since the project did not estimate the proper time or effort to get it completed as planned.

The two primary reasons discussed are: Not including sufficient time to deal with uncertainties and creating an artificially low estimate in order to get the project approved.  I propose that these two reasons are be driven by a similar motive, to get approval to execute the project.

Acknowledging the uncertainties in estimating time and cost are easy for Lean Six Sigma practitioners, because we deal with means and variability every day.  In the project management world, most work is built on using averages.  It is assumed that if you average enough steps or activities together, that the final project will be good.  If this article is correct that 90% are late and over cost, buiding a plan using averages is not adequate.

Using a Lean Six Sigma view, the project plan should plan a mean and a confidence interval for true completion date.  I have been put in a position to provide project estimates at my last employer and we used nominal estimates at first, but we were wrong a bit over 50% of the time.  As you would expect, after getting metaphorically beat up enough times, my Lean Six Sigma group began providing the 95% upper bound for time and the 95% lower bound for the projected improvement and cost savings to the company executives.  Using this model we were always early and we always exceeded our savings goals.  During each project, we still worked with milestones based on the average expectations to stay on track, we just avoided sharing that plan with the leadership.

The second issue, under-scoping the effort to get it approved, is very risky.  At one level, you risk your credibility every time you take this path.  If it is an internal project, your career could be limited because of this type of plan.  If you are under-scoping bids on external work, your company may risk fines or other problems if you complete the project late and over-budget.  I would rather not commit to the work without a realistic time and cost plan.  Now if the management accepts my plan but sets an artificial deadline that is different from my estimate, I will still do the work, but I will make my plan public and let them understand it is a risk to meet their artificial deadline.

Consider reading this article, it may enlighten you to the project management views that are not always included into Lean Six Sigma training.

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One Comment

    Jorge Farfan

    Greetings Rick.
    In regards to what is concluded in the PMI article, it may be a misguided conception on my part but I believe this is most commonly seen in the IT arena rather than in the construction arena.
    The reason I say ‘it may simply be a misconception on my part’ is because as a General Contractor (GC), we deal with lump sum contracts all the time and although it is not the best or only instrument for estimating and going into a contractual agreement on a project, it places the responsibility on the GC to make sure we deliver what’s defined in the owner’s scope of work without budget overruns.
    As a GC, when we compare our bids on won and lost projects, and we continually find that the GC with a huge gap in their estimate is the one that missed something within their risk mitigation, and/or equipment, and simply ends up buying a project (very risky business). On our awarded project, although we are always going into those projects as the lowest bidder, there’s always a very fine line between making a profit on a project and buying a project altogether, hence why we place great emphasis on estimating our projects correctly and competitively. I believe the conclusion of the article is not inclusive of all projects and/or all project industries.
    Lean Six Sigma (in my opinion) has greatly helped me in having a better (a most analytical view) of how we go about our processes and procedures, even within our industry. Although I still have tons and tons of learning to do on this subject, it has already reaped rewarding results in refining our own projects. Although I must confess, I benefitted mostly from the lean side.
    For example: In my field of work, project overruns due to lowballing the figures is seen less and less specially in municipal projects (as in WTP & WWTP projects). The overruns we do see and that come up in most cases (if not all) have to do with issues we cannot directly control (+/- 5%). Be it uncontrollable equipment/material delays (some equipment may be spec’d and/or come from unique providers and we may be bound to their manufacturing delays although plenty of lead time was allocated), project unknowns (at the field or as part of existing plant operations), and/or weather (which we can closely mitigate but never to a full precision). For those unknown/unknowns, there is not much we can do, but for the other 95% of the ‘other’ project risks (known/known, known/unknown’s), intentional risk mitigation, accurate estimates, realistic project planning, and intentional project executions keep’s our business alive.
    I assume that in the unknown/unknowns areas of their industry may be where other projects (capital and/or IT projects) are facing most of their challenges but even in those scenarios, I bet PM’s can also benefit greatly from using Lean Six Sigma principles to some extent.
    Jorge Farfan

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