Estimations In Project Management

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Estimations in Project Management

“The Father of the Bride”: wrong estimations of the cost.

George Banks Mental Errors

1.     1. He wanted to spend as little as possible and therefore was motivated to come up with an unrealistically cheap estimate. He ignored all evidence that would have suggested the true cost of the wedding (expensive cake, large number of guests, etc.) when he did his rough estimate.

2.     2. He used a reference point (the cost of a house) to come up with the estimate. It was completely irrelevant to a wedding and therefore was nonsensical for this particular estimate (though good for the movie). This is a classis example of anchoring.

3.     3. He was overconfident. Weddings are a one-day event and it will take place in his house, so he thought the amount of money required would be manageable.

What Should Have George Banks Done to Avoid a Nervous

Breakdown ?1. Ask some other people how much the wedding would cost and use this number as a reference point.

2. Make a rough estimate by summing up all known expenses without ignoring any items.

3. Make necessary contingency plans by continually asking, “What else could happen?”

Politics of Psychology?

Flyvbjerg Curve

Examples of Wrong Estimation

Project type Number of cases

Average cost escalation

Rail 58 44.7%

Fixed-link (bridges and tunnels)

33 33.8%

Roads 167 20.4%

All projects 258 27.6%

Psychology of Estimations

• Rule of PI: Actual duration (cost) of an activity will be about PI (3.1415…) bigger than the original estimate, even if the estimator was aware of this rule.

• Planning fallacy and the optimism bias • Student syndrome: many people will start to

fully apply themselves to task just in the wake of a deadline.

• Confirmation Bias

Availability Heuristic

Simple Psychological Exercise

1. Take three seconds to try to recall all of the projects or large activities you were involved during the last year.

2. Now repeat step 1, but take 15 seconds.

3. Repeat steps 1 and 2 taking up to three minutes for each step, and write down the results.

“What I see is what I want to see.”

Planners or project managers sometimes cease to review data as soon as they find something that supports their estimate. They can also discard evidence that contradicts their estimates.

Selective Search of Evidence

Other Explanations Of Problems With Estimation

· There is no established project estimation process.

· Inaccurate data is used, or historical data may not be complete.

· The forecasting techniques and tools are inefficient.

· There is no ability to track actual project performance, which can be used to refine estimates.

· The project planners are inexperienced.

Simple Remedies

• Never make a wild guess • Collect Relevant Historical Data • Reality checks • Independent Assessment

Example of Reality Check

500 1000 1500 2000 2500

Mission Cost ($ mln)

0

0

20

40

60

80

100

120

140

160

180

Mis

sion

Dur

atio

n (m

o )

HEAD

Magillan

Landsat 7URAS LISA

CGRO Chandra (AXAF)

GalileoTerra

HST

GOES I-M

Aqua

NASA’s LISA Project cost estimation

Estimating Probabilities

1. Subjective judgment

2. Relative frequency approach

3. Combination of both

Method of Eliciting Judgment

• Direct assessment of an event’s probability• Ask the experts two opposing questions: “What is

the probability that the project will be canceled?” and “What is the probability the project will be completed?”

• Probability wheel

25% No problem with the component

35% Full replacement of the component

40% Repair of the component

Probability Method

Low estimate

High Estimate

11 intervals

How many instances per each interval

Building Consensus

• Come back to original questions• Visualize range on opinions• People usually good in technical estimations but not good

about cost• Separation of compound events

Sensitivity to Probability

Maj. Ernest Y. Wong and Lt. Col. Rod Roederer of the U.S. Military Academy (2006) reviewed the decision to attack Iraq from a decision theory point of view. To make their point, they hypothetically assumed that the decision to attack Iraq was based only on one criterion: the existence of a stockpile of weapons of mass destruction (WMD). They performed analysis using methods that we have discussed in this book. They demonstrated that outcome of the decision to attack Iraq is very sensitive to uncertainty in assessment of probability of Iraq having WMD at this time. If probability is greater than a certain break even number (say 75%), the decision may be correct; and vice versa. However, if the probability is expressed as a range (from 60% to 90%), and the break even point is within this range, it is very hard to tell what course of actions should have been taken.

Future Reading

Lev Virine and Michael Trumper

Project Decisions:

The Art and Science

Management Concepts, Vienna, VA, 2007

Lev Virine and Michael Trumper

Project Think:Why Good Managers Make Poor Project Choices

Gower, 2013