Cost Estimating - Why Haven\'t We Gotten Better?

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ALON, Inc.

6800 Versar Center, Suite 303

Springfield, VA 22151

T: (703) 256.9503 F: (703) 256.9508

W W W . AL O N I N C . C O M

Copyright 2011 ALON, Inc., All Rights Reserved

COST ESTIMATING –

WHY HAVEN’T WE

GOTTEN BETTER?

SCOTT PATTON

PMIWDC

FAA LUNCHEON SERIES

DECEMBER 21, 2011

1 COMMITTED TO EXCELLENCE



20+ years working in “project management”

– Project Manager. EHS projects in the nuclear weapons complex

– Consultant. Helping clients build project management capabilities

and competencies

– Business Owner. Benchmark assessments and knowledge sharing

– Adjunct Professor. Project management certificate program

10+ years supporting the profession

– PMP, PMI-RMP and OPM3 Professional certifications

– Supported development of the OPM3 ProductSuite assessment methodology

– Knowledge sharing through different venues

SCOTT PATTON

INTRODUCTIONS




Key principles of cost estimating

Challenges in developing estimates

Strategies to consider in developing

reliable estimates

AGENDA




Definitions

Estimating methodologies

Assumption validation

Reserve Analysis

References

COST ESTIMATING PRINCIPLES




To calculate approximately (the amount, extent, magnitude, position

or value of something)

To judge and form an opinion of value from imperfect data

To judge tentatively or approximately the value, worth or significance

DEFINITIONS


In other words . . .

estimating implies an effort to deal with uncertainty

by developing an educated guess that substitutes

for an actual measurement




Estimates define the effort needed to meet project requirements

Estimates set stakeholder expectations as to the size of the effort

Estimates provide a baseline for monitoring and controlling the project

Estimates provide the foundation for trade-off decisions


Performance

Schedule Cost

WHY ESTIMATE?




Commonly used cost estimating techniques

– Analogous

– Extrapolation from actual costs

– Parametric

– Engineering

– Grass Roots

– Delphi

– Round Table

– Expert Opinion

Select cost estimating methodologies and approaches based on availability

of “good” data

– Methodologies selected should be specific to each type of cost

ESTIMATING METHODOLOGIES





Assumption – a way of dealing with an uncertain future when there are

a number of possible options

Document assumptions

Validate assumptions with key stakeholders

Challenge assumptions to expose uncertainties/risks

“IF this assumption proved to be false, THEN the effect on the project

would be …”

DOCUMENT AND VALIDATE ASSUMPTIONS


Source: Society of Cost Estimating and Analysis




Contingency Reserves

– Used for future situations that may be planned for only in part (known unknowns)

– Based on cost risk assessment

– Determined by the quantitative (expected monetary value) assessment of impact and probability

Management Reserves

– Used for future situations that are impossible to predict (unknown unknowns)

– Based on assumption analysis

– May be specifically identified in the budget as “Cost Management Reserve”

– Based on the complexity, size, strategic importance of the project

– Reflective of the risk tolerance of sponsor/organization

RESERVE ANALYSIS





GAO Cost Estimating and Assessment Guide – Best Practices for

Developing and Managing Capital Program Costs; March 2009;

GAO-09-3SP; http://www.gao.gov/new.items/d093sp.pdf

System Engineering for Intelligent Transportation Systems; January 2007; http://ops.fhwa.dot.gov/publications/seitsguide/seguide.pdf

Practice Standard for Project Estimating; 2011; PMI

Identifying and Managing Project Risk by Tom Kendrick; 2009;

American Management Association

Society for Cost Estimating and Analysis (https://www.sceaonline.org/index.cfm)

Others???

REFERENCES


http://www.gao.gov/new.items/d093sp.pdf

http://ops.fhwa.dot.gov/publications/seitsguide/seguide.pdf

https://www.sceaonline.org/index.cfm




Project Failure

Factors

Caused By Inadequate

Estimates

Causes Estimation

Failures

Rebaselining

Customer Dissatisfaction

Lack of Resources

Unrealistic Expectations

Lack of Executive Support

ACTIVITY: PROJECT FAILURE FACTORS – WHICH

CAUSE OR ARE CAUSED BY ESTIMATION FAILURES?

Place an “X” in the appropriate column(s) for each row

x

x

x

x

x

x

x

x

x

x




UNCERTAINTY

WHAT IS THE CHALLENGE?

THE ESTIMATING CHALLENGE

TECHNICAL

PSYCHOLOGICAL

POLITICAL

MANAGEMENT




Timing of estimates

Data sensitivity

Changes in technology

Understanding complexity

UNCERTAINTY


Cone of Uncertainty

Source: ops.fhwa.dot.gov

PMI – Accuracy of Estimates

ROM: +/- 50%

Budget Estimate: -10 to +25%

Definitive Estimate: -5 to +10%





Source: Is it really true that these cartoons are public domain or is there somewhere a copyright owner on them?




Scope

– Incomplete requirements

– Misinterpretation of requirements/statement of work

– Improperly defined scope/incomplete work breakdown structure

Cost

– Lack of timely, relevant data

– Applying improper skill levels to tasks

– Failure to understand or account for cost escalation or inflation

– Failure to properly use the selected cost estimation method

– Failure to adequately consider overhead/indirect costs

– Failure to account for total lifecycle costs

TECHNICAL





Being overly optimistic – natural tendency

Individuals tend to follow predictable

estimation patterns based on their position in

the organization

– Lower level managers tend to add reserves

and upper levels to delete them

– Acquisition managers tend to delete reserves

and PMs to add them

PSYCHOLOGICAL





Decision making and planning are multi-actor

processes with conflicting interests

Budget and acquisition cycles take time

Project scope or ambition level will change

Changes in organizational priorities

Influenced by agendas

POLITICAL





MANAGEMENT


Planning has not improved in 15 years

0

1

2

3

4

5

1993 1996 1999 2002 2005 2008 (Est)

Risk

Value & Benefits

Planning

© Cooke-Davies and Patton, 2009

Lack of a systematic approach to

estimating

Inappropriate use of tools and

techniques

Varying estimating skill levels

Mangers do their own estimating

regardless of skill level

Decisions are made based on these

estimates




Understand the challenges

Manage bias

Manage uncertainty

Understand political nature of organization

Use sound practices

Build cost estimating capabilities

WHAT ARE THE STRATEGIES?

STRATEGIES FOR RELIABLE ESTIMATES




MANAGE BIAS


Three point estimate

Source: visionarytools.com




Program Evaluation Review Technique (PERT)

MANAGE UNCERTAINTY


CE = (O + 4M + P) ÷ 6

CE = estimated costs

O = most optimistic estimate

M = most likely estimate

P = most pessimistic estimate




Monte Carlo analysis – encompasses any technique of statistical sampling

employed to approximate solutions to quantitative problems

MANAGE UNCERTAINTY


$190,000,000 $200,000,000

Distribution (start of interval)

0

20

40

60

80

100

120

Hit

s

0% $181,419,283

5% $185,618,909

10% $186,690,787

15% $187,509,265

20% $188,176,720

25% $188,863,949

30% $189,432,362

35% $189,850,284

40% $190,317,773

45% $190,818,409

50% $191,418,280

55% $191,893,524

60% $192,332,421

65% $192,824,491

70% $193,380,512

75% $193,767,813

80% $194,274,786

85% $194,896,984

90% $195,972,844

95% $197,146,209

100% $203,887,262

Cu

mu

lati

ve F

req

uen

cy

New Attack SubmarineEntire Plan : Cost Makes extensive use of random

numbers to control the decision making

when a physical event has a number of

possible results

Translates the uncertainties specified at

a detailed level of the project into their

potential impact on project objectives

Source: Pertmaster, LLC




Base estimates on past results, reliable data, and validated assumptions

Have estimates developed by “experts” – use more than one person

Develop estimates based on sound requirements and understanding of

uncertainties

– Iterative development

– Refine estimates as more information becomes available

– Use quantitative analysis

– Use more than one approach

Present estimates as a range – defend/explain estimate range probabilities

Review, revisit, remove head from sand, repeat

USE SOUND PRACTICES





Stakeholder management – interpreting and influencing both the external

and internal environments and by creating positive relationships

UNDERSTAND POLITICAL NATURE OF ORGANIZATION


Adapted from www.business.utah.edu

Play with diligence and a full

understanding of the

landscape, players and rules

Be prepared – provide data

derived information, foster

alliances, build trust and

continually adjust your

approach

Develop negotiation and

conflict management skills




People

– Skilled and experienced cost estimators

– Knowledgeable and empowered program/project managers

Process

– Key component of acquisition/program management planning and execution

– Continual refinement of “adaptable” processes and techniques

Tools

– Integrated capacity to develop and maintain estimates

– Supports “what if” analysis

Organization

– Supportive and knowledgeable senior management

– Internal resources to build/improve estimating capabilities

BUILD COST ESTIMATING CAPABILITIES


24




Key principles of cost estimating

Challenges in developing estimates

Strategies to consider in developing

reliable estimates

IN CLOSING




Full service information technology and program management solutions company

with five core services:

Program Management

IT and Engineering Solutions

Information Assurance

Virginia corporation with headquarters

in Springfield and an office in DC

Certified ISO 9001:2008

Top 100 DHS Contractor

(Government Security News)

Top 40 Acquisition Support Contractor

(Federal Times)

CORPORATE PROFILE

Capital Planning and Investment Control

Financial Management

Department of Homeland Security

National Archives and Records

Administration

Federal Aviation Administration

Environmental Protection Agency

National Oceanic and Atmospheric

Administration

Department of Treasury

U.S. Census Bureau

Drug Enforcement Administration

Department of Defense

ALON IS CURRENTLY SUPPORTING:




CONTACT INFORMATION

Scott Patton Director, Program Support Services ALON, Inc.

[email protected] (703) 256-9503

mailto:[email protected]




QUESTIONS AND COMMENTS?

THANK YOU!

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