The quality of a company’s estimating competency is an indicator of the strength of its project team and project system capabilities. Project systems include the people, processes, methods, and tools that work together to manage a project from conception to hand-over to operations.
Most things that go wrong during a project’s execution phase can be traced back to gaps in the estimation work processes that surface later in the project cycle.
Industry research points to the critical importance of project planning to the success of the project execution phase — where the quality and completeness of project planning drive successful project performance.
Estimating is a crucial part of superior planning. More accurate estimates improve project decision-making, which leads to enhanced capital investment performance.
Estimate accuracy as a basis for project risk assessment
AACE defines estimate accuracy as an indication of the degree to which the cost estimate’s value may vary from the final actual outcome of the completed project. Accuracy is typically represented as percentages above and below the expected result.
Over budget exists when variances are higher than the project budget. This over budget condition destroys project NPV.
Conversely, under budget exists when estimates are driven by bias, resulting in excessive budget overfunding for the sake of predictability. Under budget destroys capital efficiency unless all the funds are returned for future capital investment.
Closing Estimating Gaps
These six steps close common estimating performance gaps related to inferior project planning.
1. Develop and use a standard, scope-based WBS classification system: Use scope-based WBS with a standard code of accounts that is integrated with other project system coding schemas.
Estimating systems must seamlessly interact with estimate management systems, benchmarking systems, performance management systems, and ERP systems. A well-thought-out coding schema to support the entire project system is imperative to increasing estimating’s organizational value.
2. Increase scope management capability: Estimate accuracy improves as the level of project definition improves. There is no better way to enhance the strength of the project system and reduce systemic risks than good scope management, especially in early project stages.
Better focus on scope management also helps preclude starting construction too early, which is another common pitfall that drives out-of-sequence activities.
To start managing scope, deploy an AACE estimate classification system and enforce parameters that define completeness of scope in support of estimate classification. Take advantage of enhanced project definition by using a combination of estimate classification with a Project Definition Rating Index (PDRI) for completeness and quality of deliverables.
3. Include value engineering (VE) and constructability reviews: Strong estimating participation in VE and constructability reviews improves scope definition. Estimating is a watershed activity. The more the scope is reviewed and improved, the less systemic risk and the greater the chances for project success.
4. Develop a mature and broad array of estimating methods: Strong estimating organizations employ several estimating methods.
These methods, driven by dependable cost estimating relationships (CER), give estimators a wide range of tools to prepare and validate their estimates. Examples of these capabilities include parametric, capacity-based, conceptual quantity-based assemblies, and bottoms-up estimating.
Strong estimating organizations deploy technology platforms that support core estimating methods, have robust estimate management systems that provide seamless, real-time line-of-sight into estimates in-process, and a deep, organized history of completed estimates.
Benchmarking systems are the third element of critical core capability needed for estimate validation and become the basis for parametric analysis and inputs into probabilistic risk management.
5. Integrate estimate and schedule development to support the control budget and project execution.
Although estimating and scheduling should be highly integrated, too often, schedulers do not benefit from estimates, and estimators do not benefit from the scheduling process.
Both elements require integrated data to support their respective processes. Make sure to tie these two together organizationally and from a business process and data perspective.
6. Develop basic risk capabilities: Given that base estimates are probabilistic in nature, an estimate reflects a range of potential outcomes. Each value within the range is associated with a probability of occurrence.
Capture project history in benchmarking technology. Include estimates, quantity-based contract schedule of values (including bids), change order history, and project closeout (actuals).
Remove bias and use past performance history with outputs from scope management to establish probabilistic ranges of project contingency on base estimates.
Strong estimating capability is a critical component to the success of a project. Project planning is impacted even more by the quality of estimates prepared up to project sanction.
To the extent that companies can deploy these six key steps, they will also strengthen their project system as the benefits of a healthy estimating capability pay dividends for other dependent project stakeholders.