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THE MOST LIKELY CAUSES OF INACCURATE PROJECT COST ESTIMATES

Alternatively, factors that undermine cost estimations include poor raw data or assuming that resources are 100 percent utilized. Some of the most common pitfalls for cost estimators are:   

Lack of experience with similar projects: Accuracy in cost estimating tends to increase as estimators, project teams, and organizations gain experience working with similar projects. Inexperienced estimators and project teams may not be familiar with the scope of a project, which may lead to inaccuracies with – even with deterministic estimating techniques. At an organizational level, the use of analogous estimating techniques is typically not reliable if the organization has not conducted similar projects before.

Length of the planning horizon and of the project: Professional estimators stress the importance of not making premature estimates. As we have discussed, accurate estimating depends on the degree to which a project is defined. For large, complex projects, approaches such as rolling wave planning mean that future work is less well defined. It is important that cost estimating practices reflect this and that cost estimates are revised as more up-to-date information becomes available. For mega projects that take several years to complete, it’s important to take currency value fluctuation and political climates into account.

Human resources: Creating accurate estimates becomes more difficult as the number of human resources involved in a project increases. While it is standard practice to assume that any resource will only be productive 80% of the time and to create estimates accordingly, it becomes harder to account for costs in managing and organizing people. This is especially noticeable in project activities that involve building consensus or coordinating tasks across many people.

Difficulty also arises when estimating costs of human resources via resource costing or parametric estimating. Both estimating techniques revolve around the concept of unit-based costing, but the complexities of managing people make it difficult both to obtain accurate unit costs and to forecast the task completion time accurately. Further, it’s unlikely that workers’ skill levels will be identical (even if they are classified as such), so some time deviation is inevitable. This shows the value of systematically overestimating instead of underestimating, especially when dealing with human workers.

Several other common mistakes can affect the accuracy of estimates:

Not fully understanding the work involved in completing work packages: This is sometimes a problem for inexperienced project teams who have not worked on similar projects before.

Expecting that resources will work at maximum productivity: A more appropriate rule of thumb is to assume 80% productivity.

Dividing tasks between multiple resources: Having more than one resource working on a task typically necessitates additional planning and management time, but this extra time is sometimes not taken into account.

Failing to identify risks and to prepare adequate contingency plans and reserves:Negative risks can both raise costs and extend durations.

Not updating cost estimates after project scope changes: Updated cost estimates are an integral part of scope change management procedures, as project scope changes render prior estimates useless.

Creating hasty, inaccurate estimates because of stakeholder pressure: Since project managers are held accountable for estimates, order of magnitude estimates are a much better choice than numbers pulled out of thin air.

Stating estimates as fixed sums, rather than ranges: Point estimates are misleading. All estimates have inherent degrees of uncertainty, and it is important to adequately communicate these via estimate ranges.

Making a project fit a fixed budget amount: The scope of a project should determine its budget, not the other way around. As Trevor L. Young explains in his book How to be a Better Project Manager, estimating is a “decision about how much time and resource are required to carry out a piece of work to acceptable standards of performance.” The reverse approach — planning projects to fit budgets — is likely to result in projects that fail to meet requirements and to deliver results.