Tony DeMarco is a recognized expert and frequent speaker on estimating and predictive cost modeling. He has contributed over 30 papers on cost estimating, analysis and management and is cited on two U.S. patents for cost estimating techniques. In 1997, Mr. DeMarco received the highest honor bestowed by the International Society of Parametric Analysts (ISPA), the Freiman Award. In 2001, Mr. DeMarco served on the NASA International Space Station Management and Cost Evaluation Task Force (IMCE) to help address cost growth on the program. Read more about Tony.
Recently the Director of the Office of Management & Budget (OMB), Peter Orszag issued a directive that was posted on the OMB blog that outlined three specific actions for IT reform. The actions include a freeze on all new IT modernization task orders for financial systems, reviews of current high risk IT projects and require agencies to submit improvement plans to the CIO; thirdly, the OMB Deputy Director will develop recommendations within 120 days to improve the federal government’s overall IT procurement and management practices. Orszag states:
“While a productivity boom has transformed private sector performance over the past two decades, the federal government has almost entirely missed this transformation and now lags far behind on efficiency and service quality. We are wasting billions of dollars a year, and more importantly are missing out on the huge productively improvements other sectors have benefited from.
Quite simply, we can’t significantly improve the efficiency and effectiveness of the federal government without fixing IT.”
My experience is that government IT project managers are very competent people and they want to deliver on time, on budget results. However, as confirmed by this survey, 78% of government IT project managers feel that they are not equipped with the people, processes and tools to determine accurate project estimates and to conduct effective program affordability management. The root cause of late, over budget IT projects are inaccurate, over-optimistic project estimates. I and others at my company have worked hard to change this, and to ensure that government IT project management are educated about project estimating software but little has changed over the past ten years. Fundamental change will only result from greater leadership focus on estimating accuracy throughout OMB and agency program management.
I am excited about the efforts described in Derek Kaufman’s article on the AFMC website. For the complete story please see this link http://www.afmc.af.mil/news/story.asp?id=123202181. The DoD is investing in the rapid build up of a new foundation of acquisition workers focused on estimating costs and negotiating prices through continuous learning.
Mr. Assad notes that Wright-Patterson Air Force Base, Ohio, was once the preeminent DoD recognized leader at estimating costs and negotiating prices with defense contractors. It's a skill that has been allowed to atrophy, he noted. "We need to build that pricing capability back up," he said. "It's extremely important for us to have world-class pricing talent, so that we make sure that we get a reasonable deal for our taxpayers."
For over 30 years, PRICE Systems has passionately supported this same vision.
Every year we train hundreds of analysts and acquisition professional across the globe. We proudly offer training on topics such as source selection support, software cost estimating fundamentals, data collection and total ownership costs. And recently we introduced an on-line acquisition training center, known as PRICE University, where students can gain continuous learning credits through self paced study, right from their own desktops!
If you haven’t had the chance to hone your skills as Mr. Assad suggests, I invite you to start today by taking a quick tour of PRICE University - http://university.pricesystems.com/index.jsp
The cost estimating community mourns the loss of a true pioneer this week. Our thoughts and prayers are with his family. Frank Freiman has a special place in the history of PRICE Systems as his innovative work is directly responsible for the company’s existence today. This is a classic case of where one man can truly made a difference. Thousands of estimators across the world have benefited and continue to benefit from his accomplishments.
Frank began studying the applications of statistical quality control as an officer in the US Army during World War II. It was this experience that led him to pursue graduate studies at NYU where he began examining cost estimating relationships or CERs. It was during this time that Frank began early development of his weight based production model, which would later serve as the fundamental assumption for the first commercial parametric cost estimating model, PRICE H.
After graduation Frank was employed at Federal Manufacturing and Engineering in Brooklyn, NY. It was here that Frank analyzed the cost and physical parameters of more than 700 products. From this analysis he developed a method for "normalizing" the effects of production, schedule, organizational experience, and product staging. His study also included the effects of differing production schedules on cost as well as the impact that mature technology had on reducing manufacturing costs.
In 1957, Frank was hired by RCA Missile & Surface Radar Division in Moorestown, NJ to lead its cost estimating department. His main responsibility was to review cost proposals. In 1969, Frank began to integrate his database of CER’s into a basic time-share computer (BTSS) which was connected by a phone line. This was the origin of the first PRICE model.
In 1975, Frank became the first Director of the newly developed PRICE Systems business unit. Frank would also later be instrumental in the establishment of ISPA, the International Society of Parametric Analysts. The Frank Freiman award is the society’s highest honor given to individuals recognized for exceptional achievement in the area of parametric cost estimation.
Frank had retired to Pompona Beach, FL and passed away on December 13, 2009.
A special thanks to Hank Apgar, much of the bio information came from his article "Who is Frank Freiman" published in Parametric World. Please add any rememberances to our comments section.
Doing business with the Department of Defense (DOD) requires that you have disciplined company governance in specific areas as noted in the Defense Federal Acquisition Regulations (DFARs). In particular, DFARs 215.811 and 252.215-7003. DFARs 215.811 requires all DOD contractors, large and small, have adequate estimating systems to support their proposals. As part of a regulatory oversight requirement, the Defense Contracts Audit Agency (DCAA) will periodically perform contractor estimating system reviews. If you are a large defense contractor, you can expect your estimating system to be reviewed routinely. Smaller defense contractors can be audited at any time at the request of their customer. If DCAA finds that you have estimating system deficiencies, "Flash" reports are broadcasted to your customer and other defense agencies. If the deficiencies are serious, you may be suspended from submitting any further proposals until your estimating system is deemed adequate.
So what is an adequate estimating system? It is DOD policy that contractors have estimating systems that consistently produce well supported proposals acceptable as a basis for negotiating fair and reasonable prices. Estimating systems should be consistent and integrated with a contractor's related management systems, and be subject to applicable financial control systems. To be considered adequate, an estimating system must be established, maintained, reliable, and consistently applied. It must also produce verifiable, supportable and documented cost estimates.
DFARs 215.811-70 delineates attributes of an adequate estimating system. So if your estimating system is tested, you will be scored on following:
The Contractor…
1. Establishes clear responsibility for the preparation, review, and approval of cost estimates.
2. Provides a written description of the organization and duties of personnel responsible for contributing to the estimating process
3. Ensures that relevant personnel have sufficient training, experience and guidance
4. Identifies sources of data and the estimating methods and rationale used in developing cost estimates.
5. Provides for appropriate supervision
6. Provides for consistent application of estimating techniques.
7. Provides for detection and timely correction of errors.
8. Protects against cost duplication and omissions.
9. Provides for the use of historical experience, including vendor pricing information where appropriate.
10. Requires use of appropriate analytical methods.
11. Integrates information available from other management systems as appropriate.
12. Requires management review [of the estimating system]
13. Provides for internal review of and accountability for the adequacy of the estimating system, including the comparison of projected results to actual results and an analysis of any differences.
14. Provides procedures to update cost estimates in a timely manner.
15. Addresses responsibility for review and analysis of subcontract prices.
Barak Obama's 2010 U.S. Federal Budget proposal promises a "New Era of Responsibility", and in the introduction he says,
"...we must begin the process of making the tough choices necessary to restore fiscal discipline, cut the deficit in half by the end of my first term in office, and put our Nation on sound fiscal footing."
How can you decide among project alternatives and choose an optimal strategy if you have not determined the value of each?
How can you restore fiscal discipline and cut the budget deficit if you do not know the cost-benefit analyses your projects?
Since a new era of government spending responsibility will hinge upon making tough decisions, they must be supported by the disciplines of
business case analysis, analysis of alternatives, and portfolio management optimization to be successful.
These disciplines have been areas of study for us at PRICE Systems for the past two years and our work was released this week in TruePlanning 2009. There are three innovative new features in this release:
- Value models - enabling analysts to estimate the value and benefits of project once it is delivered, and over its lifetime
- Business Case Analysis - enabling analysts to prepare and score a case for the project including the cost/benefit analysis, payback period, investment rate of return, strategic benefits, and other evaluation criteria scoring. The business case tells the story of the project.
- Analysis of Alternatives and Portfolio Analysis - enabling decision-makers to view Risk/Reward charts of alternatives and planners to reconcile total project estimates to budgets.
The three panels in this view tell the story of the project and make its business case. The product breakdown structure view below identifies the elements of the project that will cost money and identifies the various benefits expected from the project implementation.
Each element in the tree represents either a cost item or a benefit associated with the project. The cost items and benefit items are grouped into separate folders so that they can be reviewed individually or summarized.
The Payback chart below shows how costs and benefits are realized over time so that project cost/benefit cash flow can be analyzed.
Each bar quantifies the costs and benefits realized in each year, the line shows the cumulative cash flow over time.
The Metrics table shown below shows the most commonly used financial metrics used for business case analysis.
This alternative of the BPA has a payback period of just over five years and has an IRR of nearly thirty-nine percent.
However, there is a problem. When we combine our BPA project with the other projects in our portfolio we identify an estimated budget overrun. As shown in the project portfolio view below, the sum of the project estimates exceeds our agency budget over time.
Now we must decide what we cannot do or what project we must cancel to stay within budget. We know the business case for the BPA project, how does that compare to the other projects? The chart below shows the risk/reward for the projects under consideration.
Tough decision time! If you only had budget for two projects, which would you choose? Are you willing to say NO to the others?
TruePlanning 2009 has been delivered just in time to empower government decision-makers with the right tools so that they can "begin the process of making the tough choices necessary to restore fiscal discipline, cut the deficit in half by the end of my first term in office, and put our Nation on sound fiscal footing". TruePlanning cost management software estimates software development costs, IT project costs, and now, the value of those projects. The value of determining a project's true value is more important than ever.
Today, change is in the air. As I write this, Barack Obama is about to be sworn in as our new U.S. President and the space community, among others, should be braced for change. A recent LA times article reported that of the 74 questions asked of NASA by the Obama transition team, over half were on basic spending issues, including cost overruns.
The Obama team and the NASA Administrator Michael Griffin clearly do not see eye-to-eye. Monday, it was announced that Mr. Griffin will step down from the post. Griffin characterizes himself as an engineer and states that NASA shouldn't be evaluated by how well it estimated the cost of projects.
"We start these things out, and we admit up front we don't completely know how to do them. That is what makes them interesting," Griffin said recently.
"If we are to judge the worth of our work by our ability to estimate, then that is a standard I am not ready to apply or to accept," Griffin said.
Others are more realistic about NASA's obligation to create credible expectations for spending taxpayer money.
"Our space program is running inefficiently, and without sufficient regard to cost performance," wrote Alan Stern, a former NASA associate administrator who has been mentioned as a possible replacement for Michael Griffin, the current NASA administrator.
In a recent op-ed piece in the New York Times, Stern called the cost overruns a "cancer" that has cost the agency's science program about $5 billion over five years.
Agency officials said they had improved financial controls -- including forcing managers to better estimate costs.
Considering NASA's great technical achievements, one must wonder, "Is accurate estimating harder than rocket science?"
I don't think so. I believe the clue to accurately estimating the cost, uncertainty and risk associated with large, complex space projects can be found in a recent Defense AT&L article by Col. Brian Shimel, USAF. Col. Shimel states,
"We cannot relieve ourselves of the need to plan for the future just because the future is uncertain. For our plans to be reasonably accurate and reliable, it is prudent we base them on rational analysis and not on wishful thinking.", and...
"We must think clearly about uncertainty and risk, and we must fight the temptation to discount those factors when communicating the real conditions of our management situation. We don't get in trouble because of risk and uncertainty. We get in trouble for not admitting to ourselves - and those who rely on us - all of the risk and uncertainty that inherently exist in everything we plan to do."
Our TruePlanning estimating and cost management software gives managers metrics and benchmarks of previous projects, and methods to realistically quantify uncertainty and risks. TruePlanning's reports and charts expose over-optimism and show managers the real conditions of the situation. I routinely recommend that government agencies quantify all the risks and uncertainties of each project in their portfolio and budget to the sum of the 70% confidence levels of each project, yielding 80% confidence that the projects can meet taxpayer expectations for the budget.
President Barack Obama just finished his acceptance speech. He called upon us all to increase our service to the country. Government managers can help by stepping up to the estimating challenge.
Accurate estimating is not rocket science. There are sophisticated cost estimating models to accurate estimate software development costs, hardware development costs, IT project costs, and operation and support costs - we just need to be realistic, responsible and courageous about presenting the results for our analysis. Contact us and we'll help you get started today.
This was a fun and gratifying week at PRICE Systems. In our Mt. Laurel, NJ headquarters we had our annual holiday gift wrapping of presents we donated for needy children and families in the area. The PRICE team gathered in our classroom and the wrapping began with no pre-instruction or guidance - but much merriment. What a study in production process and learning! Wrapping that first present was awkward. It had been a while since I wrapped last. How to measure the paper? Where to cut? How to keep the cut straight? Which way do I fold first? How to fold? What to do if I have too much paper on the ends? Where do I put the tape? ...and so on. Needless to say that first present took some time, I wasted a lot of paper and tape, and the final product had some wrapping defects. After reflecting on the results, I looked around at others to see what they were doing, asked some questions, processed that information along with my own experiences, and set out on the second package. I did much better. I wrapped faster, I wasted less, and the final product was an improvement over the first. With each new gift I got better and better. I "learned" how to be more productive, reducing the effort and materials with each present. By the eight present, I started to focus on how I could reduce materials. How can I use less paper? How can I use the least amount of tape and still keep the paper form coming off? I was improving the overall process.
Productivity increases like mine occur with each and every production process and it is an essential part of cost and schedule estimating. The method most commonly used to model this effect is called "learning curve", and we use it in all of our models. You can find hundreds of references and equations on the web, but generally the model uses a "learning curve parameter" (LC) to estimate the cost for a certain production quantity. The LC is expressed as a percentage, and (1-LC) represents the amount the production cost is reduced every time the quantity doubles. For instance, if I say an 80% learning curve applies to the process, then every time the quantity doubles the cost to produce is reduced by 20%. So if the first unit cost $100, then the second would be $80, and the fourth would be $64, and the eighth would be $51.20. For the same starting point, a 90% learning curve represents less learning and higher costs, while a 70% learning curve steeper learning and lower costs. 
If I had timed my wrapping and measured the materials used, I could have used simple math to determine the learning curve that applied. I suspect it was close to 70%. Determining the learning curve for everything from paper clips to space ships is more complicated, but that is one of the things we do at PRICE. We perform operations research and analyze data to keep our models as accurate as possible, and embed that research in our cost management software. Accurate learning curve estimates help our clients optimize their investments, prepare better budgets, plan more effectively. And as part of this most recent study, we made a lot of kids happier for the holidays. Happy Holidays to you.
Technology readiness is a critical cost driver of development programs. Many high technology programs fail because initial cost and schedule expectations were based on the assumption that the technologies employed were proven, when actually they were not. Space programs have the most dubious history in this regard. I once listened to a Lockheed Martin executive explain how the X33 space shuttle was a great vehicle, but was canceled because it was, "two inventions short of meeting the requirements". Canceled after over one billion dollars were spent. 
Starting development projects that have constrained budgets and schedule with unproven technology is a bad idea, one that has not gone unnoticed. The Defense Acquisition Performance Assessment 2006 (DAPA) report states,
"Technology maturity or “knowledge-based” development has been a subject of considerable discussion between the Department and the Congress. However, although there is agreement concerning the advantages of ensuring that technology is mature prior to proceeding to development and production, there are no clearly definable measures of technology readiness.", and,
"Incorporating high-risk technology in systems generally leads to significant cost and schedule impacts."
So, have decision-makers learned their lesson by now. Recent news suggests not. It was just published that NASA's Mars Rover mission was delayed two years and is over budget because,
"problems developed in the design and operation of the 31 actuators that control the mechanics of the craft, including the steering mechanism and its robotic arm"
Probably a few inventions short.
Technology should be matured in a lab environment with a sustained level of effort before it is employed in a development project with cost and schedule constraints. Anything else is extremely risky and will most likely fail.
The PRICE TruePlanning models each have a method evaluating the cost and risks associated with technology maturity. Our cost management software helps our clients decide among alternatives with varying technology maturity and let them know the risk of overrunning cost and schedule. Most of the time our analysis can dissuade executives from starting a project "two inventions short".
Jacob has a great comment to my recent post on getting it "right the first time". He notes that requirements are often fuzzy and that estimates rely on peoples' opinion of cost and duration - and that the are often wrong. He asked what silver bullet we have. Our silver bullet is a proven discipline that makes people better estimators and sheds light on fuzzy requirements.
It starts with the people. Becoming an accurate estimator requires the same step-by-step approach as any learned skill such as golf or tennis or swimming (things I am currently struggling to do well). First you need the right tools, then you need to learn the right way, then you need to be mentored by experts as you practice what you learned until it becomes second nature. Recently, I was struggling with my breathing while attempting to swim. Lap-after-lap I was breathing hard, swallowing water - it was a miserable sight. Then I consulted an expert that got my head turning the right way and got me into an rhythm of breathing every third stroke. My swimming quickly improved by 40% - more laps in less time.
We do the same for our clients. First we arm them with the right tools. Our TruePlanning software provides a proven step-by-step discipline to do an estimate the right way, TruePlanning asks the right questions and covers all the bases, including risks. Then we train people not just how to use our software but how to be great estimators. Sizing methods, interview techniques, and requirements elicitation are part of our training. Then our experts are by their side as they hone their skills through email, live-meetings, a 24/7 hot-line, and on-site visits. Throughout we provide people with benchmark measurements of other similar efforts and tips to guide them. Suddenly fuzzy requirements become clearer. People are doing more accurate estimates in less time. Typically our clients improve their estimating accuracy by 50% within three months and several of our clients now produce estimates that average within 5% of actual scope, cost, and schedule. Our clients leverage our cost estimating software and cost management software to estimate software costs and schedules, IT infrastructure costs, and custom hardware to improve their overall project and portfolio management. By the way, I just finished a mile in the pool and improved by another 10% - practice makes perfect.
As I prepare my remarks for the first PRICE Systems International Symposium and User Group Meeting in Asia hosted by the PRIGENT corporation, I am astounded by the recent globalization of the Defense Industry. Worldwide weapon systems acquisition has been permanently changed by:
- the merger of US defense contractors in the 1990's,
- the entry of European contractors into the US Defense Industry (EADS, BAE) in the 2000's, and
- the entry of Korea into the global market happening now.
Today, BAE Systems is the sixth largest U.S. defense contractor, U.S. defense contractors dominate European Defense top-ten lists and S. Korea is building its global customer portfolio, including Turkey. Among of the greatest challenges to this newly globalized industry are communication and understanding between customers and contractors, and among the internal organizations within a multi-national corporation. Defense procurement agencies and contractors wishing to succeed in this new world must adopt new communication strategies.
One of those strategies will be evident at our event. Negotiations to set the right price and to determine the ensuing operation and support costs are difficult in this environment. Cost models, which work in the precise global language of mathematics, are the Rosetta Stone in the procurement Tower of Babel. At our Symposium TruePlanning and the PRICE models will be the common language among Defense procurement professionals from around the world. And they will have little trouble communicating and understanding because the models distill their differences down to a universal set of cost drivers, activities, and resources common to all projects. We will discuss estimating software costs, IT project cost estimating, the effect of software development tools, the challenges of project planning and budgeting - and there will be understanding. When we used acronyms to name our model parameters, an arcane term like ECMPLX (engineering complexity) became the global term for describing the technology maturity and engineering experience of a development task. Today, our clients from around the world have a universal understanding of our model parameters and can communicate and negotiate effectively using our cost estimating software. Everyday, I see evidence of vast productivity improvements when multi-national companies and international procurements standardize on our models and cost management software, establishing a common language in the midst of diversity.
Is it like a Tower of Babel where you work? Consolidation is occurring in nearly every industry today, so think about the efficiencies that can be gained through standardization? ...communication? ...immediate understanding? As you improve communication and understanding, you will become more productive and estimate more accurately.
While many at Bear Stearns, Lehman Brothers, Merrill Lynch, and AIG are staggering from the Wall Street financial crisis, others on the acquisition side are contemplating the fate of redundant operations created by the these consolidations. This reminds me of the rapid consolidation of the global Aerospace and Defense (A&D) during the 90's after the fall of the Berlin Wall. Granted, this consolidation is happening at a much faster pace, but it would be wise for decision-makers to do a little performance measurement before they slash and burn redundant operations.
During the A&D consolidation, the General Electric Corporation called upon me to help them measure performance of several redundant operations. Why me? Well our activity-based estimating models do a tremendous job of normalizing and measuring the productivity of similar, but somewhat different operations. When you provide costs as an input to our models, you can calculate productivity. Doing this for several projects at different operations gives you a clear picture of which operation is the most productive. Decision-makers can then make unbiased decisions about which one to close. The same method can be employed with our TruePlanning for IT estimating suite. Centers of excellence and laggards for IT budget planning, IT project management, software development, IT data-center operations can be quickly identified and the best allowed to survive. So, let's hope that the decision-makers are doing their due diligence and apply proper corporate governance. A little bit of performance measurement modeling will go a long way.
During the A&D consolidation, the General Electric Corporation called upon me to help them measure performance of several redundant operations. Why me? Well our activity-based estimating models do a tremendous job of normalizing and measuring the productivity of similar, but somewhat different operations. When you provide costs as an input to our models, you can calculate productivity. Doing this for several projects at different operations gives you a clear picture of which operation is the most productive. Decision-makers can then make unbiased decisions about which one to close. The same method can be employed with our TruePlanning for IT estimating suite. Centers of excellence and laggards for IT budget planning, IT project management, software development, IT data-center operations can be quickly identified and the best allowed to survive. So, let's hope that the decision-makers are doing their due diligence and apply proper corporate governance. A little bit of performance measurement modeling will go a long way.
A good point is made in a comment to my last post, Chris Carter says, "As estimators I think it is our duty to tell our customer (management) what we assess the possible range of outcomes to be so that they can make use of this information ". I agree that we should always deliver an indication of accuracy every estimate. Uncertainty and risk analysis is an integral feature of TruePlanning and we educate our clients on the value of estimate ranges to optimizing project and portfolio performance. The uncertainty-based probablistic confidence-level of an estimate that our products produce is an effective means of addressing the issue. Your cost estimating tools and cost estimating software should address uncertainty and confidence so that weapon system project planning and IT budget planning can be optimized.
Many times estimating software cost is the major challenge. I recently came across a strong case for estimating accuracy and the value of risk ranges in a recent Forrester Research report titled, “Debunking IT Project Failure Myths,” by Lewis Cardin, a former CIO and currently senior analyst. The twelve-minute Podcast is worth a listen. Mr. Cardin found that among the top reasons projects failed were:
[Begin quote]
1. An unrealistic project plan, which dooms the best project.
All too often, when these projects go on the rails of the original project plan, PMs must spend more time on damage control with steering committees and project resources rather than on execution — doubling their work when it is least desirable to do so.
2. First-number syndrome, which makes business execs forget it’s an estimate.
When projects are first sized, which is likely to occur before they are approved, estimates of cost, time, and resources are preliminary with a wide confidence interval…. But business execs remember the number and forget how uncertain it is…[and] may see this simply as increasing costs, not as the inevitable result of greater knowledge.
[End quote]
I have seen these two factors kill many good projects and ruin the careers of many good people. I served on the "Intenational Space Station Management and Cost Evaluation Task Force" (IMCE) for NASA and this was exactly the situation with that program. My experience there prompted me to compile "Six Steps to Program Success" where, "Getting the estimate right the first time" is the most important step. It is so important that you create the right expectations at the beginning of project by presenting the possible outcomes, good, bad, and ugly.
Estimating accuracy is not just about one number. It applies to risk ranges and confidence-levels so that management can determine the right number that goes into the bid or budget.
Productivity refers to measures of output from production processes, per unit of input. The labor and materials that go into a project are the input, and the final delivered product represents the output.
Your estimated project budget determines the planned productivity, and decomposes to a planned productivity for each individual and each unit of material. The dynamics of the Project Management Triangle tell us that for a fixed cost (input) and schedule, if I underestimate the scope (output), then I have planned for a lower than optimal productivity. And Parkinson's Law law tells us that "work expands so as to fill the time available for its completion", so you will achieve that lower productivity. If I overestimate the scope, then people will take shortcuts that induce errors and reduce quality resulting in rework - utimately increasing the cost and schedule (input) for a given scope (output) and achieving a lower than optimal productivity. The best way to improve productivity is to improve estimating accuracy. Estimating just the right amount of material and processing time to produce a product achieves the lowest input for the output. Estimating exactly how much your people can do within a given schedule achieves the optimal output for a given input.
To improve estimating accuracy people must become better estimators. PRICE Systems is dedicated to providing project managers and estimators with models, benchmarks, and training so that they become more accurate estimators and improve organizational productivity.
Your estimated project budget determines the planned productivity, and decomposes to a planned productivity for each individual and each unit of material. The dynamics of the Project Management Triangle tell us that for a fixed cost (input) and schedule, if I underestimate the scope (output), then I have planned for a lower than optimal productivity. And Parkinson's Law law tells us that "work expands so as to fill the time available for its completion", so you will achieve that lower productivity. If I overestimate the scope, then people will take shortcuts that induce errors and reduce quality resulting in rework - utimately increasing the cost and schedule (input) for a given scope (output) and achieving a lower than optimal productivity. The best way to improve productivity is to improve estimating accuracy. Estimating just the right amount of material and processing time to produce a product achieves the lowest input for the output. Estimating exactly how much your people can do within a given schedule achieves the optimal output for a given input.
To improve estimating accuracy people must become better estimators. PRICE Systems is dedicated to providing project managers and estimators with models, benchmarks, and training so that they become more accurate estimators and improve organizational productivity.
While working with clients who operate under fixed budgets I often hear, "Cost is not an issue when we plan and budget, so why is estimating important?". I quickly stress that estimating is not just about cost. It about balancing project scope, cost, time, benefits and risks. If your estimates are not accurate, your projects and portfolios are not optimized – and you are wasting money.
Projects are planned and managed within scope, time, and cost constraints. These constraints are referred to as the Project Management Triangle. Each side represents a constraint. One side of the triangle cannot be changed without impacting the others. The time constraint refers to the amount of time available to complete a project. The cost constraint refers to the budgeted amount available for the project. The scope constraint refers to what must be done to produce the project's end result. These three constraints are often competing constraints: increased scope typically means increased time and increased cost, a tight time constraint could mean increased costs and reduced scope, and a tight budget could mean increased time and reduced scope.
The discipline of project management is about providing the tools and techniques that enable the project team to forecast, anticipate and organize their work to meet these constraints. The discipline of portfolio management is about using tools and techniques to provide management with accurate estimates of cost, scope and time for each ongoing and proposed project so that they can make the right decisions to optimize their objectives within overall constraints. Every day, project managers and business leaders make decisions based on estimates of the dynamics of the project management triangle. Since each decision can determine whether a project succeeds or fails, accurate estimates are critical. Projects launched without a rigorous initial estimate are five times more probable of experiencing delays and cancellations. Even projects with sound initial estimates are doomed if they are not guided by informed decisions within the constraints of the triangle. If you are working under a fixed budget (cost constraint), then an inaccurate estimate of the number of product features you can produce (scope) within a fixed period of time (schedule) will doom your project. Inaccurate estimates across your projects de-optimize your portfolio.
Unfortunately, most project management tools only balance cost and schedule. Tools like Microsoft Project, CA Clarity, Primavera, and others do not link cost and schedule with scope. 
Project modeling and estimating tools, like TruePlanning by PRICE systems, maintain a persistent link among project scope, cost, schedule and risks. With project models, project managers can instantly see the impact that changes in scope have to costs and schedules. Any side of the Project Management Triangle can be constrained while "what if?" analyses are performed. Accurate estimates optimize the balancing act.
Successful organizations recognize that estimating is not just about cost, but about balancing within constraints and optimizing results. They respect the triangle.
Nothing drives me crazier than the statement I get from many of our clients during that first meeting, "We are really bad at estimating. So what? Why does it matter? Management does not seem to care." Business leaders have been duped into believing that inaccurate project estimates are not a concern and that they cannot do better - Wrong. Bad estimates lower profitability and yes, you can do better. Please consider that projects are prioritized and launched based on their expected costs and benefits, the return-on-investment (ROI). So you optimize your portfolio of projects based on the total expected ROI of the projects, or at least you think you are. Because any inaccuracy in your estimates of cost, benefits, and schedule will result in a delay of net benefit realization and a de-optimized portfolio.
Underestimates cause overruns, costing more and delaying benefits. Overestimates become self-fulfilling prophecies, consuming resources that could better used elsewhere. So much for your perfect plan. If you knew then that the big troubled project in your portfolio would take twice as long and twice as much, would you have approved it? Would you have not been better off approving the two smaller, more certain projects that would deliver benefits faster?
Improving your estimating accuracy from +-70% to +-20% more than doubles the net benefits from your portfolio of projects. Improve your estimating accuracy and you will improve profitability.
Underestimates cause overruns, costing more and delaying benefits. Overestimates become self-fulfilling prophecies, consuming resources that could better used elsewhere. So much for your perfect plan. If you knew then that the big troubled project in your portfolio would take twice as long and twice as much, would you have approved it? Would you have not been better off approving the two smaller, more certain projects that would deliver benefits faster?
Improving your estimating accuracy from +-70% to +-20% more than doubles the net benefits from your portfolio of projects. Improve your estimating accuracy and you will improve profitability.
Last week the U.S. Senate Committee on Homeland Security and Governmental Affairs held a hearing entitled "Offline and Off-budget: The Dismal State of Information Technology Planning in the Federal Government". The prepared remarks by those who testified before the committee make good reading. You can find them here. The committee focused on the many IT projects that are overrunning cost and schedule, giving most Federal Agencies failing grades on their budget management report card. My experience while working with Fortune 500 companies is that they do not do much better - we just do not hear about the failures.
I have seen Federal IT planning and management come a long way over the last decade. OMB has taken the lead to bring more visibility and discipline to IT project management across the agencies. Karen Evans testified to the many disciplines in place: Exhibit 300 business cases, Earned Value Management (EVM) requirements, the Management Watch List and the High Risk List among them. These are great tools for visibility and exposing management problems. Using these tools, the GAO exposed the practice of project rebaselining to mitigate the fallout of inaccurate initial estimates. Visibility tools have the effect of "describing the water as someone is drowning" when a life preserver is what the drowning agency really needs. The root cause of this "dismal state" is inaccurate estimates of project scope, cost, schedule, benefits, and risk. The life preserver is to make project managers and oversight managers better estimators. Managers become better estimators through training and the use of models and benchmarks. I have addressed the essential steps of program affordability management and project estimating accuracy in previous papers and presentations (you can download these by clicking on the links).
There is evidence that the testimony of those who came before the committee that they recognize the importance of accurate estimating. Karen Evans said that we must "ensure the use of analytical tools and collaboration environment to improve our own information management capabilities." Paul Denett said that an OFPP training program will certify that program and project managers have cost estimating skills, among other essential competencies. And Norm Brown said that "continuous estimation of cost and schedule" is an essential project management discipline to avoid IT train-wrecks. So while these leaders get it, there is still not enough emphasis on estimating. OMB has taken great visibility actions, but now it is time to address the root cause of the poor report card - estimating accuracy.
I have seen Federal IT planning and management come a long way over the last decade. OMB has taken the lead to bring more visibility and discipline to IT project management across the agencies. Karen Evans testified to the many disciplines in place: Exhibit 300 business cases, Earned Value Management (EVM) requirements, the Management Watch List and the High Risk List among them. These are great tools for visibility and exposing management problems. Using these tools, the GAO exposed the practice of project rebaselining to mitigate the fallout of inaccurate initial estimates. Visibility tools have the effect of "describing the water as someone is drowning" when a life preserver is what the drowning agency really needs. The root cause of this "dismal state" is inaccurate estimates of project scope, cost, schedule, benefits, and risk. The life preserver is to make project managers and oversight managers better estimators. Managers become better estimators through training and the use of models and benchmarks. I have addressed the essential steps of program affordability management and project estimating accuracy in previous papers and presentations (you can download these by clicking on the links).
There is evidence that the testimony of those who came before the committee that they recognize the importance of accurate estimating. Karen Evans said that we must "ensure the use of analytical tools and collaboration environment to improve our own information management capabilities." Paul Denett said that an OFPP training program will certify that program and project managers have cost estimating skills, among other essential competencies. And Norm Brown said that "continuous estimation of cost and schedule" is an essential project management discipline to avoid IT train-wrecks. So while these leaders get it, there is still not enough emphasis on estimating. OMB has taken great visibility actions, but now it is time to address the root cause of the poor report card - estimating accuracy.
Whether you are pricing a competitive bid, or you are trying to get a new product to market, estimating accuracy will determine your success or failure. When pricing a competitive bid, you first want to “ghost the competition” to determine a price-to-win. Parametric estimating models allow you to quickly estimate the cost of recently priced items from your competition to determine their bidding margins and target a likely price-to-win for a new competition. I recently worked with one of our clients who has an extensive database of competitive bids from which he can determine a price-to-win for a new bid in less than one hour. The rich set of industry benchmarks we supply with our TruePlanning models streamlines the task.
Once you have a price-to-win, you need to estimate your business's cost, schedule, and of risk of meeting the requirements. Comparing the most-likely cost estimate and potential cost of risks to the price-to-win, helps management decide their bidding strategy, metered by the businesses risk tolerance.
(Cost + (Risk Tolerance x Risks)) x Profit_Margin = Bid_Price ≤ Price-to-Win
Estimating accuracy is vital to winning the bid, and vital to delivering the expected margin after the bid is won. You must win and you must realize your margins to achieve revenue growth.
All new products have a certain “window of opportunity” to capture market share and achieve revenue growth for a business. Everyday I read stories of cancelled new product developments or new products failing in the marketplace because their window of opportunity has passed. Most new products are good ideas and most product managers are skilled, but failure is the result of over-optimism. The most common cause of new product failure is inaccurate estimates of the scope, cost, schedule and risks of bringing the product to market. Inaccurate estimates result in bloated requirements, under-estimated schedules, and missed opportunities. Successful new products bring just enough features (scope) to market on schedule to be first, capture initial market share and then grow with successive offerings – look at the iPhone story. Accurate estimates help you launch within the window of opportunity and achieve revenue growth.
If you are a baby-boomer like me and occasionally suffer from symptoms of mid-life crises it is important to answer the question, " What is the purpose of my work, my mission, my raison d'être?" So, I am starting this blog by taking a step away from the challenges on my desk at the moment to look at the big picture. Business leaders agree that reliable shareholder value lies in companies that sustain profitable growth and are "built to last". Hence, leaders focus on improving key performance indicators (KPIs) throughout their companies to improve shareholder value: revenue growth, profitability, productivity, and customer satisfaction. Accurate and timely estimates are critical to each objective. Inaccurate estimates lead to unhappy customers, lost revenue opportunities and delayed cost savings, degrading shareholder value. The table below links KPIs to estimating accuracy.
My mission in life is to help business leaders sustain profitable growth by empowering them with estimating accuracy – this is my raison d'être. I am passionate about the value of what I do and the impact it has on business success. Later I will expand on each of these KPIs, but with my mid-life crisis avoided for now I will get back to the work on my desk. …now, if only it was so simple to get rid of those extra mid-life inches around my waist.
My mission in life is to help business leaders sustain profitable growth by empowering them with estimating accuracy – this is my raison d'être. I am passionate about the value of what I do and the impact it has on business success. Later I will expand on each of these KPIs, but with my mid-life crisis avoided for now I will get back to the work on my desk. …now, if only it was so simple to get rid of those extra mid-life inches around my waist.
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