Sunday, December 20, 2009
Blog #9 from Lau
Learning from estimates
This chapter provides an insight into estimating project cost where there are unrealistically cost/price estimation offer in order to win or justify a project but eventually end up with additional cost and time incurred while in actual implementation. This is a serious issue faced particularly by the contractor in the real business world where "over ambitious" price have been offered to the customer in order to win contracts and eventually/ultimately creating a lose-lose-lose-lose situation where the customer have to incur more time and cost to re-negotiate the contract or to issue VO for the contract. For the contractors which offer higher price, with estimation done with high level of details and professionalism, will soon be running out of contracts to survive. This lead to unhealthy development and competition for an industry, unfortunately this is happening in the real business world. This chapter may help to appropriate, professional and practical answers for PM to deal with the challenges arise from estimation and competition. PM need to put the learning in practice so that answers to poor or "feel good" estimation can be provided automatically to deal with risk or trap arise from poor estimation.
Lose-lose-lose-lose situation is in opposed to win-win situation. Whereby contractor lose, competitor lose, customer lose and also end customer lose due to unprofessional estimation that leading to price war.
What is an estimate?
Estimates mean anticipating cost that reflects a scope of work performed within a specified time frame with defined assumptions. The larger and more complex a project is, more assumptions needed to define the estimate conditions. The estimate is often the input to decide the go/no go decisions on whether to proceed with a project. However, timely delivery of an accurate estimate is equally important; a late estimate is equal to an inaccurate estimate.
Estimating and its impact
Every project starts with an estimate. In fact, the outcome from the estimation could serve as important factor in making project decision. For contractor, winning an external project with low offer price (price estimation), will entail unforeseen problem later that results from the decision made with wrong or "over ambitious" estimation which often seen in real business world. The down side is that the owner may have to incur more cost and time with the awarded contract due to the difficulties faced by the contractor while delivering the project due to the "over ambitious" estimate. On the other hand, the contractors that provide an estimation which is far too high with or due to its setup and internal cost will soon be out of business. This will eventually causing the contractors who can provide quality work, soon to be out of competition from unethical price slashing with wrong estimation. In a fixed price environment, this can be a threat where there is no space for further negotiation on contract price of the initial contract awarded was based on wrong or poor estimation. Ultimately, poor estimation will pay the price of failing the business.
Process of estimation
- Estimation needs to be done based on set of guidelines such as projecting handbook and internal business guideline and policies as well as past project report and results that provide the framework for estimating process.
- WBS is needed to estimate the initial cost as well as update estimating data.
- WBS dictionary to define the boundaries of the scope for each element so that cost can be estimated and reported correctly.
- Standard format should be defined to facilitate for highly reporting as well as detail analysis.
WBS, templates, templates structure and templates formats are the essential and fundamental and basis for cost estimation and subsequent cost collection as well as interrelationship between various account levels and comparisons as well as user interface, data maintenance and consistency for traceability and analysis on changes.
The WBS and templates are the framework for all the cost estimating and should also be the basis for all subsequent cost collection. If the same structure does not support estimate development and actual cost collection, then it will never be possible to confirm that the estimated costs were accurate.
As mentioned earlier, estimation serves the fundamental and important for an organization for its business success and failure within the stipulated business guidelines and policies of an organization. All these need substantial practice carry out by the cost estimator to ensure fundamental such as WBS, templates and reference guiding policies as well as past histories are built and available for success estimation.
[Reference: Chapter 21, The Estimating Process, Project Management Using Earned Value]
This chapter provides an insight into estimating project cost where there are unrealistically cost/price estimation offer in order to win or justify a project but eventually end up with additional cost and time incurred while in actual implementation. This is a serious issue faced particularly by the contractor in the real business world where "over ambitious" price have been offered to the customer in order to win contracts and eventually/ultimately creating a lose-lose-lose-lose situation where the customer have to incur more time and cost to re-negotiate the contract or to issue VO for the contract. For the contractors which offer higher price, with estimation done with high level of details and professionalism, will soon be running out of contracts to survive. This lead to unhealthy development and competition for an industry, unfortunately this is happening in the real business world. This chapter may help to appropriate, professional and practical answers for PM to deal with the challenges arise from estimation and competition. PM need to put the learning in practice so that answers to poor or "feel good" estimation can be provided automatically to deal with risk or trap arise from poor estimation.
Lose-lose-lose-lose situation is in opposed to win-win situation. Whereby contractor lose, competitor lose, customer lose and also end customer lose due to unprofessional estimation that leading to price war.
What is an estimate?
Estimates mean anticipating cost that reflects a scope of work performed within a specified time frame with defined assumptions. The larger and more complex a project is, more assumptions needed to define the estimate conditions. The estimate is often the input to decide the go/no go decisions on whether to proceed with a project. However, timely delivery of an accurate estimate is equally important; a late estimate is equal to an inaccurate estimate.
Estimating and its impact
Every project starts with an estimate. In fact, the outcome from the estimation could serve as important factor in making project decision. For contractor, winning an external project with low offer price (price estimation), will entail unforeseen problem later that results from the decision made with wrong or "over ambitious" estimation which often seen in real business world. The down side is that the owner may have to incur more cost and time with the awarded contract due to the difficulties faced by the contractor while delivering the project due to the "over ambitious" estimate. On the other hand, the contractors that provide an estimation which is far too high with or due to its setup and internal cost will soon be out of business. This will eventually causing the contractors who can provide quality work, soon to be out of competition from unethical price slashing with wrong estimation. In a fixed price environment, this can be a threat where there is no space for further negotiation on contract price of the initial contract awarded was based on wrong or poor estimation. Ultimately, poor estimation will pay the price of failing the business.
Process of estimation
- Estimation needs to be done based on set of guidelines such as projecting handbook and internal business guideline and policies as well as past project report and results that provide the framework for estimating process.
- WBS is needed to estimate the initial cost as well as update estimating data.
- WBS dictionary to define the boundaries of the scope for each element so that cost can be estimated and reported correctly.
- Standard format should be defined to facilitate for highly reporting as well as detail analysis.
WBS, templates, templates structure and templates formats are the essential and fundamental and basis for cost estimation and subsequent cost collection as well as interrelationship between various account levels and comparisons as well as user interface, data maintenance and consistency for traceability and analysis on changes.
The WBS and templates are the framework for all the cost estimating and should also be the basis for all subsequent cost collection. If the same structure does not support estimate development and actual cost collection, then it will never be possible to confirm that the estimated costs were accurate.
As mentioned earlier, estimation serves the fundamental and important for an organization for its business success and failure within the stipulated business guidelines and policies of an organization. All these need substantial practice carry out by the cost estimator to ensure fundamental such as WBS, templates and reference guiding policies as well as past histories are built and available for success estimation.
[Reference: Chapter 21, The Estimating Process, Project Management Using Earned Value]
# posted by Lau @ 12/20/2009 01:19:00 AM 
Comments:
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Good comments, Lau!! You identified the problem very nicely, but what about the solution? How can we remain competitive and be able to win work when our competition is unethical or careless? What can or should we do about it as professionals?
What steps can YOU take or RECOMMEND your organization take to ensure that you remain competitive while delivering a fair return to your shareholders and not cheating your client?
BR,
Dr. PDG, Jakarta
What steps can YOU take or RECOMMEND your organization take to ensure that you remain competitive while delivering a fair return to your shareholders and not cheating your client?
BR,
Dr. PDG, Jakarta
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