Estimations in Project Management
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George Banks made several mental errors when estimating the cost of his daughter's wedding in "The Father of the Bride". He wanted to spend as little as possible, so he ignored factors that would increase the cost like many guests and an expensive cake. He also used an irrelevant reference point (the cost of a house) rather than considering wedding-specific expenses. Additionally, he was overconfident since it was a one-day event at his house. To avoid problems, estimators should gather data from others, make a thorough initial estimate accounting for all known costs, and plan for uncertainties. Accurate project cost estimation is challenging due to biases, incomplete data, and other psychological factors.
Estimations in Project Management
- 1. Estimations In Project Management Intaver Institute Inc. 303, 6707, Elbow Drive S.W, Calgary, AB, Canada Tel: +1(403)692-2252 Fax: +1(403)459-4533 www.intaver.com
- 2. Estimations in Project Management “The Father of the Bride”: wrong estimations of the cost.
- 3. George Banks Mental Errors 1. 1. He wanted to spend as little as possible and therefore was motivated to come up with an unrealistically cheap estimate. He ignored all evidence that would have suggested the true cost of the wedding (expensive cake, large number of guests, etc.) when he did his rough estimate. 2. 2. He used a reference point (the cost of a house) to come up with the estimate. It was completely irrelevant to a wedding and therefore was nonsensical for this particular estimate (though good for the movie). This is a classis example of anchoring. 3. 3. He was overconfident. Weddings are a one-day event and it will take place in his house, so he thought the amount of money required would be manageable.
- 4. What Should Have George Banks Done to Avoid a Nervous Breakdown ?1. Ask some other people how much the wedding would cost and use this number as a reference point. 2. Make a rough estimate by summing up all known expenses without ignoring any items. 3. Make necessary contingency plans by continually asking, “What else could happen?”
- 5. Politics of Psychology? Flyvbjerg Curve
- 6. Examples of Wrong Estimation Project type Number of cases Average cost escalation Rail 58 44.7% Fixed-link (bridges and tunnels) 33 33.8% Roads 167 20.4% All projects 258 27.6%
- 7. Psychology of Estimations • Rule of PI: Actual duration (cost) of an activity will be about PI (3.1415…) bigger than the original estimate, even if the estimator was aware of this rule. • Planning fallacy and the optimism bias • Student syndrome: many people will start to fully apply themselves to task just in the wake of a deadline. • Confirmation Bias
- 8. Availability Heuristic Simple Psychological Exercise 1. Take three seconds to try to recall all of the projects or large activities you were involved during the last year. 2. Now repeat step 1, but take 15 seconds. 3. Repeat steps 1 and 2 taking up to three minutes for each step, and write down the results.
- 9. “What I see is what I want to see.” Planners or project managers sometimes cease to review data as soon as they find something that supports their estimate. They can also discard evidence that contradicts their estimates. Selective Search of Evidence
- 10. Other Explanations Of Problems With Estimation · There is no established project estimation process. · Inaccurate data is used, or historical data may not be complete. · The forecasting techniques and tools are inefficient. · There is no ability to track actual project performance, which can be used to refine estimates. · The project planners are inexperienced.
- 11. Simple Remedies • Never make a wild guess • Collect Relevant Historical Data • Reality checks • Independent Assessment
- 12. Example of Reality Check 500 1000 1500 2000 2500 Mission Cost ($ mln) 0 0 20 40 60 80 100 120 140 160 180 MissionDuration(mo) HEAD Magillan Landsat 7 URAS LISA CGRO Chandra (AXAF) Galileo Terra HST GOES I-M Aqua NASA’s LISA Project cost estimation
- 13. Estimating Probabilities 1. Subjective judgment 2. Relative frequency approach 3. Combination of both
- 14. Method of Eliciting Judgment • Direct assessment of an event’s probability • Ask the experts two opposing questions: “What is the probability that the project will be canceled?” and “What is the probability the project will be completed?” • Probability wheel 25% No problem with the component 35% Full replacement of the component 40% Repair of the component
- 15. Probability Method Low estimate High Estimate 11 intervals How many instances per each interval
- 16. Building Consensus • Come back to original questions • Visualize range on opinions • People usually good in technical estimations but not good about cost • Separation of compound events
- 17. Sensitivity to Probability Maj. Ernest Y. Wong and Lt. Col. Rod Roederer of the U.S. Military Academy (2006) reviewed the decision to attack Iraq from a decision theory point of view. To make their point, they hypothetically assumed that the decision to attack Iraq was based only on one criterion: the existence of a stockpile of weapons of mass destruction (WMD). They performed analysis using methods that we have discussed in this book. They demonstrated that outcome of the decision to attack Iraq is very sensitive to uncertainty in assessment of probability of Iraq having WMD at this time. If probability is greater than a certain break even number (say 75%), the decision may be correct; and vice versa. However, if the probability is expressed as a range (from 60% to 90%), and the break even point is within this range, it is very hard to tell what course of actions should have been taken.
- 18. Future Reading Lev Virine and Michael Trumper Project Decisions: The Art and Science Management Concepts, Vienna, VA, 2007 Lev Virine and Michael Trumper Project Think: Why Good Managers Make Poor Project Choices Gower, 2013