Here's a metaphor, or word picture, you might use with your own management team as a memorable parable. It's about something familiar to almost everyone -- building a house.
Let's say you have a $200,000 budget to build a house (you already own the lot). Depending on the part of the country, a "starter home" can be built for about $100 per square foot. So, a rational person who understood construction costs would lay out a 2,000 square foot foundation (about 50 feet by 40 feet) and begin building.
A person less knowledgeable might, on the other hand, go out to the site and lay out a 50'x 60' foundation -- 3,000 square feet. So he starts building and gets the walls all framed up. At that point, he has either a house with no roof and he can afford to finish the interior OR a house with a roof and an unfinished interior. He's unwittingly put himself in an impossible position -- he can't shrink the "footprint" of the house, and he's $100,000 short of what it will cost to finish a 3,000 Square foot house. Then what??
How often does a project go down that same road? And it's generally for the same reason -- failure to scope the whole project, resulting in failure to estimate the full cost of execution. So, the project starts off with overly-ambitious goals and in midstream we discover that the few choices available include bailing out with nothing finished or slugging it on to the finish line with massive cost and time overruns.
The outcome of these projects can be disastrous. Best case, they get finished and deliver the expected benefits despite their huge cost overruns. Worst case, they break the bank, don't get done at all, and the entire project becomes a sunk cost (sometimes with a sunk career or two included). The middle ground is more common -- cost-cutting at the end compromises most of the project goals and objectives, resulting in a finished product that's not only expensive but also ineffective. Think about trying to finish that 3,000 square foot house on 2/3 the necessary budget.
Again, this parable is about the failure to define scope. Just how ambitious is the project at the outset, and do we really have the budget, the talent and the time to do everything within the defined scope?
What are some good practices in scoping and estimating longer-term projects? A friend of mine who had just remodeled a kitchen (notoriously vague scope) told me what he learned: "Ask three contractors what they think it'll cost, and add them all together". Hopefully you can't personally relate to that experience. Seriously, when you're talking about investing any amount of money into the business that you consider "large", whether that's $10,000, $100,000, $1 million or more, stop and put together a rigorous description of the expectations, plus a rigorous estimate of the cost and schedule. "Rigorous" means talk it through with others knowledgeable of what you're planning to do, and build a line-by-line listing of expectations, tasks, cost per task and time duration per task.
You'll find, I believe, that it's not the mis-estimation of a task that kills an estimate. It's a missing task -- something you forgot entirely. In my experience with analyzing errors in construction estimating, it was never that it took 3,000 feet of conduit and we'd estimated 2,500. It was that we left out the conduit line item (including all the associated labor, of course) entirely!
If you do similar projects regularly, take the time to build an estimating check list -- a rigorous listing of all known possible costs. Just the "reminder" value of that exercise will save you a multiple of a month's pay some day.
So, set your internal threshold for the dollar amount of a "large" project , and whenever one of those comes up, insist on a rigorous, structured, carefully reviewed scope definition and estimate.
If you have experience with a large project overrun, click "comments" below and share your story with us. What would you do differently, knowing what you know now?
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Terry Weaver
CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com
864 527-5917
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