There are many errors that can be made during the compilation of a cost estimate, however there is usually a recurring theme which is present across many estimates which we have seen. This blog will take you through these common errors in the hope that the recognition will prevent or remove these from your estimates.
If you are familiar with the values that underpin Project Control Simplified, you will already understand the principal that your estimate is always wrong, the real question is, “How wrong is it?” It is key that you understand how wrong your estimate really is so that adequate provision can be made for both estimating uncertainty and discrete risk events.
Ultimately the removal of errors from the estimate will reduce the degree by which it is wrong!
Common Error 1: Missing Scope
One of the first steps in the estimating process is scope definition.
This is the most important step in the process as if an item of scope is not quantified (or missed) then it cannot possibly be estimated. The item will need to be funded from contingency which assuming the contingency has been calculated properly means there isn’t enough contingency for the estimated work scope.
There are numerous measures which can be put in place to prevent the occurrence of this error which include setting a Work Breakdown Structure (WBS), measuring the work using a defined method of measurement like the Standard Method of Measurement (SMM) and finally by ‘walking’ the proposed project to ‘visualise’ the project.
Estimates can be significantly affected by missed scope as you can’t estimate something which you don’t know exists!
Common Error 2: Thinking Accuracy is Proportional to Detail
It is natural to think there is a correlation between detail and accuracy when estimating. However, this is a common error trap as the detail can be misleading.
This links to our underpinning principal of “Broadly Right, not Accurately Wrong”. This error trap can relate to numerous areas within the estimate, including the measure and quantification of scope, the unit rates and the factoring applied. An example from our experience is a project in the feasibility stage, i.e. with low technical readiness and design maturity, had an access ladder measured at 9 metres with an underpinning rate of £199.62 per metre.
Here the error trap occurs twice, first the measure of 9 metres is based on an indicative design so is accurately wrong, more appropriate would be 10 metres. Secondly, the rate of £199.62 per metre is applicable only to a very specific specification of ladder of which this ladder was not, so perhaps £250 per metre would be more appropriate or £150 per metre.
Whilst these values are relatively low in the grand scheme of a project estimate the underpinning principal should be adhered too across all items which are estimated. This also applies to the level of detail contained within an estimate, keep it to the highest level you can possibly achieve in accordance with the Work Breakdown Structure (WBS) or Cost Breakdown Structure (CBS).
Common Error 3: Deterministic Estimating
There are two ways to produce an estimate; first deterministically where the input is ‘determined’ this is also commonly known as single point estimating and maybe the only way you are currently estimating. The second method of estimating is called probabilistic which is also commonly known as three-point estimating.
This technique uses the optimistic (cheapest), pessimistic (most expensive) and most likely (deterministic) to produce three estimate points and consequentially an overall estimate banding with minimum and maximum points.
Utilising a three-point methodology is crucial to understanding the estimating uncertainty and is required as an input to any probabilistic model. Without out utilising the three point methodology you are in danger of becoming accurately wrong with the estimate as the single point estimate will always be wrong by fact that it is an estimate. You will have little idea of how “wrong” it is to estimate the degree of uncertainty.
Common Error 4: No allowance for factoring
All estimates will need factoring to be applied in one form or another. Some common factoring techniques include Retail Price Index or RPI, inflation, escalation and location specific factors.
When using industry published estimating ‘Norms’ they will usually be specific to one location within the country and a factor will need to be applied to them in order to make the rate location specific as labour costs may vary depending on whether the project is in a large city or a remote location. Furthermore, if cost rates available are historic, then inflation will need to be applied to bring the cost up to date.
In addition to these costs relating to volatile commodities such as metals will also need to be factors to reflect the market trends. Failure to take account of these factors could result in an estimate being vastly under provisioned.
Common Error 5: Not documenting the basis of estimate
At Project Control Simplified we firmly believe that the most important document when producing an estimate is the basis document. Without it, the estimate is a collection of numbers in a spreadsheet. The basis of estimate should contain the following items:
- The scope of works to which the estimate relates
- The schedule (or timescale) to which the estimate relates
- Any assumptions and exclusions
- The underpinning of all items estimated
- The underpinning calculations for estimating uncertainty and escalation
To improve your estimating knowledge, take our Estimating Fundamentals training course today.
If you want to Simplify the Control of your Projects get in touch with us today.