Improving Estimating and Cost Management on IT Projects

Presentation for PMOZ 2009

By Martin Vaughan

PMOZ09 – Martin Vaughanslide 2

About me– 20+ years Project Management experience, initially

specialist planner, later Project Manager (lots projects, many industries incl IT)

– Have owned/built/run two successful businesses in and around Project Management, currently Core Consulting Group (17 staff) which specialises in Planning and Cost Management

– Have been teaching/training for years, currently lecturing in Project Management Post Grad level at Melbourne University

– Keen Sailor, skippered last Sydney to Hobart ocean race on “Wild Side” and previously won 2006 Melbourne to Hobart yacht race

– Busy life with wife Susan, kids Sarah 11 and Thomas 13, a large dog called Boags, a cat called Toosh, I play touch, am a scout leader and own 1970’s classic car

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Is there a problem ?

• Global financial crisis – projects are now more difficult to fund, financial scrutiny has increased

• Business case quality expectations are rising – note PRINCE2 Business Case focus plus Government Investment Logic Mapping and Gate Review initiatives

• Investment decisions rely on individual project merit (NPV, IRR etc) plus relative merit when considering Portfolios of projects

• Fundamental to a Business Case is the cost estimate

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Is there a problem ?• The often quoted Chaos study by Standish would

indicate so. The following table shows the average % cost overrun on projects

• Other studies challenge this figure and propose a more realistic average overrun of 33%

Either way this is clearly unsustainable, what would a 30% increase in cost do to the Business Case ?

2000 2002 2004 2006 2008

45% 43% 84% 47% 54%

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Author’s opinion

We believe that a major reason IT projects overrun is due to insufficient budget, often due to a flawed estimating and hence budgeting process.

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Is IT Unique ?

IT is unique in some respects:• Difficulty is “seeing” end result• There is often a high level of integration to

Business process change• More susceptible to funding games and

year to year funding• Many senior managers have limited

understanding of project based cost management

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Is IT Unique ?

But IT is not so unique in other respects:• Difficulty in requirements clarity at times• Technically complex solutions at times• Large labour component• Procurement packages• Customer involvement• Defined quality expectations• Risks, both known and unknown • Whole of life costs

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The role of the QS• In Engineering/Construction there is a defined

role in the Quantity Surveyor (QS):– Measures and defines scope– Provides preliminary cost estimates– Assistance with scope changes– Maintains budget

• In IT there is no QS, it is left up to the Project Sponsor and Project Manager

• The role of the QS is difficult, even for experienced people

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Skills decline ?• Project Management skills have improved

dramatically across IT in the last 10 years, particularly around governance, leadership, risk and communications.

• PRINCE2 as a methodology, PMBOK based accreditation (RegPM and PMP) all good.

• But computer software has “dumbed down” several domains, masking the lack of skills in forecasting:– Planning & Scheduling– Cost Management

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GamesThere are numerous games played by IT managers when it comes to cost,

some favourites include:– Operational vs Capital movements, usually linked to funding (or lack of) for

Business as usual– “Hollow logs” for funding work “under the radar”– Ignore internal costs, we don’t pay for them and they will just make the Business

Case look bad if they are included– Keep under the threshold

• Splitting projects into components• Intentionally underfunding then revisiting

– Doubling just in case – Usually from a negative past experience. Can also be done by bosses in which case it is double double

– Done deal – Regardless of your estimate the boss already has a figure in mind and they wont accept yours

– Tell them what they want to hear – The customer has a number in mind, tell them that then move to the real number via Change Requests

– False precision – Guess a number but make it look obscure, ideally with several decimal places so it looks scientific

– False reality – Ban Contingency, hope that will lower cost

For more games Google “Estimating Games”, published by Thomsett International

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To improve, focus on ….

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Scope• To manage cost you must manage scope• Scope and Budget are linked

– No scope change without budget change– No budget change without scope change

• Develop and maintain a product based Work Breakdown Structure (WBS)– Focus on deliverables/products– Not to be confused with Schedule structure

• Focus on controlling Scope changes, for IT projects that means Business Requirements Change– Consider impact on plans and deliverables

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Control points

• Intersection of WBS and Organisation chart will define Control Points

• This will help clarify responsibility– Primes or Control Point Managers

• Will help integrate the cost model, Resource model, Timesheet system and Accounting system as well as Timesheeting and other systems such as work authorisation

• Focus on outputs– Defined deliverables and acceptance criteria

• Focus on Inputs– Defined dependencies

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Planning

• Planning, not just scheduling• Logic not date based• Detail plan each WBS

element (jigsaw piece)• Build the “big picture”• Consider Rolling wave

– Focus on soon– Plan future when needed

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Uncertainty• Definitions vary, but we need to allow for:

– Risk response plans (which will be done)– Impact of some known risks (eg bug fixes)– Anticipated unknowns (how much ??)– “In scope” changes and rework

• Our definitions are:– Contingency – allowance for the above, within the budget,

controlled by the Project Manager– Management Reserve – outside of budget but within funding,

controlled by Sponsor. May cover Scope change– Risk Reserve – separately funded risk budget, controlled by the

business.

The only certainty is that allowing $0 for uncertainty will lead to a cost overrun.

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Uncertainty• Uncertainty varies as projects move through the project life cycle• Cost Estimates used early in the project life cycle, eg for assessing

feasibility or for funding, must contain a level of uncertainty• Uncertainty can be expressed as either ±% or as a definitive

Contingency allowance• A Management Culture change may be needed to allow this to

happen• Standards and education will help to ensure there is no

misunderstanding

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Education• Some Project Managers need to be educated

about planning and estimating– Look beyond the “click and drag” approach to

scheduling– Consideration of the various estimating techniques

• Senior Management needs to be educated in “At completion” cost management rather than just “Year to date”

• A culture change program may be needed to avoid the “games” managers play

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Assurance• Setting standards will help, particularly on

approaches to Contingency, setting out Cost models and Project status reporting

• An independent oversight/review function, by PMOs or other Project Management specialists is needed

• Governance and Decision making can only occur when estimates and reports can be trusted

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History

• Again a PMO role exists to collect history, ideally through “Lessons Learned”

• History is one of the most powerful of the estimating tools

• Improves the “plan by analogy” estimating approach

• Useful for collating “rules of thumb”

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Author’s opinion

IT Project cost performance can improve, only when the business environment both insists and allows it to improve.

Business must be willing to change, and to learn from other industries.

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IT Quantity Surveyor role(revisited)

• If time allows, let us discuss openly the need for a QS in IT

• ISBSG is a starting point, they have defined a related role but only for Application development projects:– Function Point Analyst