probabilistic project cost and schedule estimating - michel sterling - nesma 2013

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Probabilistic Project Cost and Schedule Estimating NESMA Najaarsconferentie in Baarn, NL - 21 Nov 2013 Michel Sterling – ExxonMobil IT

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In an analysis of 1,200 IT projects completed over the past 5 years, on average, these projects turned out 8% under their approved budget and took 21% longer than their approved schedule. This means that too much money and resources are claimed and claimed resources become later available then planned. Too much money is left on the table that could have been allocated to other business opportunities. Looking forward there are two trends that demand for faster delivery of IT projects: Increasing pace of IT evolution Shorter time windows for new business opportunities To enable faster delivery of IT projects ExxonMobil is introducing P50 probabilistic project cost and schedule estimating for classified estimates. Classified estimates are estimates within the envelope of uncertainty when it is possible to make risk-based predictions of a possible range of the project outcome in both cost and schedule. For a single project the P50 estimate means a 50% probability of cost and schedule overrun. When these projects are accumulated into a portfolio the underruns and overruns even out to a level where money and resources are used as efficiently as possible. Introducing P50 estimates is a culture change where overruns within the allowable range are accepted and results outside the acceptable range should be treated with equal scrutiny whether it’s an overrun or an underrun.

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Page 1: Probabilistic project cost and schedule estimating - Michel Sterling - NESMA 2013

Probabilistic Project Cost and Schedule Estimating

NESMA Najaarsconferentie in Baarn, NL - 21 Nov 2013Michel Sterling – ExxonMobil IT

Page 2: Probabilistic project cost and schedule estimating - Michel Sterling - NESMA 2013

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Project Estimating

Case for action Cost and Schedule Essentials What is P50 estimating Why P50 ? Change Management Challenges

Page 3: Probabilistic project cost and schedule estimating - Michel Sterling - NESMA 2013

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Case for Action

On average, IT projects completed over the past 5 years turn out 8% under their approved budget and take 21% longer than their approved schedule.

Opportunity to leave less “money on the table”

Trend : Increasing pace of Information Technology evolution Trend : Narrower windows of business opportunities

Demand for faster delivery to capture full benefits of business opportunities.

Page 4: Probabilistic project cost and schedule estimating - Michel Sterling - NESMA 2013

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Before we jump in…

“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.” – Albert Einstein

“There are three types of lies : Normal Lies, Damned Lies and Statistics” – Mark Twain

Page 5: Probabilistic project cost and schedule estimating - Michel Sterling - NESMA 2013

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Estimate Classification Concept

0

100

Unclassified

Scoping

Appropriation

ImplementationActual

Cost

Notional "envelope of uncertainty"

Final Cost

Base

Allowances

Contingency

• Basis definition improves as project progresses through project stages, increasing confidence in the range of possible outcomes

• Unclassified Estimates : No historical statistical data available to support accuracy

• Classified Estimates : Risk-based predictions of possible range of outcomes.

Cost and Schedule Essentials

Page 6: Probabilistic project cost and schedule estimating - Michel Sterling - NESMA 2013

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What is P50? The P50 cost value is a probabilistic estimate of the project cost

based on a 50% probability that the cost will be exceeded.

Projects of a portfolio are considered at the mean of a simulated cost distribution, typically the P50 estimate.

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%Cost Estimate Performance

P10 P50 P90

Actu

al /

Esti

mat

e Co

st R

atio

Page 7: Probabilistic project cost and schedule estimating - Michel Sterling - NESMA 2013

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Why P50 ?

For a project : an equal likelihood to complete under or over the appropriation basis (cost and duration) Maximize individual project’s predictability, avoid surprises Not wasting, not shortcutting; Net zero impact

Avoid overly conservative estimates that encumber resources Capital that can be used elsewhere Resources that can be deployed elsewhere

Requires thorough comprehension of Risk events, Opportunities and their impact on Cost and Schedule

Level of experience Assessment of complexity

Page 8: Probabilistic project cost and schedule estimating - Michel Sterling - NESMA 2013

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Confidence Ranges

Routine Project’s within +/- 10% Repeatable Known Risks, low uncertainty High confidence

Non-Routine Projects within +/- 20% One-off or first time Unknown risks New Technology, Geography, Process

90% 100 110%

10%10%

80%

Num

ber o

f Pro

ject

s

Within a Portfolio : 8 out of 10 projects to complete within a given confidence range of the

appropriation basis cost and duration.

80% 100% 120%

80%10%10%

Page 9: Probabilistic project cost and schedule estimating - Michel Sterling - NESMA 2013

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Managing the Change Culture change

A over-run within the allowable range (between 100-110% of appropriation basis) is as good as an under-run (between 90-100%)

A result outside the confidence band should be treated with equal scrutiny whether it's under or over

The confidence band should be broaden when there is more inherent risk in the estimate : A result between 100-120% of appropriation basis is as good as a result between 80-100%

Gate 2 – “Scoping” should represent a P50 too…

Process & Tools to implement P50 Norms and tools calibrated to P50 Cost and schedule controls earlier in the project life cycle Risk management and contingency planning

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Time for Questions