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Accurate Estimates are Important

December 28, 2010 2 comments

Accurate estimates are critical to successful development projects because overestimates and underestimates damage credibility and profitability. Ideally, the estimated cost and actual cost are found to be identical at project completion and optimal, meaning that we didn’t overpay. But what happens if we start with a bad estimate?

Overestimates become self-fulfilling prophecies because work expands to fill the budget. So one impact of an overestimate is a linear increase in cost. For every estimated unit over the optimal cost, we pay one additional unit in actual cost. Another possible outcome is that the project never gets funded or someone else gets the work because the estimate doesn’t provide the needed ROI. Even if a bloated project is funded, the downstream impact is bad because sloppy work habits become ingrained in the workforce leading to systemically poor productivity.

Underestimates are even worse than overestimates, because the impact is non-linear. Once it’s clear that the budget is broken the team is pushed into overdrive to meet the unrealistic goal, causing turnover and exacerbating the problem. If the estimate is bad enough the project is replanned, either by descoping or pushing the schedule. When that happens there is often a leadership change, which impacts the schedule as well. Changes to leadership, plan and personnel are multiplicative and cause cost to escalate rapidly. In the worst cases, the project is canceled completely.

The Standish Group is a respected industry analysis and research firm that regularly publishes a study, fittingly named CHAOS, documenting project failure rates (among other things). Since the inaugural study in 1994, project failure rates have dropped from 31% to 24%. That’s improvement, but still dismal. Inaccurate estimates are a key reason that projects fail – though certainly not the only one. I’ll be writing more on this subject going forward, including approaches that I’ve seen work.

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