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4 Keys to Managing Risk and Finding Profit in Project Estimating
Posted by Sylvia Lagerquist, CPA
When we think of how businesses are structured, we tend to think of two very common models: product businesses and service businesses. Product businesses produce and sell manufactured items, and service businesses sell the time and expertise of their employees (or contractors). However, there’s another essential model: the project-based business.
A project-based business certainly sells services, and may also include products in its offering, but is ultimately responsible for the successful outcome of the project it is contracted to deliver. In this sense, what a project-based business really sells is project completion, and the firm’s ability to make money (or its likelihood of losing money) ultimately rests upon its ability to effectively perform the estimating function upon which its contracts will be based.
Major kinds of project-based businesses include architecture and engineering firms, information technology companies, construction businesses, government contractors, and other kinds of enterprises that bundle professional services expertise with the concrete delivery of a completed project for the client.
If you’re leading or managing a project-based business, then it’s essential for you and your team to master the art and science of effective estimating — both to reduce risk and to increase profitability. With that in mind, here are four keys to achieving better results in your project estimating:
1. Begin with Objectives, Not Just Project Delivery
The first key to effective estimating is to understand the client’s overall objectives for the project, rather than falling for the temptation to just dig into the project delivery requirements right away. There are a few reasons for which, not the least of which is that the client may not have clear alignment between their objectives and the project requirements as they have defined them.
If you find out during the client review and engagement process that their construction project has a very strong environmental component but sufficient consideration has not been given to the costs or scope of implementing green technologies, that’s better to get on the table now rather than later. In a similar fashion, a client may be planning to proceed with a solution that simply doesn’t meet their needs as you have assessed them. Perhaps they are planning a switch from in-house application hosting to a cloud hosting model, but have not developed a security plan essential to selecting and implementing the best cloud architecture for their needs.
The two takeaways from this step are as follows: First, clients may have a defined a project that is objectively not aligned with their intended objectives. And second, clients may have defined a project that appears to meet their objectives, but where more sophisticated expertise would have led them in a different direction and to a far better solution. In both cases, your consulting expertise up-front will solidify a stronger relationship and result in a more realistic and achievable project estimate to boot.
2. Honestly Evaluate the Estimate vs. the Budget
The second key to estimating success is to use the estimating process as a cross-check for the actual project budget. Don’t fall for the temptation to just shoe-horn the estimate into the limitations of the budget, or alternately assume that the estimate is realistic and the budget is not. Remember that there are a number of factors that can cause this mismatch.
One is a misalignment between objectives and project parameters (exactly what we discussed in the first key, above). Another is overly enthusiastic /or/ overly pessimistic assumptions used in either budgeting or estimating. And the third is unidentified or under-appreciated differences in understanding what the scope of work or project deliverables actually are.
One area where differences often develop is in developing the work breakdown structure (WBS), and another is in failing to accurately identify the project’s critical path. If WBS planning creates too many spaces designed to protect against contingencies, the result can be a project schedule and estimate that is wildly out of alignment with the budget. Make sure that you are clear on what factors can create bottlenecks in the project and those that can generate efficiencies and opportunities for faster progress.
3. Stay Clear on Effort (Work Time) and Duration (Calendar Time)
For our third key, it’s essential to appreciate and understand the relationship between effort (or work time) and duration (or calendar time). Effort is the amount of work units that are necessary to complete any given task. In a manufacturing process, this might include the bill of materials, the machinery or equipment, the required labor and the process itself. These all result in a given expectation of time that a given step will take.
In contrast, duration is calendar time — the actual amount of time that the project step or function will take when all factors on the actual calendar are taken into account (including work days vs. weekend days, work shifts, availability of the right combination of labor, equipment and materials, and waiting time for dependent processes prior to this step).
You need to be clear throughout the estimating process on what activities are dependencies (for example, if you have to strip old paint and sand a surface, before you proceed with applying new paint to that surface); and also what resources create bottlenecks (for example, if the painting job is being performed on delicate trim work and only a specially trained painter can perform that labor).
4. Use Checklists to Standardize Estimating Components
Estimating is an inherently complex discipline that is, by its very nature, concerned with a great many unknowns. Construction of two high school buildings may seem to be a relatively consistent process, until you consider that one is going to be built on flat land and the other will be against a hill, or that one will be a traditional school and the other will have rooms and resources designed to serve special populations.
Nonetheless, it’s crucial to begin building checklists that you can use repeatedly, both to enforce consistency where it is possible to do so, and also to provide a backstop that helps ensure that nothing is missed in the estimating process. In addition, this will help you create a library of estimating components that, over time, you can use interchangeably.
For example, if we’ve built three schools on hills and five schools that have special needs components, then we should be able to use modular components from these prior projects to — in the future — estimate the scope of a project that involves building a school for special needs students against a hill (i.e. one that combines components from prior projects in a new manner).
While this example is certainly oversimplified, the point remains solid and rooted in fact: Every project you accurately estimate presents an opportunity to more precisely estimate in the future, but to create re-usable components you must standardize processes and steps, which is best supported through effective checklists.
By following these four strategies closely, you’ll be well positioned to create stronger, more accurate, lower risk estimates that help you increase profits and strengthen your ability to generate repeat success in the future. Commit to these keys for a more streamlined and disciplined estimating process in your project-based business today.
Image Credit: Menlo Innovations (Flickr @ Creative Commons)
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