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20 September 2016

When the Customer Holds You to the Rough Estimate

How can a project manager prevent rough estimates from becoming fixed project boundaries?

The answer depends partly on who sets the boundaries. Let's assume that both your company's management and an external customer are involved.

Understand the Estimate

For the purpose of explanation, let's assume that a rough estimate's required accuracy is +/- 50%. If we spell out the estimate, "The most likely cost, time, or availability of resources is X, the optimistic is X/2, and the pessimistic is 1.5X." 

If management approves that estimate, it implies that the company accepts three stipulations: 
  • The project will be judged "successful" if the time or cost at completion is between 0.5X and 1.5X. 
  • The company is ready to fund a cost of 1.5X. 
  • The company schedules resources to be available when the project requires them. 
In summary, your budget is not X, but 1.5X.

Understand the Risks

When the company insists on running with the rough estimate, it creates several risks: 
  • If the cost at completion turns out to be 0.5X, the the fees and interest on borrowing (1.5-0.5)X will have been wasted. 
  • Your company will lose other business for which it could have used the funding and reserved resources ("opportunity cost"). 
  • Since a rough estimate does not include a deep consideration of risks, risks exist that you would only discover through the processes associated with performing a more accurate estimate. 
  • The high cost estimate (1.5X) creates a risk that the customer will go to another company that offers a more mature estimate.

Educate Stakeholders and Enforce Definitions

An explanation of the risks and responsibilities of using the rough estimate should convince your customer to allow a more accurate estimate. If you insist on the stipulations above and everybody accepts the risks and responsibilities, you should be able to live with the situation. 

Remember that, as you progressively elaborate your project plan, you will derive more accurate estimates anyway, and you will keep your stakeholders informed about your progress, allowing them to adjust affected plans.

Copyright 2016, Richard Wheeler

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