Reducing the Estimation Gap

Based on a Knowledge Shelf article by Hrishikesh Karekar, PMP

Your project is going deeper and deeper into crisis as time goes on. Costs spiral upward; milestone due dates are pushed back ever later.   
We all know that cost and time overruns can lead to project cancellation or failure. Yet these overruns continue to happen. Why is that, and what can you do about it?

Why Do We Overrun?
Often, cost and time overruns are blamed on forecasting errors — imperfect techniques, inadequate data, honest mistakes, lack of experience by the forecasters, etc.
But were the planned budget and timeline correct and realistic? Or were they underestimated and impractical from the beginning?

What is surprising is that all project estimates go through a series of reviews for validation to ensure their correctness. Even with those reviews, we can’t seem to get it right for many — if not most — projects. Is this simply an oversight, or are there deeper phenomena influencing the planning?
Optimism and Other Biases
Neuroscience and social science suggest that humans in general are more optimistic than realistic. So we tend to exaggerate our own ability and minimize potential difficulties.
This optimism isn’t the only bias that can affect project estimates.
Self-serving bias is the tendency to take credit for success and blame external factors for failure. Project teams that ignore lessons learned from previous projects, hoping that external factors influencing failure were one-time incidents, act under this bias.
The false consensus effect is the tendency to believe that most people share one opinion. The potential incorrectness of this assumption can lead to trouble later on.
Illusion of control is the tendency to exaggerate one’s perception of control over external events, also possibly leading to problems when these events prove more difficult than expected.
Strategic Misrepresentation
More insidious a phenomenon is strategic misrepresentation, which is the planned, systematic distortion or misstatement of fact (i.e., lying) in response to incentives in the budget and schedule planning process.
Factors stimulating these misrepresentations include:

• Uncertainty, which leads to erring on the high side or cutting excessively because assumptions were made about generous time or money buffers
• Information asymmetry, where stakeholders with more information than other stakeholders choose to withhold or share that information based on their strategy and the expected outcome of budget or schedule planning
• Absolute constraints on resources and benefits that align only with objectives of several stakeholders, possibly not aligning with the overall organizational objectives for the project
• Making planning decisions in a highly accelerated timeframe lacking thorough analysis and/or sufficient data
• Short-term versus long-term perspective (i.e., lowering the estimate on purpose in order to “win the bid”)

The result of any of these factors and biases is an estimation gap that can cause real business losses. Levi Strauss & Co., for example, took a US$192.5 million charge against earnings to compensate for problems caused by a possibly misestimated US$5 million IT upgrade project.
Minimizing the Gap
Although optimism bias and strategic misrepresentation cannot be completely avoided, organizations can take steps to limit their negative impact.

Approaches include:

• Improving systems and procedures for historical data gathering and trend analysis
• Training project teams to improve their understanding of biases connected with estimating
• Maintaining extensive checklists based on lessons learned from previous projects, and using the checklists to validate that estimates account for everything to ensure on-time and on-budget completion of the project
• Collecting reference estimates for similar projects done in the company and/or industry to establish baselines
• Creating incentives in the forms of rewards and praise for those who provide, review or approve project forecasts in a realistic way
• Auditing forecasts to enforce transparency of information

Minimizing the gap between estimates and reality will go a long way toward increasing project success rates.
This article is based on "Expectation versus Reality: Reducing the Estimation Gap" by Hrishikesh Karekar, PMP, an article posted on the Knowledge Shelf. Knowledge Shelf is a growing (more than 250 articles written and reviewed by your peers) online resource for categorized project management knowledge.

Source: PMI