IT Consulting from the Trenches

THE THREE MOMENTS WHEN YOU'RE MOST AT RISK FOR FAULTY ESTIMATES

Good news, bad news. “I finished the project.” “But we went over the budget.”

Two reasons account for most cost overruns. These are Scope Creep and Faulty Estimating. Scope creep occurs because the Project Manager (PM) didn’t control change requests made to the original project plan. An approved change always comes at a cost and, therefore, a change that is approved must be accompanied by additional funding. Faulty estimating is the other usual reason for cost overruns. In this case, the budget was incorrectly calculated at the start. There are three moments during the project life cycle that the PM is particularly vulnerable.

This article discusses those high-risk moments.

Moment #1: At the start of the relationship

It’s one of your first meetings with the client. Naturally you want to start the relationship on the right foot. Pleasantries are exchanged after introductions are made. Both sides talk and walk “gingerly.” Nobody wants to rock the boat.

This is the first high-risk moment. In this situation, a Project Manager (PM) is likely to commit the first grave error—accepting client statements at face value without verifying them. Everyone on the project team is equally likely to make that mistake. It’s up to the PM to catch it, however, since the PM is ultimately responsible and accountable for the project's outcome.

(Incidentally, why does it seem that the Subject Matter Experts (SMEs) are the second most likely members of the project team to commit the mistake? I think this occurs because their stature as experts puts them in a particular frame of mind.)

Acknowledge every statement or assumption that they make but tell them that you will verify each one. There are many tactful ways to communicate this, beginning with the truth, and that is to check because both of you—the client and yourselves—want to accomplish the objective effectively and that correct assumptions are necessary for that to happen. Acknowledge it like the Japanese. During negotiation, they will say “hai!” Although it means “yes,” during the initial meetings, this yes simply means that they acknowledge receipt of a point and not agreement with that point.

You, the PM, must be firm about this. Do not concede to pressure from executive stakeholders (e.g., your Sales Vice President or the client’s executive). Since you are responsible and accountable for the project's outcome, you have the authority and power to perform the necessary steps. You will return to this theme again and again. Like the American colonists who sparked the Revolution against Great Britain, you must be represented if you are going to be taxed. In this case, the metaphor is that you must have the power to do the necessary things to create the desired outcome if you will be held responsible and accountable for that outcome.

Finally, do what you said you would. Confirm all assumptions. Verify every assumption that they make. And verify every assumption you and your team also make. Some assumptions will be difficult to verify but verify them anyway. An example of a difficult assumption is the client's contention that they already have the necessary computer workstations for the project. Confirm that and get that confirmation in writing signed off by the appropriate party.

Moment #2: When you negotiate with your project sponsor

You've finished the preliminary project plan. Now you're sitting with your sponsor. This is the moment for you to firmly explain that, to be prudent, we should follow PMI methodology and create a contingency allowance as well as management and contingency reserves.

The third edition of the PMBOK identifies two types of reserves. A Management Reserve is a portion of the approved project budget, controlled by management that is reserved for unidentified or unexpected work inside the scope of the project. This reserve is excluded from the baseline until it is utilized. Another accepted definition: A Management Reserve is a designated amount of time and/or funds held to account for parts of the project that cannot be predicted. These are sometimes called “unknown unknowns.” Use of the management reserve generally requires a baseline change.

A Contingency Reserve is an amount (of dollars and time) held by the project sponsor for possible changes in project scope or quality. All scope and quality changes to the project will affect the project’s cost and schedule and this reserve will cover those. Another definition: A Contingency Reserve is a designated amount of time and/or funds held to account for parts of the project that cannot be fully predicted. These are sometimes called “known unknowns.”

The PMBOK also recognizes the concept of a Contingency Allowance. It is a specific provision meant to cover variations in the expected cost or schedule, but not scope or quality. The scope of the project may not change but unforeseen factors may change the budgeted cost and schedule.

These three concepts are now illustrated.

First is the Management Reserve. Assume a project’s objective is to wire a building’s electrical subsystem. If the area is unexpectedly hit by an earthquake (an unknown unknown), the ensuing clean-up and repair is a major activity involving numerous tasks (e.g., checking the building’s structural integrity). Covering these unknown unknowns is the reason for the Management Reserve.

Second is the Contingency Reserve. When the scope or quality of a project is officially changed, there will be additional tasks. These additional tasks are not unidentified or unexpected, as in the previous case. The Contingency Reserve is used to cover the cost and time of these additional tasks. Continuing the previous example, assume that from experience, you are certain that there will be some electrical rework, but the amount of rework and when it will occur in the project are unknown.

And third is the Contingency Allowance. Assume a project whose objective is to migrate a company’s IT operations to a new data center. The objective is straightforward—move operations from point-A to point-B. Since there’s only one Point-B whose purpose is to become the new data center, it’s unlikely that the scope of will change. However the cost or schedule easily could. It might require more man-hours than expected to shut down and restart the company’s data servers. These are the surprises that the Contingency Allowance covers.

To reiterate, therefore, the Management Reserve is held and released at management’s discretion to deal with unknown unknowns. The Contingency Reserve is held and released by the project sponsor (usually) to deal with known unknowns. And the Contingency Allowance is a wise precaution that the PM should create to deal with potential changes in cost and schedule.

Moment #3: At the start of the actual project

Complete your documentation before starting the project. This is easier said than done. PMs are usually pressured to begin with the assurance that the documentation will follow. When your boss’s boss makes that assurance, you frequently have no choice. What you can do, however, is get that assurance in writing. If the signed documentation isn’t delivered, you should firmly exercise your power and explain that it won’t be proper to hold you responsible and accountable if your right to act appropriately is curbed. Once again, reiterate that you have to exercise the power to do the necessary things to create the desired outcome if you will be held responsible and accountable for that outcome.

Your documentation should be meticulously prepared and organized. Contracts should be intact copies, email should be filed, and so forth. Remember those assumptions that you verified? Keep the evidence of verification. Remember those reserves and allowance you created? Know the warning signs and the steps you’ll need to take to avail of them.

Finally, note that you can only prepare so much. Be cognizant of those moments above and you’ll be off to a strong start!