Project Estimation (3 of 3) – Risk

November 9, 2010

An important and sometimes overlooked aspect of project esimation is determing the risk associated with the project.  There is a natural tendency to simply estimate the time and cost associated with the project – assuming everything goes well. OK, perhaps, we pad our estimate a bit for uncertainty. But how much? Or ultimately, how can we be more precise in our risk assessment?

The Game of Risk

Project risk comes in a variety of forms. There can be risk associated with ‘newness’ of the project or technology. Risk can come from the lack of specifications or reliance on the customer (e.g. provide necessary parts, time on manufacturing line, ….)

So, for a sizeable project, you want to identify the risks and define their potential impact. Then, determine the possible costs of those risks in much the same way as estimating the costs of the project itself.  Finally, you can analyze the probability of the risks – individually and collectively.

Mitgating Your Risks

After your analysis, you will want to mitigate the substantial risks. For instance, you can:

  1. Minimize the risk – Do a feasibility or pilot study to reduce uncertainty.
  2. Transfer or share risk – Don’t be afraid to consult with the client and inform them of potential risks. Just like a doctors shares the potential risks of a surgery.
  3. Share risk – You may be able to find a way to share the risk. For instance, provided a fixed bid for the project + variable cost for the identified risk as pricing model.
  4. Accept or avoid risk – Ultimately, you may have to accept the risk in order to get the project.

Acceptable Risk

I know of some Alliance Partners who have established acceptable risk factors. For instance, what is the ratio of risk to total project cost. Or, the owners may even have cumulative project risk vs. annual revenue. At some point, you need to know, when to say ‘no’, this project is just too risky.

Project Estimation (2 of 3) – Pricing

November 2, 2010

Last week, we started a discussion on project estimation. It starts with good requirements gathering. Then, you can break down the project into a set of tasksthat meets the requirements and make estimates the effort, duration, and cost of those tasks. Now, we move on to translating that into the actual project price.

Pricing Method

Once you have estimated the cost of the project, you can determine the total price for the bid. Yet this is another area, where mistakes can be costly. So, you should develop a common, efficient and standard method for pricing projects. This becomes particularly important as your organization grows and you look to delegate the responsibility.

Cost of Goods

The cost of hardware should be straight-forward, right? You may have common products stored in a spreadsheet or rely on the vendor’s web site to look up prices. But, do you have a method in place to validate your cost of goods? If that is too much overhead, you should require validation on higher-priced items.

Labor Rates

How about labor rates? If you have done so already, you should consider establishing different labor rates depending on seniority, certification, and so on. If nothing else, it creates value that can be negotiated. For instance, in a competitive situation, you can ask the customer other bids included labor from certified developers. Or, if your customer is pushing for a lower price, you may want to say ‘OK, we’ll give you a discount, but because you are a good customer, we’ll be providing a certified architect at certified developer prices.”

The Price Is Right

Other possible variables that you may want to include in your price are pre-sales effort, marketing, and other overhead. You may not want to provide them as line-items in your quote, but ultimately they need to be accounted for. And, finally, you should assess the capacity and ability of your organization to take on the project. Not to mention the overall risk of the project (more on that next time).

Project Estimation (1of 3)

October 26, 2010

One of the areas that has always amazed me with respect to Alliance Partners and their system integration efforts is their ability to estimate and ultimately bid the project cost. It seems almost an art (perhaps a black art) as it is a science, but it is critical to the success of the business.

Project Requirements

It starts with gathering good requirements which is an art in and of itself. In a previous post, we discussed a ‘needs-based’ approach and the type of requirements that you want to gather. We also talked about probing techniques and how to deal with conerns.

Task Breakdown

Once you have a good set of project requirements, you still face the challenge of estimating the cost of the project. Hopefully, you have a good idea of the hardware requirements, but labor usually makes up the bulk of the total cost. Ideally, you can break down the project into a set of tasks to develop a system that meets the requirements. Then for each task you can estimate the effort, duration, and cost.

There are several methods for estimating the labor cost of each task:

  1. SWAG (Not recommended) – Scientific Wild Ass Guess
  2. Expert – ask an expert based on their experience
  3. Delphi – Ask a group to brainstorm and build consensus
  4. Comparative – Based on history or similar task
  5. Weighted average – a combination of estimates (e.g. Optimistic + 4*Likely + Pessimistic) / 6)

Obviously, depending on the size of the project, you’ll need to decide how much time you want to invest in this process. But, estimating project costs is critical to your profitability.

Labor Cost Variables

Other factors to consider in estimating projects.

  • Work interruption factor – no one can work uninterrupted. For instance, meetings. Such breaks in the thought process and work effort will inevitably impact effectiveness. Idea: consider limiting meetings and e-mails to certain parts of the day.
  • Part-time effect – Working on multiple projects can impact effectiveness. The developer must ramp up or down from one project to the next.
  • Skill factor – Obviously, a novice may take longer to complete a task than an expert.
By completing the task breakdown and considering the variables, you can reasonable estimate of the labor cost which often constitute the majority of the cost of the project. Next week, we’ll formulate that into a price and ultimately the proposal.