The Case for Building Cost Estimating Competency
Updated: Jun 18, 2020
Why you should care more about your estimating competency and how you should go about improving it.
I read this article Estimation as a capability: The business case for estimation competency (by Jarred Markel & Kevin Downs at Deloitte), and several things rang true to me. It started off by saying:
“Unreliable estimation is an endemic problem in many organizations”
I have the same impression, which is troubling considering the impact it has on the performance and profitability of any project-centric business. Companies spend lots of time, money, and resources to improve their business processes around project execution, but don’t apply nearly the same rigor and effort in improving their estimating processes. The truth is, in many ways estimating is just as critical as execution to your bottom line.
Naturally, the questions you might ask yourself are: What are typical weaknesses and how can they be addressed?
In the referenced article, Markel & Downs mention a few of the typical weaknesses and elaborate a bit on each. I share some of their opinions and below is my top 5 list of estimating mistakes:
Estimating is treated as a one-off, where each time an estimate is prepared it is started from a clean sheet of paper and it is up to the individual capture manager how to best approach the bid. This honestly does not make sense. Every company distinguishes itself by a set of core competencies, and naturally when going after new contracts, it will aim to win business where it can leverage these competencies. So, almost every new contract will build upon the experiences the company already has. It is also true that the process of preparing and estimating a bid is largely a repeatable process, assuming the tool is capable of handling the wide range of estimates you produce.
Limited time to estimate. Because the timeline is almost always dictated by the buying party, and because typically there is no way to anticipate when a new RFP will arrive, the time to assemble a team and respond to a new bid is almost always a fire drill. Because of the fire drill nature, companies take shortcuts and reinvent the wheels almost every time. And because the process is not well-defined, it easily becomes chaotic.
Organizations do not effectively deal with ambiguity. I believe it is almost human nature to always seek to have all the information before giving an answer. When estimating, there always will be missing information. So the mindset of making estimating decisions is one where you need to become comfortable and confident making decisions with a lack of information. Instead of having all the answers, you need to become good at understanding how much uncertainty there is. What is the range of possible outcomes? What are the main drivers that can increase or decrease the cost? Are there specific risks that can derail this project? Can we do something about them before we sign the contract? What is the likelihood that we will make a certain profit?
Estimating software solutions are not integrated with other business tools. In execution, it would be unthinkable to not integrate planning, execution, and finance systems. But somehow in estimating, it is rare that requirements management, PLM, ERP, scheduling and estimating tools are all integrated. Why is that? Because, if all these systems talked to each other and the end-to-end process of estimating flowed smoothly across them, surely it would be possible to drive significant process improvements.
Estimates are not linked to delivery. Worst of all, estimates are typically not linked to execution and execution is not linked to estimating. The cycle of continuous improvement, where execution and estimates are compared to learn for the next time, rarely exist. It is a case of fire and forget. Again, people will come up with excuses of why it is difficult, but nobody will argue that if it can be done it would not add tremendous value. I believe there are two main reasons why the disconnect remains. The first one is a held belief that so much change happens when a contract is signed, it is not worth it. The second major reason is because there is a disconnect in terms of accountability as it moves from the opportunity to execution; a new set of stakeholders take over.
If you agree that all or some of these are issues also in your organization, what should you do to overcome them?
Building an Estimating Capability
Markel & Downs further goes on to suggest that companies should think about estimating as a capability, similar to how many project-centric businesses have a Program management capability, and then build a plan for building competence along the dimensions of: talent, processes, governance & technology. In my SAP-centric career, I am very familiar with this type approach to a business transformation, though my preference is to use the dimensions of: people, process, system, data, and governance. A good transformation is where all of these 5 areas are properly addressed. And it certainly applies also to building an estimating capability. To say a few words about each dimension:
People: Identify role-based expectations and the necessary training to support consistency in creating and validating estimates. Identify the necessary Subject Matter Experts (SMEs) / estimation champions within the organization.
Process: Decide what the end-to-end processes of bid-to-win looks like. Decide which estimation approaches to use and when to use them. The processes will detail the complete set of actions as well as the detailed steps involved in performing an estimate using various techniques.
System: Define and provide the tools to support the defined processes. Decide how various business systems interact with each other.
Data: Connect all relevant data sources and enabling a single source of truth. Build an estimating knowledge base, where estimates and actuals are collected and can be drawn upon for future estimates, including lessons learned and sizing metrics from the project.
Governance: Establish governance to ensure full-scale usage and standardization of processes and tools, ensure appropriate ownership and accountability is in place, and put in place mechanisms to improve the estimation approach as a whole.
The article also suggests that a good way to move forward is to use a maturity model to both define your current level of maturity along these 4 dimensions and then build a plan/roadmap for how to best improve each area.
“Like typical transformation projects, the current maturity of an organization is assessed against the target maturity goals to define a set of initiatives that can be laid out on a roadmap for achievement over time.”
These are all very sensible suggestions from my perspective. The matrix below (taken from the article) illustrates their 4 dimensions and the distinguishes 5 levels of maturity. I am curious to know where you would be on this map.
At Twenty5 our passion is to help companies improve their estimating competency. Our iPE platform for Integrated Project Pricing & Estimating will help you get to a place where you can bid with confidence. As a next step, let us help you establish your estimating maturity model and build a prototype for you with your data to light the path towards improving your estimating competency.
Co-Founder Twenty5 LLC
Markel, J. & Downs, K. (2014). Estimation as a capability: The business case for estimation competency. Paper presented at PMI® Global Congress 2014—North America, Phoenix, AZ. Newtown Square, PA: Project Management Institute and published on https://www.pmi.org/learning/library/estimation-capability-business-case-estimation-competency-9330