26.11.2015 : James Macneil

Dollars and sense

Any estimate will be influenced by what is known and what is not at the time of the estimate. Each unknown element – such as ground conditions, unconfirmed scope or performance requirements – has the potential to affect the project cost.

It was early in my career, but I still remember the phone call like it was yesterday.

It was before 9am on a Tuesday and the caller, my client, was apoplectic. The night before, the project quantity surveyor has delivered a revised concept stage estimate for the fit-out project we were managing and it showed the price has escalated, not insignificantly from the ball park figure we had kicked around in the design meeting six weeks earlier, before pen had been put to paper.

After 15 minutes receiving a frank, but arguably harsh assessment of the competence of me, the design team and consultants generally, we agreed to meet later, finished the phone call and I sought the advice of one of our wizened project directors. On hearing the story, he winced and said,

Never forget that the first estimate of a project’s cost a client hears will be the one they remember forever and measure everything else by."

In my 20 years’ experience since, I have found this to be an incontrovertible truth. The first figure announced becomes the yardstick for all others. Therefore, when you take responsibility for delivering a project, be it as an internal sponsor or an external project manager, it helps to understand why this is and develop some tactics to address it.

The resonance and longevity of the first estimate is a direct result of the limitations of the human brain. As an organ, the brain comprises approximately 5% of the the average person’s body weight, but consumes about 20% of our energy to run. In other words, thinking is hard work.

To conserve energy, we have developed a number of subconscious tools to reduce how hard we have to think and these tools are directly relevant when we seek to understand why the first number is so important.

The key tool is the brain’s fondness of using relativity to benchmark value, as described by behavioural economist Dan Ariely in his book ‘Predictably Irrational’. Simply described, relativity is comparing other similar data to determine value. The most common examples of this in daily life occur in retail; rather than determining the actual value of all the features of things like wine or televisions, we just compare the prices and a limited number of features and subsequently make an educated assessment of which is the best deal.

In many cases when undertaking a capital works project, the ultimate client – where it is the operations team, the board or the owner - is not an expert in costing capital works and will have little context to develop an understanding of cost until they get the first figure. From the moment they hear it, it becomes the base to which everything is compared. This remains the case no matter how rubbery the estimate, how little information it was based on or how much has changed in their requirements since the original cost discussion.

So what can you do about this as a project manager?

  1. Investigate what your client’s expectations are. Before they have engaged the delivery team, your client may have relied on threshold values that switch the business case from positive to do nothing, based on heuristics built from experience in associated projects or experiences in their past. Understanding these at the outset can allow you to pre-emptively explain why the expectation and the reality may diverge.
  2. Have an open discussion around risk with your client. Any estimate will be influenced by what is known and what is not at the time of the estimate. Each unknown element – such as ground conditions, unconfirmed scope or performance requirements – has the potential to affect the project cost. By engaging in a deliberate discussion about how these items are covered in the estimate can help the client understand how the price is formulated. This discussion must talk in tangible and readily understood terms. Remember, the default position will be ignoring the complexity and clinging on to the number. One approach is to give a realistic price range. Again, this can cause problems if it is too broad, and there is always the temptation for the client to use the low end of the range as their reference point.
  3. Get the price as accurate as possible in the first instance. This is easier said than done, as there are always unknowns – and hence risk of escalation – when a project is only at the pre-concept or concept design phase. Refining the accuracy invariably means investing more in scope definition and early design, and many clients quite rightly are nervous about overcommitting expenditure before confirming that the project is in fact viable.

There is always an option to load the initial price so anything in the future can only be less. This may make life easier, but also risks making the client question their business case for the project overall and loss of credibility for the project team if the price drops too far from the original estimate.

Whatever approach you decide to take, remember that ‘what has been heard cannot always be unheard!’

About the Author

James Macneil

Victorian Regional Manager (Aus)

James is General Manager, Management Services in Australia and has over 15 years’ experience in project delivery. He understands the importance of human behaviour on project outcomes and has developed a keen interest in understanding how the latest research on neuroscience and psychology can help project managers understand behaviours on projects that may not always appear totally rational.

Ignite Your Thinking

What Do You Think?

Vaibhav Gandhi · 5/12/2016 5:29:05 a.m.
Great article James. We valuers struggle with the same problems. Clients usually refer to the previous valuation ignoring the change in market condition and forex rates. It is a good idea to inform the client about the variables beforehand.

Veronique · 27/11/2015 4:21:14 p.m.
What a cool article. Loved the analogy. Thanks for sharing!

Eric Wolters · 27/11/2015 9:11:52 a.m.
Great advice and an interesting, well-written article. Many thanks!