Phased Estimating

Phased estimating is a favorite among project managers because it requires cost and schedule commitments for only one phase of the project at a time. The phased estimating approach recognizes that it is impractical to demand a complete estimate at the beginning of the product life cycle. Instead, it breaks down the full product life cycle into phases, each of which is considered a project (see Figure 8.1). If you recall from Chapter 2, the product development life cycle describes the work required to create a new product, while the project life cycle focuses on managing the work. There can be a number of projects involved in the development of a new product.

The term most commonly applied to blending project life cycles and product development life cycles is phase gate development, which specifically calls out both the product development and project management deliverables and decision points in each development phase (see Figure 2.5). The term phase gate refers to decision points for evaluating whether the development should continue. Each phase gate

Product development life cycle

Product development life cycle

• At each decision point make two estimates: A cost and schedule commitment for the next phase, and an order-of-magnitude estimate for the remainder of the project.

• This example shows three decision points, but a product development life cycle could use 2 or 10 decision points—however many make sense to reduce the risk of overcommitting based on too little information.

• The amount of uncertainty is high at the beginning of the development life cycle—too high to make accurate estimates.

FIGURE 8.1 Phased estimating.

is clearly defined so the project team knows what they need to produce to reach the gate and what criteria will be used for getting approval to move to the next development phase.

There is an enormous amount of uncertainty at the beginning of every development life cycle, but this uncertainty is reduced as the project progresses and more information is gathered. This presents a dilemma, because the customer, more than any other stakeholder, wants an accurate time and cost estimate for the complete development life cycle. This demand is easy to understand because the customer is trying to make an investment decision. The problem is that there is so much uncertainty when the product development effort is first considered that an accurate cost and schedule projection is impossible to produce.

The phased estimating approach recognizes this impossibility and instead breaks down the full product life cycle into phases, each of which is considered a project. Here is what this process looks like:

• The first phase is initiated with an order-of-magnitude estimate for the full development life cycle combined with a detailed estimate for the first phase. This detailed estimate is considered a commitment by the project team; this commitment signals an end to the uncertainty that surrounds a new project. By agreeing to a detailed plan with a fixed completion date, the team becomes more focused and productive.

• At the end of the first phase, a new authorization for the second phase starts this cycle once more. A new order-of-magnitude estimate is developed for the remainder of the product life cycle together with a detailed estimate for the second phase. The new order-of-magnitude estimate will be much more accurate than the previous one because so much has been learned from the first development phase. This cycle of phase authorization will be repeated at each phase gate, and each time the order-of-magnitude estimate will become more accurate.

The reason project managers and teams like phased estimating should be clear by now: It is because they are required to make cost and schedule commitments for just one phase at a time; they have to look only as far as what can be called a "realistic planning horizon." The people who are funding the effort, however, don't always understand this benefit. To them it appears that the project team is not accountable to any overall budget, but simply keeps coming back for more money at every phase of the project.

What this customer group needs to realize, however, is that phased estimating is a risk-reduction technique that also works in their favor. If the project team is required to commit to a cost and schedule estimate for the full product development life cycle before it has enough information about the product, this will place everyone at risk. This is because the team is likely to come up with an inaccurate estimate at this early phase.

Customers often believe that getting a firm commitment from the project team is their safeguard against runaway budgets, but, in this case, they are mistaken. Without a realistic budget, unforeseen costs are likely to crop up as the project progresses—and the customer will be the one to pay for them. This will be true even if the project team is an external firm with a fixed-price contract. If these overruns become too extreme, this team may simply leave, preferring damage to its reputation to bankruptcy. At this point, the customer will have lost money, and the project will still be incomplete. Without the accurate estimate, both sides will lose.

On the other hand, if the customer and project team work for the same organization—as many product development projects do—then it is obvious who will pay for cost overruns: the company that both work for. If the original estimate was too low, no amount of pressure from above will get the project team to meet it. Again, both sides lose.

Customers will embrace phased estimating when they understand that every new phase gives them an opportunity to completely reevalu-ate the effort, or even cancel it if it looks too expensive. If they like the product but don't like the project team, then this is the obvious time to choose another. While it's true that canceling will mean that they have no end product to show for their money, at least they will have canceled an unrealistic project before it cost them even more.

Phased estimating is always used on construction projects. If you planned to build a house, no contractor would commit to a bid until you knew the location and had a blueprint. After the design was complete, you might find that the cost of the house was too high and decide not to pursue the project. This realization didn't come without cost, because you had to spend time and effort to find the location and pay for the design of the house. But it was smart to do your homework before you started digging a hole for a house you couldn't afford!

Now consider this true example: A software company decided to relocate its offices. Company officials spent a year determining whether to build or move to an existing building. After deciding to build, they announced the location and said the move would take place in "12 to 18 months." Once the building design was complete, they set schedules for the actual construction and for moving.

But at the same time they were using this phased estimating model for their new building, they continued to set hard delivery dates for software products that were barely more than ideas (this is common practice in the software industry). Although it was obvious to them that phased estimating applied to their office building project, they never considered applying it to their software projects.

Successful project managers treat every phase of the development life cycle as a project. They use the phased estimate approach to formally review the cost-schedule-quality equilibrium several times during the product development life cycle. The great advantage to this method is that it allows the project to be directed by many small, informed decisions rather than one large, premature decision.

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Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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