Aug 1997 PM217: Project Management (Question 4) Suggested Solutions

4.	(a) Describe, using examples, two traditional approaches to cost estimation.		[6]
	One mark should be awarded for naming bottom-up cost estimating, and one mark should be awarded for parametric cost estimating. One mark is available for a good description of the bottom-up approach, e.g, the bottom-up approach focuses on tracking all cost elements associated with a project. One mark is available for a good description of the parametric approach, e.g., the parametric approach focuses on formulating cost estimates by examining fundamental parametric relationships. In addition, one mark is available for an example which illustrates the parametric approach.

	(b) Describe five causes of poor cost estimation.		[10]
	One mark is available for each correctly named cause and a further mark is available for each satisfactory elaboration (up to a maximum of ten marks). Examples include the following:
		Inexperienced guessers: A major cause of poor estimation is that the people responsible for the estimate might be optimistic about the job at hand, leave things out of the estimate, or fail to follow a consistent method in deriving the estimate.
		Lack of continuity between the preaward and postaward phases: When project staff take over a project in the postaward phase, they may find themselves in a no-win situation. For example, the price of a service provided to the client may be lower than the cost to the company; technological enhancements might have been promised that lie outside the organization's capabilities; or commitments may have been made to achieve impossible deadlines.
		Bad technical guesses: Thorough planning and the employment of good quality management practices can avert to many surprises. However, some are factors which cannot be anticipated. Therefore, estimators should assume the worst when making estimates.
		Changes to the project: The problem with change is that it typically causes some measure of cost and schedule overruns. Consequently, change can lead to failure of estimation. Cost and schedule estimators must factor the effects of change into their estimates.
		Psychological factors: The impact of unchecked optimism on cost and scheduling can be enormous. For example, the new project may offer interesting technical and marketing challenges, or it may hold the promise of increased profitability. Unfortunately, such optimism can distort estimates in subtle ways that are not easy to detect.
		Lowballing: Lowbaling occurs when the project organization says that it will do a job for less money than it will actually cost, in the hope that the low bid will get the job and money can be made through follow-on business - the bid is a 'loss leader'.
		Politics: Occasionally, an organization's best cost and schedule estimates are overridden because of political concerns. For example, an estimate which is put to upper management may change it to value that is more politically acceptable.

	(c) Name two strategies for dealing with poor estimates. When might each of these strategies be employed?		[4]
	One mark is available for each correct strategy, and one mark is available for each satisfactory scenario up to a maximum of four marks). Examples include the following:
		Rescoping: this is employed when the project has serious cost and scheduling problems.
		Rebaselining: this is employed when the problems reflect built-in overruns caused by bad estimates.
		Tightening execution: this is employed when there are problems caused by inexperienced personnel or bad planning.