Basis of Estimate (BOE) – Project Management 101

BOE Basis of Estimate (BOE)   Project Management 101Whilst it is a basic project management 101 practice for estimating, it seems we regularly struggle to document the Basis of Estimates (BOE) and fail to do it in a consistent manner, resulting in this critical practice regularly being overlooked and the benefits it can bring being missed.

Given that in the recent Price Waterhouse Coopers (PwC) 2012 Insights & Trends: Current Portfolio, Programme & Project Management Practices survey findings, “Poor Estimates” was found to be the single biggest contributor to project failure (a whopping 30% of all project failures), we need to re-think our practices and do it better.

Why do it?

Scope & Change Management have proven to be key processes in any successful project management system and these two key elements benefit the most from having well documented BOE. To this end and interestingly also in the PwC survey findings that while Scope, Quality & Benefits performance has improved since their last survey in 2007, conversely Cost & Schedule performance has not and has in fact has declined.

PwC do not venture a reason for this, but in the absence of the data, I would hazard a guess there are a combination of causes, such as projects being hell bent on delivering Scope, Quality & Benefits regardless of budget and schedule constraints, estimates being either unrealistic, inaccurate or very likely flat out being ignored by senior executives charged with signing off budgets for internal projects or bid prices for competitively tendered work, but this is a whole can of worms to be opened at another date.

Regardless of the politics of price and budget setting and delivering customer satisfaction at the expense of cost and schedule performance, we are all obligated to implement strategies to achieve our objectives and targets.

So faced with these undeniable obstacles, we need to:

  1. Document our scope and cost assumptions in such a way that gives us maximum leverage to mange and control costs.
  2. Be able to clearly articulate why in fact the project will cost what it will cost, because to be blunt, if you don’t intimately understand the scope and you can’t demonstrate the veracity of your estimates, you’ll be in trouble on both counts.

A well documented Basis of Estimate, to a very large degree, goes a long way to improving these dilemmas.

Scope

The ability to clearly define the scope of work in words through a Scope Definition, then translate that into a Work Breakdown Structure (WBS) and estimate the costs associated with each WBS element are paramount and provides you the ability to see how the project will be executed, what allowances and assumptions have been made for each WBS element by the estimator.

Cost & Schedule

When the bid or proposal transitions to project execution, both cost and schedule breakdown should align with the WBS, allowing earned value performance management to occur, of which the BOE is used as a primary reference point.

Change Management

Then as you execute the project, scope changes or grows, documented basis of estimate allows the project team to again, understand how the estimate was put together, what’s in or what’s out, and what was intended by the proposal team?

What to Document?

When estimating, besides documenting how the estimate was derived, it is vital that the level of potential variability in the estimate is understood, that is, how much of the estimate is as far as reasonably possible fixed and unlikely to vary, and at the other end of the scale, how much is based on a wild guess and could vary considerably. From a risk perspective you will clearly want to have the greatest percentage at the fixed end of the scale, the important point though is to know. Knowledge allows you to make the right decisions as opposed to flying blind.

Elements of an estimated costs I have used, usually fall into a number of categories and typical examples and guidelines are outlined below.

  1. Fixed price – we have received a fixed and firm quote from a vendor and there is little to no risk of price variability.
  2. Budget price – we have received a budget price from a vendor due to lack of information/time and the price could vary.
  3. Historical data – we have utilized past project data and the price should be accurate, however there may be some variability due to specification, escalation etc.
  4. Metrics – we have used metrics derived over several of our projects and this accurately represents actual project performance.
  5. Estimate – we have undertaken a bottom up estimate to derive the price based on our own mto’s and metrics.
  6. Guess – we have made our best guess at the price given lack of information or time.

Demonstrating the accuracy of the estimate, or the potential variability of the estimate is vitally importing to having the estimate you present to senior executives accepted. This is not only to ensure you get adequate funds for the project, but on the flip side, an inability to show you have confidence in your estimates can result in a big fat contingency being applied by nervous execs, meaning you will not  be competitive when tendering for work.

Procurement

Primarily quotations in this category will be either: fixed, budget and occasionally historical data.

In support of categorizing the procurement as fixed or budget, you also need to record where your pricing came from.

Eg. – Fixed price received from XY Machinery Co., refer to quote ref, 12345/ABC 10th Jan 2010. Gearbox package is Client Supplied per Specification ABC/2012.

Unfortunately, I have seen many projects try to negotiate procurement on outdated quotes, so get your version control in order.

Sub-Contracts/Service Providers

Similarly, quotes in this category will be either, fixed, budget and occasionally historical, and the same description provided.

Eg. – Budget price received from Joe Blogs LLC, likely to be reduced with more scope definition, quote ref. Chal/01/2010 7th Jan 2010.

It doesn’t matter if there is some variability expected, up or down, as long as you know.

Material Procurement

Could be any combination of the above and to this end may need to be broken out so it is clear what is fixed and what may be variable.

Eg. – Primary structural material quote based on client supplied MTO, fixed price received from 3 vendors, average price taken for estimate, 5% wastage allowance made. For secondary and miscellaneous structure internally developed MTO’s, historical material pricing utilized, 7% wastage allowance made.

Technical & Project Management Staff Labor

Will generally be based on Historical, Metric or Estimated data based on previous projects or individual knowledge of similar projects.

Eg. – Project Management based on project team structure provided by our PMO, refer to document PT/123. All project team costed 100% for project duration, including PM, QS, 1 QC & Project Secretary costed for additional 1 month to close out. 100K allowance for travel and entertainment.

If you have trouble resourcing projects, the ability to show you have the budget goes a long way to building a case to employ someone.

Workforce labour

Will generally be based on Historical, Metric or Estimated data based on previous projects or individual knowledge of similar projects.

Typical BOE – Primary structural steel work labor allowance of 200 hrs/tonne. Based on the last 4 projects actual fabrication rates.

BOE only needs to be one small statement in your estimate, a single spreadsheet cell, as shown above, anymore it won’t get done.

Show people that there is fact in your numbers, it’s hard then for them to slash your budget, or increase through nervousness.

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Comments

  1. Gene Fricks, P.E. says:

    Amen! It is surprising, to me at any rate, how little attention is devoted to developing and checking estimates. Value assurance and risk assessment for a project begins with a critically examined plan and estimate. Some participants believe that ‘fudging’ the estimate will improve prospects for a project approval and ignoring the basis of estimate step facilitates that. However, as experience in the past several years has demonstrated repeatedly, project stretch-outs reveal the fallacies well before the participants have moved on to other engagements. Projects are curtailed or canceled and reputations besmirched – clients who have been led astray don’t forget.

  2. Very well summarized. unfortunately, too many organizations place too little credance on the value of good estimating, good planning and even robust project management – at least in the US shipbuilding business. We have been in this business of estimating, planning and project management for over 40 years, but our efforts here in the US have been less successful than abroad. When the US government becomes the cusotmer, there are too many distractions that cloud these issues from being implemented properly.

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