Projects are implemented by people. People aoply processes and tools during the implementation of the project. The People, Processes, and Tools paradigm is well worn and at the same time modern. From the very early days of formal project management described in Managing Projects, Peter W. G. Morris to the current agile frameworks, someone has to pay for labor and materials needed to deliver the value to the customer.
The management of gathering the money, allocating it to work, and monitoring the expendature of that money in exchaneg for the value produced by the work is call Managerial Finance, or in the project context Project Finance.
There are a few immutable principles of project finance.
- The project should not cost more than the monetized beneficial outcomes attributed to the project. If this is not the case, for commercial firms this mans going out of business. For government entities, this means encumbered expenses without sufficient funding.
- Decision making processes on projects must consider several variables
- What are the minimal capabilities to be delivered by the project to call it a success. This success can be measured in several ways - Effectiveness, Performance, and other ...ilities. Or it can be measured in vague and obtuse ways, by asking the customer did they get their money's worth?
- Projects are composed of many little projects. Formally these can be Work Packages, Rolling Waves, Iterative and Incremental releases. But in the end the "all in" set of capabilities is likely what the customer is paying for.
- The capabilities and the sequence, the value produced by the project both cost money. Making decisions about these or anything on the project eventually leads to the question
How Much Will This Cost?
- The answer to this question many times comes from the project finance processes. From the CEO down to the Work Package manager, money is needed to produce value.
- How much money to produce how much value is a question answered by the project finance paradigm.
And Known For he Punch Line
The answer to that question of how much money will be needed to produce the planned value can only come from estimating both the cost and the value. Waiting till the end of the project to know those values is too late. The money will have been spent and the value may or may not have been produced.
So if we plan on having enough money and enough time to produce those needed capabilities - even if they are still emerging - we'd better have some understanding of HOW MUCH and WHEN.
This is the role of estimating. Estimating cost and duration to produce the estimated capabilities to satisfy the estimated value in that pesky ROI equation of (Value - Cost) / Cost.
Basic Cost Estimating
When building cost estimates we need to be aware of both direct and indirect costs. Direct costs are for labor, equuipment, and materials employed directly in the work.
Indirect costs are incurrer to support the direct productivity of the work effort.
We also have variable costs and fixed cost. Variable costs are tied to carrying out the work. Fixed costs are there no matter if the work is being performed or not.
We can estimate the cost of our project in one or both of two ways:
- Top Down - a quick and dirty approach for sure. Fraught with risk and misinformation. But a fast and very effective way. This is the is it bigger than a bread box approach.
- Bottom Up - usually derived from the Work Brealdown Structure, story boards, or some other decomposition of the work into smaller parts that can be examined through the lens of experience.
But there are other costs
- Life cycle costs
- Maintenace costs
- Support costs
- Warranty costs
These have to be estimated as well, since they will be occuring in the future and we'll need to plan to actually have the money to pay for them.
Estimates Are The Smell of Dysfunction
This is a common lament.This is true only if you
Do Stupid Things On Purpose
If you let the customer talk you down below your known baseline cost for staying in business, you deserve to go out of business. You can of course buy the job - done that before - but someone, somewhere else needs to cover that loss.
So let's be clear - Estimates are NOT the smell of dysfunction. Dysfunction is the smell of Dysfunction. Find the dysfunction, find the root cause of that dysfunction, fix it if it's fixable. If it's not fixable, devise a work around. If there is not work around, find a source of funds to cover the unrecoverable sunk cost from that dysfunction.
But when you hear estimates are the smell of dysfunction and the dysfunction is not mentioned, and the root cause of the dysfunction is not mentioned, and the possible corrective actions to repair that dysfunction is not mentioned, and working examples of the repair actually fixing he dysfunction are not mention - it's time to call BS on the whole notion.
It's that simple, show me the tangible beneficial outcome of your suggested fix to remove the smell of dysfunction. And then use Demning's quote: