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A Comparison Between 8 Common Cost Forecasting Methods

 

FEATURED PAPER

By Stephen J.C. Paterson

HuaHin, Thailand

 



Abstract

Forecasts, one of the most important tools in a Project Controls Practitioners toolkit, the importance of which cannot be stressed enough. Although it may not be an exact science, analyzing the project data, evaluating the trends and getting the message to Project Team and Stakeholders is an important step in creating a successful project. Yes, creating, successful projects just don’t happen by themselves, they are created by a team of competent professionals utilizing the best resources available to them. Nowadays, a high percentage of projects are failing due to several factors, one of which is poor “tracking and analysis. Tracking and analysis cover a large scope in the practitioner’s remit, part of which is forecasting. This forecasting needs to be accurate, utilizing as much of the historic and current data as possible to provide the best possible information to allow informed decisions to be made.

The NDIA’s “Guide to Managing Programs and Projects Using Predictive Measures” along with the Guild of Project Controls “Compendium and Reference” (CaR) are two sources of information available to practitioners that should be considered when performing such analysis.

This paper explores the information contained within these sources and applies their formulas against a live project to determine which methodology provides the best accuracy, before providing some guidelines for fellow practitioners to consider when developing similar forecasts.

Keywords: @Risk, Forecasts, Forecasting, Guild of Project Controls, Linear Regression, Monte Carlo Simulation, GAO, MS Excel Best Fit Curve, Mean, NDIA, Normal Distribution, Standard Deviation, Oracle, Crystal Ball

Introduction

Forecasting, a term used to describe a planning tool that helps management to cope with uncertainty of the future, utilizing past and present data in conjunction with analysis of trends.[1] In today’s economic climate the importance of dealing with this uncertainty is becoming more and more critical as marginally viable projects strive to achieve tighter budgets amid financial constraints imposed by the stakeholders.

Why marginally viable projects? Well because nowadays projects have a high “failure rate” and projects that were originally viable are resulting in failure. Research shows many studies have been performed to determine why projects fail and what can be done to enhance competitiveness to reverse the trends. [2, 3, 4, 5] The GAO’s Best Practices a) Cost Estimating and Assessment Guide[6], and b) Schedule Assessment Guide [7] were developed by the US Government to address the numerous projects that were over-running both schedule and costs,[8] and the several projects the author has worked on since 2005 were not big success stories either, all overran schedule by several months.

There are various causes why projects fail and although they might be given different names by different researchers, there is some commonality between them; goals and visions, engagement of stakeholders, inadequate/poor leadership, team communication, risk management, scope estimation, planning expectations, tracking and analysis, decision making, and for those global projects the added topic of cultural differences appears. It’s a wide and varied range of topics that essentially covers most, if not the entire project. This paper is not going to address all the items listed above, but is going to focus on the “tracking and analysis” item, that of forecasting.

In the Oil and Gas sector there is a big emphasis on the use of dashboards and key performance indicators (KPIs) which goes some of the way to assisting the project teams to identify potential trends if the project controls team are doing the correct analysis. However, analysis of the historic trends is only a part of what is required, with the rest attributed to looking forward in the future or forecasting. If a contractor is not meeting the daily objectives set out in the schedule then the chances of meeting the final target is virtually impossible, unless a recovery plan is implemented.

Without the detailed analysis and forecasting techniques to determine where the activity is headed, be it on schedule, ahead of schedule, or behind schedule, there is no knowing whether a recovery plan is required or not. The importance of providing project management not only with forecast ranges but also a proposed recovery implementation for potential schedule busts is crucial to the success of the project. As noted above in the causes for project failure, high on the list was team communication (team issues), tracking and analysis, and making decisions, by performing the correct analysis, communicating it to the team members, allows them to make informed decisions which creates one success after another. Projects are about creating small successes and building on each one to achieve the big success, forecasting is one of the key building blocks.

When starting out in the industry, the author was advised by his mentors that forecasting did not make any sense until an activity was at least 25% complete, a view held until recently, however it is now believed that the “window of opportunity” is between 15% to 33% from the commencement of the project to identify if the project is in trouble and what mitigations can be implemented, failure to act in that time frame reduces the probability to implement an effective recovery if at all. [9]

More…

To read entire paper (with footnotes and references), click here

 



About the Author


Stephen J.C. Paterson

HuaHin, Thailand




Stephen Paterson
is an Oil and Gas professional with 35+ years of experience in project controls and construction management. Born in the Highlands of Scotland, he served an apprenticeship and gained a Higher National Certificate in Civil Engineering in the UK, before embarking on the adventure of expat living, working worldwide; Middle East, North & South America, Russia, Middle East, Far East, South East Asia, China and Australia. He just completed his last assignment in February of 2017, and currently, furthering his education by way of a distance learning mentoring course, under the tutorage of Dr Paul D. Giammalvo, CDT, CCE, MScPM, MRICS, GPM-m Senior Technical Advisor, PT Mitrata Citragraha, to attain Guild of Project Controls certification.

Stephen lives in HuaHin, Thailand and can be contacted at [email protected]

To view other works by Stephen Paterson, visit his author showcase in the PM World Library at https://pmworldlibrary.net/authors/stephen-j-c-paterson/