If you oversee or are associated with implementing capital projects, then you've heard this question a bunch of times.
How much will this project cost?
I'm sure capital project portfolio managers, construction engineers, project engineers, project estimators, cost control engineers and other project management practitioners have had to answer this question on numerous occasions.
All too often, this question is asked well before you have enough details on the project to come up with a reasonable estimate. The question can generate a lot of frustration for many project professionals.
If you're fortunate, you may have done a similar project that you can use to scale or establish a rough order of magnitude estimate.Worst case scenario is you must develop a feasibility or preliminary estimate from scratch by using what little information you may have. If you're not a professional project cost estimator, it certainly would be wise to collaborate with one before you come up with an answer.
While it's likely that you will be pressured to provide an estimate that will be forever etched in the memories of the recipients, how you communicate your answer is paramount. You should be careful to ensure these early project cost and duration estimates are not stated or received as a commitment to a guaranteed outcome. You should be forthright and clear in stating that your answer is simply a possible outcome that's attached to error bands having a significance that is inversely proportional to the amount of information that is currently known.The more information and details provided, then the narrower the error bands will be and vice versa.
It's also important to document all the available project data, sources of information, tools, methods, and assumptions that were used to arrive at the early estimate. Doing this will provide you with a great reference that you can refer to and rely on without too much dependence on the memory banks in your brain.
If you're successful in coming up with an estimate that you feel worthy of conveying, it's quite likely that your work is not done. The next questions that you'll probably be asked, should not be a surprise:
- What kind of monthly or yearly spend-out should we plan for in our budget?
- What are the key project milestone dates that we should use to guide our staffing, communication, and business plans?
- When will the project be completed and ready to use?
At this point, your head is likely spinning as you try to figure out how best to answer these questions. To respond to the spend-out or project cash flow question, many people simply estimate how many months a project will take to complete based on historical norms. They will then divide the estimated cost of the project by the estimated months to complete the project and produce a linear or straight-line monthly spend-out chart. Linear spend-out estimates are quick and easy to do. However, when applied individually to a project or to all projects in a company's project portfolio, this spend-out estimating procedure can yield poor cash flow timing for a project. Further, it can lead to portfolio management results that underperform expectations.
A more realistic spend-out for a typical project would look more like an s-curve. An s-curve spend out profile is a more reasonable representation because projects typically start spending slowly and then spending picks up pace in the middle of their implementation phase and then spend tapers off as project activities are completed at the end of a project’s life.
Additionally, the size, business climate and complexity of a project will play a role in determining the actual shape and duration of a project’s spend-out or cash flow profile.
Coming up with the timing for key project milestones in the conceptual phase of a project is, in my humble opinion, a more difficult task.Many project professionals rely on their arsenal of past project experiences and lessons learned to rough out approximate project milestone timing.Of course, key milestone dates include the project completion date and the start date for beneficial operations and these milestones are the ones that business leaders want to know early in the project process.
There's an easier way to answer some of these tough questions during the conceptual phase of a project
Whether the project involves building a manufacturing facility, a data center or office building or anything else that requires business planning, conceptual design, detailed design, build and start-up phases, calculating cash flows and milestones can be quite daunting.
But how can you develop a reasonable spend-out curve and milestone estimate quickly?There are probably several methods you can use, however, The Brandon Group (TBG) has devised a novel web-based tool that a user can quickly modify, depending on various anticipated situations, to generate potential spend profiles and key milestone dates. We call it the Early Spend-out Profile and Milestone Estimator (ESPME).
The tool is designed to provide users with approximate spend-out profiles and key milestone dates over the life of a project. TBG’s tool is relatively easy to use and can serve as an electronic “sandbox” to try different project parameters and determine the impacts. The actual spend-out or cash flow profile will likely end up looking quite different than this early view, however, the early curves and milestone dates can be used to develop preliminary spend-out and a key activity milestone plan to debate and iterate with a project team and stakeholders. It can also be used on individual projects in a capital portfolio to develop a more realistic portfolio spending plan.
If you're reading this article, then you're probably interested in a different and creative approach to answering questions early in the life of a project. ESPME could be used for preliminary cash flow estimates and budget planning and timing discussions.
When initial spend-out curves and milestones are developed, there will be those who will argue that certain activities should occur more quickly or perhaps, more slowly.These arguments may very well be true.ESPME will provide users with a starting point for the project team that allow stakeholders to discuss the basis for the timing of activities, spend rate of a project and error bands around preliminary cost and time estimates. Having a good starting point is invaluable. It serves as an initial basis to build on as the project matures and becomes more developed with more specific objectives, information, and details.
Further, since ESPME also generates estimated project milestone dates, this information can be useful in early planning discussions. All you need to do is indicate when you'll start conceptual design, the total cost of the project and a few other parameters and then, two spend out curves will be generated. One curve is fixed by the parameters entered and the other can be modified with dynamic graph sliders until you get something that seems more aligned with how your company historically spends money on capital projects.
One of the parameters available to users is a choice of whether delivering a project on budget (Budget Priority) or on schedule (Schedule Priority) is more important.You can choose to include a cost penalty for a Schedule Priority project because these types of projects can overrun the budget a bit, however, the overrun may be worth it to a business to meet a certain readiness timing. You can also adjust the complexity of the project to see how cashflow and milestones might be impacted as project complexity levels are changed.Please give it a try. I suggest you look at some past projects and input the historical data you have into our tool. You can then see if the tool would have been able to provide a reasonable estimate well before you had details that would be more common in the later phases of a project. For a limited time, you can get free access to the tool. This link will take you to a page where you can learn more about the tool and use the tool. "Life is a succession of lessons which must be lived to be understood." -Ralph WaldoEmerson