Estimating the Cost of Project Management
By Bruno Collet
Isn’t it ironic that we project managers regularly pressure teams to provide estimates but are often unable to estimate the cost of project management? Most organizations, even those reputed to have achieved a high maturity in project management, still apply a standard portion of project budget, typically between 10% and 15%, to estimate project management cost.
Properly estimating of the cost of project management is not just a good idea, it is often critical, for example when providing project management service to clients on a fixed-price basis.
Imagine we want to estimate the cost of project management activities for a project that’s just starting.
One way to estimate cost is by analogy. When used bluntly, analogy estimating can lead to the “standard” project management cost of 10% to 15% mentioned earlier.
Analogy estimating works when three conditions are met:
- The organization has a well-kept history of actual project management costs per project.
The project to be estimated bears some similarity to past projects.
The organization has project management experts who can use these data effectively.
Unfortunately, these conditions are seldom present, in which case analogy estimating will be little more than elaborate guesswork that will make objective and accurate estimating elusive and time consuming.
Instead, I’d like to focus on parametric cost estimating (PCE).
In order to understand PCE, we have to understand the concept of cost drivers. A cost driver for project management is a quantifiable factor that influences the cost of project management. For example, the number of decision-making stakeholders, such as sponsors, clients, line managers, and so on, constitutes a cost driver. The cost drivers are the “parameters” in parametric cost estimating (PCE).
There are many possible cost drivers. It’s the project managers’ – often the PMO’s – responsibility to identify and to define them. Cost drivers can be divided into categories such as:
- Project characteristics: strategic importance, financial impact, scale in cost and duration, organizational scale (units involved), technical scale (technologies and systems)
Organization: project/organization fit, project impact on organizational structure and processes
Project management and support: administration (reporting…), governance, tools and support (e.g. PMO)
Stakeholders: number, experience, power, cohesion
Delivery team: size, collocated vs. distributed, cohesive vs. shared among projects, skills
Measuring Complexity and Risk
When evaluating a project against cost drivers, we have to dissociate complexity and risk of variability for each cost driver. Complexity is based on what we know with relative certainty, whereas risk reflects what we don’t know at the time of estimating (risks are often called “known unknowns”).
Moreover, in order to use PCE, we need a way to quantify a project against cost drivers. One of the simplest ways to rate complexity and risk for a cost driver is to use a 1-to-5 scale.
For example, let’s rate the cost driver “number of decision-making stakeholders” on a 1-to-5 scale for two projects A and B.
For project A, we’re pretty certain we have identified the six decision-making stakeholders. Six is quite a lot, so we set the complexity to 4. We do not expect any variation of the number of decision-making stakeholders during the course of the project, therefore we set risk to 1.
In comparison, for project B we have identified two decision-making stakeholders but expect that up to four others might show up later. For project B, we rate complexity to 2 and risk of variability to 4.
Separating complexity and risk of variability is akin to distinguishing statistical average and variance, which provides useful insight for estimating project management cost.
Translating Cost Driver Measurement Into Cost Estimates
Now that we have rated complexity and risk for each cost-driver, we need to apply a calculation method to translate these measurements into dollar amounts. Typically, the PCE system will first translate cost drivers complexity and risks into a percentage, which will be applied to total project budget.
Continuing our previous example and applying formula “rate times 0.3%” to project A will result in 1.2% for complexity and 0.3% for risk, for a total of 1.5%. If total project budget is $1M, the cost of project management specifically for managing decision-making stakeholders is $15K.
We need to do the same for other cost drivers as well.
Following are a few other aspects to consider when using PCE:
- PCE as system
The trick in applied PCE effectively and efficiently is to make it a system. Indeed PCE will not yield consistent benefits if it is used one-shot or if it is re-designed for each project. The PCE system is an important organizational asset for project management. Once defined and deployed, it should be versioned, documented, and continuously improved.
PCE as guideline
The PCE technique and system is meant to be used by project management professionals. However objective and elaborate it is, PCE is not an exact scientific method. It leaves some room for interpretation, which is normal because no amount of systematic analysis can reflect the infinite variations of reality.
PCE level of detail
PCE can use any number of cost drivers and any size of scale. The appropriate level of detail is the one that yields the most benefits and yet remains simple enough to apply. The optimal level of detail will differ from project to project.
Bruno Collet combines business acumen with technology know-how. His successful track record comprises Daimler-Chrysler, Siemens, and Loto-Quebec, with roles such as management consultant, project manager, SAP consultant, and software architect. Bruno Collet’s skills are firmly grounded in academic excellence by achieving an MBA at John Molson School of Business and a Master of Computer Science. He maintains a professional website: brunocollet.com.