Cost forecasting is almost never 100% accurate. If it were, the field of cost control would be significantly less difficult. There are elements however, that do contribute to a quality cost forecast. In this article I offer some high-level details about these elements.
Forecasting is the critical focus of cost control. Work package forecast evaluation requires knowing the estimation method, the current status or physical progress, and previous performance coming from actuals. With these pieces of the puzzle the cost controller is better able to validate estimates coming from budget owners.
This article briefly discusses conditions for a quality cost forecast.
Good cost forecasts come from suitable breakdown structures. The breakdown structure requires an appropriate level of granularity. More detail may appear to be better, but too much detail makes the forecast process cumbersome at best. And typically makes it more difficult to accurately forecast due to the inundation of information. A work package at the right level of detail represents a distinct definable task.
Start at the bottom or at the work package level, and then build up the cost forecast estimate for the entire project. Closed work packages do not require a reforecast. Active work packages need frequent reforecasting. Unopened work packages require periodic review and review when there is new information that could impact them. This new information could include substantial changes in scope, bids that differ significantly from budgeting assumptions, and other relevant information.
Committed Budget Owners
Committed and involved budget owners are a critical prerequisite to a quality cost forecast. Although cost controllers can develop detailed data analysis on cost and physical progress, budget owners ultimately validate assumptions. Budget owners’ deep involvement in forecasting is important to deliver the best estimates. Budget owners must avoid “padding” estimates, where additional money is indiscriminately added to estimates to guarantee cost goals are met. Instead of padding individual activities, risks and associated cost should be addressed at the contingency line item.
Proficient cost controllers are able to communicate with project personnel at all levels. In particular, they need to listen to project team members and glean any hint of unbudgeted costs, and to confirm expenditures and commitments. All team members must inform cost controllers of any change that impacts the budget. Time is of the essence. All relevant information must flow immediately to project controls for inclusion in the most up to date schedule, cost, and risk models.
Type of Forecast
The type of forecast also impacts accuracy. Quantity-based forecasts are based on the quantities and standard equipment that have been ordered. Quantity based forecasts are insufficient for service contracts. A progress-based approach is more suitable when it is possible to measure productivity. Earned Value Management (EVM) is a popular progress-based approach for understanding progress and forecasting. EVM forecasts rely on two pillars for accuracy:
- Actual costs spent
- Actual physical progress
Both are essential elements of a sound EVM forecast. Actual cost is dependent on quality of commitment registration and tracking. Physical progress relies on quality of schedule progress data. The most accurate and well-timed progress-based forecasts audit the well-being of work packages at the 20-30% progress marker. Earlier results in inaccuracy – later is too late to be useful to the project.
Quality forecasting is an important effort in project analysis. Quality forecasting requires the right level of detail for input into the analysis. Quality cost forecasts are constructed on a bottom-up approach. Cost forecasting builds from the work package on up.
An essential ingredient in quality cost forecasts are accountable budget owners that take the time to deliver the most accurate cost estimates. The cost controller must receive these estimates and other relevant information indicating changes in forecast. Adequate communication on a foundation of good listening skills is important for the cost controller. Finally, match the forecast type, quantity or progress-based, with the type of costs involved.
For more on Cost Forecasting consider Jeremie Averous’ “Practical Cost Control Handbook for Project Managers”.