Capital Projects

8It's Going to Cost How Much!?!A Guide to Help Executives Avoid Capital Cost Surprises

I use this joke sometimes when I talk about cost estimate accuracy in some of my presentations:

Three cost estimators get some time off from work and decide to go duck hunting. The three estimators are sitting in a duck blind and a duck flies by. The first estimator shoots and misses 15 feet to the right. The second estimator shoots and misses 15 feet to the left. The third estimator yells, “We got 'em!”

This joke gets a laugh every time I tell it to cost estimators. Executives, however, don't find it so funny. Their different responses tell you something about their different points of view. Cost estimators view a cost estimate as a forecast that has an accuracy range determined through analysis. If the actual cost is within the estimate's stated range, cost estimators will consider that to be a success. Executives are more focused—understandably—on coming in on budget, meaning the final number is at or below the estimated cost.

Unfortunately, the cost estimator's point of view is more correct. Estimates are predictions, just like a prediction for tomorrow's high temperature. A single value prediction will almost certainly be wrong. For every 1,000 projects in IPA's database, one will come in exactly on budget, and, probably for that one project, some accountant just rounded the final number up or down!

A big mistake made by executives is not understanding the chance that the actual capital ...