Friday, June 18, 2010

Scope First, Then Price

Steve Martin used to have a bit in his routine where he tells a joke, supposedly to an audience of plumbers, delivering an esoteric punch line that only plumbers would appreciate -- the rediculousness (?) was even funnier than the actual joke (I highly recommend Steve Martin's autobiographical "Born Standing Up"). In the same vein, when I was working in estimating, we used to have Steve Martin-like jokes - Jokes funny only to estimators. As an example, a number that was way-off due to a typo, like "$10,000/cy for concrete material - aaaaggghhhh, that's hilarious!" (Estimators rolling on the floor laughing) - we would call that an "Estimating Joke".

OK, back in your chairs, both of you.

Estimate vs Budget

It is useful to think of a "Budget" as what you have to spend, and an "Estimate" as what the specific scope of work should cost. In the Design & Construction industry, it has been my experience that these terms are pretty much interchangeably used - but the distinction is an important one. Before you give a reasonable estimate, negotiate a price, or even take a scientific wild @$$ guess (SWAG) at a budget, it is wise to clarify the scope first. A price without an accompanying scope is a problem waiting to explode.

This probably sounds like common sense, but budget-and-scope or estimate-and-scope mismatches happen all the time. I would bet that more change orders, disputes and claims on projects come from "missed scope", "misunderstanding of what was included", or "apples-and-oranges" mismatches than any other recurring project problem.

Who's To Blame?

There is a certain amount of anxiety on projects (more on larger projects) when it comes to being "on-budget", depending on what commitments are made, and at what point you are in the scope definition and price-assignment process. The ramifications and repercussions of being "off", or "over-budget" can be severe. Imagine the Red Queen in Alice and Wonderland: "Off with their heads!"

There is definitely an art to leveraging past experience and assigning an accurate number to a sparsely-defined scope -- This skill is something professionals work hard to refine, based on experience, past project cost histories and "tweaking" to match special considerations of the project at hand (read, for large projects: "don't do this at home, or without supervision"). I would be delighted to provide assistance or make a referral - however, at any level of endeavor, a price without a scope is comical. That would be like going to the store and saying to the clerk, "I'm hungry, how much will my groceries cost?" ---aaaagggghhh, that's hilarious!

No Kidding

OK, so what do you do? Here is a 5-step formula:
1. Agree on the Major Scope items (80-20 rule) - once you establish the major items, including labor, materials, equipment, professional fees and incidental costs, it's kind of like "The Price Is Right" - But you don't need to guess, there are many ways to get to a reasonable price once the Major Scope items are set.
2. Agree on a "Go-By" - establish quality and quantity standards for these major items. Using what has been done before as a guide "tweaks" or further refines the cost level, and helps confirm expectations.
3. Identify Unknowns - Agree on a place-holder for what isn't quantifiable or decided, but will be required. This is typically a range, and will be the variable cost within a budget or estimate.
4. Look for Unusual Aspects - Usually, estimates and budgets are based on educated extrapolations of previous experience, but miscalculations happen when they don't take enough into account what is different about THIS project.
5. Review, Reflect and Adjust - Estimate/Budget/Scope-Matching is an ITERATIVE process, it needs to be reviewed and tweaked (with input from team members and affected constituents) to be most effective.

If It's That Easy . . . .

There are all kinds of stumbling blocks involved in this process - including political, personal, tactical, avaricious, evil (?), etc . . . But just starting with agreement on scope can lead to more successful negotiations, happier clients and fewer disputes.

As an exercise, don't just get a receipt, but take a minute to review it and make sure the scope is right BEFORE you agree to pay.

An Estimating Joke where you pay the consequences isn't funny.

Here's another joke:

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