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How to Avoid Underestimating Cost Expectations during Project Definition Phase for Owners

Many owners fail to properly understand the concept of estimating uncertainty. Particularly during project definition phase, inadequate grasp of estimating uncertainty can lead to inadequate expectations of senior management regarding cost at termination, and as a consequence, insufficient funding for the project. In our new White Paper [2022-03] \’How to Avoid Underestimating Cost Expectations during Project Definition Phase for Owners\’ we investigate the issue of accounting for, and presenting, estimating uncertainty. We too often have to remind senior management to add uncertainty on top of Capex estimate when reaching Final Investment Decision!

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A proper understanding of the concept of estimating uncertainties is required for owner senior management, so as to fully appreciate the estimating values provided and take decisions in full awareness of the implications. In particular, funding requirements and business planning must fully account for this concept to be realistic. Senior management expectation management is often an essential project success factor, and it is important to provide the fullest and correctly represented information. When presented to senior management, a base estimate must always be qualified and used carefully, including making its uncertainties visible. The number used as an anchor as the value of the project for the organisation must always be considering proper qualifications. This is an essential educational role of the project manager and the lead estimator.

At PVD we have encountered a situation many times, where management held in mind the base estimate value at the end of Preliminary Feasibility as a reference for decision-making. In that case, even if the project is successfully completed, questions will be asked about a visible 20 to 25% increase in actual cost at completion relative to the baseline budget something which will almost inevitably occur as the result of estimating uncertainty at the decision-making time. The reason for this increase may not be poor project management, but rather inadequate management of senior management expectations. Nevertheless, this situation can create significant issues in the middle of project execution if senior management questions actual project performance compared to its expectations.

Read our new White Paper [2022-03] \’How to Avoid Underestimating Cost Expectations during Project Definition Phase for Owners\’ to better understand how to account for estimating uncertainties when presenting early stage estimates to project sponsors and project management.

If you can\’t access the link to the white paper, copy and paste the following link in your browser: https://www.projectvaluedelivery.com/_library/2023-03_capex_estimating_expectations_v1.pdf

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