What Approach to Project Evaluation are You Using?
Let's imagine the following situation: a young development company, not overloaded by projects yet, receives a request to evaluate a project. The customer is solid, the project is planned to be large. The immediate thought is “You must not miss it! This is a portfolio, and experience, and profit at once”.
Rough Estimation Trap
The customer wants to be estimated. Since the project is voluminous, to evaluate it properly, it is necessary to clarify all the requirements, at least to define its tasks, and give it to an expert for evaluation. In total, this is a hard work for 1-2 weeks. The customer will not wait. Therefore, there is only one way out: to set a rough price, but to be honest, to guesstimate. In addition, the customer asks for a discount. To top it off, he also demands fixing the project price in the contract (“fixed price”).
Yielding to the temptation to get a customer, the contractor goes for it.
Watch video: Evaluation Methodology in Practice and Customer Opinion
What will be next?
Then the contractor proceeds to work and reveals the facts:
there was a slightly different meaning in the requirements,
additional circumstances have emerged,
technical nuances of the solutions have appeared,
it is necessary to further augment something, otherwise something else will not work,
The solution of all these tasks will be time-consuming. It has not been laid in the price, and the price has already been set and even fixed.
Matter of Trust
The project manager on the side of the customer is also in an equally interesting situation, because all decisions on the project are submitted and made under his leadership. None of the TOP managers taking a financial decision calculates the amount of work on the project, and therefore this task rests with the project manager. What would you think when it turned out that it had been defined and estimated wrong? This is clearly a matter of competence and trust.
How do you think, which of the options would the customer’s company management take easier:
“Not immediate”, but a solid preparation, according to the results of which a financial plan would be presented in a clear framework, or
a fast and attractive price for the “total” amount of work, which would start to grow already at the drafting phase of the technical task?
The matter of trust in partners (both external and internal ones) is one of the most important factors for successful cooperation.
What Happens if Budget Ends, but Project Doesn't?
If the budget grows during a real estimation, the developer has a lot of ways out of the situation, but not a single positive one:
to conduct work on the project at his own expense – a loss;
to demand surcharge and revision of the contract - a conflict, possible termination of the contract, reputation loss;
to save on everything: programmers, analysts, testing, descriptions - in the end, he may get a very poor-quality code and the whole project, a bad experience and reputation;
to include costs into the price of future support - the customer may refuse from “expensive” cooperation;
to stop the project when his money runs out - a loss of the project...
In any case, no one will benefit from this situation: the contractor loses both time, and reputation, and, possibly, finances.
The customer is at risk of getting a scuppered project, wasted budget and a negative attitude towards developers in general.
This is how the tender won by price still does not guarantee the success of a project.
How to Ensure Financial Success of Project
Our long-term implementation experience and that of our partners shows:
The customer almost never sends a sufficiently detailed description for evaluation — so, a preliminary survey must be conducted (we will soon release a video).
You need to set a reasonable, realistic price. Use proven evaluation practices. Today we will talk about three-point estimation, which we use in our work.
Never agree to “fixed price” and honestly and correctly explain the consequences to the customer.
Three-Point Estimation: How It Works
This is a methodology for evaluating a project or individual tasks.
After task detailing, 3 estimates are made for tasks or phases of a project:
1. The minimum possible time for task completion;
2. Expert estimate of task or phase completion;
3. The estimation of resources that would not be exceeded to complete this task with a probability of 95% +.
It is advisable to show all 3 numbers to the customer, and not to set one price. You should use all three numbers in the budget, too.
This allows the customer to understand that the price cannot be fixed rigidly, and it depends on many factors: the amount of work and risks, complexity and depth of tasks. All this can come to light in the process of work. Not because the developer came up with this, but because these are the objective circumstances of the subject area.
If the customer demands (as often happens) a fixed rate or a single price, it can be calculated by the formula (1 min + 4 average + 1 max) / 6.
What do Сustomers Think about Price “In Range”?
In fact, customers who have implementation experience, as well as those who have sufficiently qualified specialists, understand the pricing process for enhancements well.
As an example, I’ll quote the speech of Evgen Osmak, the Head of corporate IT of our major client,Zeppelin.
“The biggest budget trap is when asking for an estimate, and then making it a commitment.
If you succumb to such tactics, then, having gained experience, the developer further multiplies his estimates by Pi (3.14).
The flip side of such a requirement is that the developer generally ceases to give a more or less clear estimate, voicing the deadlines for the task, for example, from 2 to 800 hours, in doing so preventing himself from being constrained.”
Three-Point Estimation in Diagram
A project has time before which it cannot be completed.
There are risks and probabilities.
There is a very small probability that a project can be completed at a minimum estimate.
An experienced expert evaluates a task in his own way, and this estimate is verified by experience. In practice, it’s probability is very high, since it seems to be written off from life.
In addition, there is a practical estimate of the maximum amount to be spent.
It is important to voice all these three prices to the customer - they are justified, and such information can be used.
The rest is guessing. To give the only right price is to guess in advance (predict) all the consequences of the risks during the entire term of the contract. How reasonable is it to hope for such a prediction when starting a project?
According to the formula, an estimate can be averaged, but this average price will not say anything either.
The longer the project period is, the higher the risk probability and, accordingly, the price will fluctuate more significantly.
It is also important to clarify what estimate does the customer enquires for. Maybe he wants to know the pessimistic one — that is, the maximum price, and you have already told him “an incredible minimum”, problem situations are inevitable then.
An estimate can be considered accurate if it has not gone beyond the minimum and the maximum price. The average value is usually larger than the most likely one according to expert estimates.
In general, due to the tension created during the implementation and assertion of limits and prices, even project managers cannot withstand and leave them. These losses are significant.
This is the opinion expressed by Zeppelin implementation specialist. You can watch a full version of his speech at CIO-Jazz-2018 here >>>
Make Three-Point Estimation and Assess its Effectiveness
1) You have received a list of tasks for evaluation. Maybe your analysts (experts) reconciled such a list.
2) It has to be evaluated.
At first glance, there are several tasks with detailed descriptions. After you read them, you can give an intuitive estimate in 2-3 days or 24-38 hours.
Often they count like that.
3) Try to count using a three-point methodology.
To do this, transfer your tasks to our file. We divide them into parts, and leave indivisible ones as they are.
Give 3 estimates to each task.
4) Also consider obligatory auxiliary work, add % for:
coordination and planning of all tasks,
for new customers also a time for deployment of the test structure of their database, storage, etc.
According to the results of the calculation, you will see a noticeable difference in numbers.
How to Show Table to Customer
Often the customer does not perceive the entire table in general. So, basing on understanding, you can give 3 or 2 estimates: minimum and average.
Notionally, you can decide what to show by yourself.
The main thing is that you will get a tool for understanding the limits and risks.
The methodology is suitable for detailed assessments of specific objects and large blocks analysis, writing technical specifications (TS). You can choose a degree of detail yourself: work can be recorded in one line, or it can be divided into TS modules. The deeper you go through the analysis, the better the results will be.
Why and how to conduct a preliminary analysis of a project? Watch our video (soon on our channel).
Why are We Telling All This? – Sharing Experience
The demand for automation is growing every day, and the number of software companies is growint, too. You may think that the competition is increasing. However, in the market, in fact, we compete not with companies, solutions or service quality, but with greatly lowered estimates, lack of experience and methodological base of estimates, with evaluation at random.
It may seem that the customer wins, but this is an illusion. The consequences of such estimates will be bad for everyone: for the developer working at a fixed price, and for the customer.
On the one hand, at a low price, you can win a tender, but then, having come to 0, you will have to sacrifice the quality of work, attitude, reputation, and even the project you wanted to get.
As a confirmation of the aforesaid, customers often come to us after some history of working with the “unscrupulous” contractor who failed the project. They like our price less, but they have been taught by bitter experience and they accept the conditions.
We must explain why an estimate is always a range, and why the price cannot be fixed.
In our company, we work according to the time and material (T & M) model.
To conduct a professional estimation of the project, use this methodology.
Where did Three-Point Estimation come from
Having received numerous questions and comments on the Three-Point Estimation video, we decided to answer the most frequent one: “Where did the methodology come from?” Watch our video for details...
Maksim Zosim: Hello everyone! Maksim Zosim and TQM systems team are with you.
My colleagues often ask about a methodology for evaluating a project or individual tasks. This is what I want to share with you today.
In our business, we use three-point estimation. How does it work?
After detailing the task, we make three estimates for completing a task or a project phase.
The first is the minimum possible time during which you can complete a task. It can’t be done in less time.
The second is an expert estimate of tasks or the whole phase.
The third is an estimate of resources and time that won’t be exceeded to complete this task (with a probability of 95% or higher).
In fact, we consider that you should show all three figures to your customers. You should operate not one fixed price, but all three figures in the budget.
Of course, the customer can demand (and, most likely, will) some fixed rate from you. In this case you can average the estimate using the formula:
1 minimum + 4 averages + 1 maximum and divide it all by 6. Next, we will look at an example of how this is done. In the meantime, listen what one of our major customers says about it:
Evgen Osmak: The biggest trap of the budget is the following: when they come to ask for an estimate, and then at some point it unnoticeably becomes a commitment. So, one more time: while it is still an estimate, everything goes well. Once it becomes a commitment, for the first time, right? Next time IT specialist takes an estimate and multiplies it by π. Or rather, an experienced one multiplies by π, unexperienced one – by e. Right? It’s Mathematics.
A voice from the audience: If you need three, add a half.
Evgen Osmak: And that’s when a PM turns on. This is a PM for three plus half. There are two multipliers there: e – 2.76 and π – 3.14. The rest is trivial. Don’t... No, look… how I solve this problem of commitments and estimates, right? In other words, if you tie a commitment to an estimate, you won’t get anything from an expert. He just raises a banner and begins to give out… I don’t know… an estimate from 2 to 800 hours. “How many hours will the task take? – From 2 to 800 hours.” That’s what I call passive aggression. You understand, right? Or, rather, not even a passive one.
There is a concept of three-point estimation. Three-point estimation. The probability diagram looks like this. So, every project has a minimum amount of time it can take to complete it. Basically minimum. Nine women can’t make a child in a month. When I explain it this way, everyone understands. Right? So, there is a minimum amount of time it can take… it can’t take less time to complete a project. In no way. There is the smallest probability that, if everything goes well, no problem, and leading wind… Then, this is the first one. It can be time or money, it doesn’t matter. Let’s say it’s money.
Now, what else do we have here? There is the most likely value. Its peculiarity is that experts perceive it. Experts use their intuition, accumulated experience. “When? How long will it take you to do it?” He predetermines the most likely value. Do you get it? He perceives it. Oh, two days…
A voice from the audience: Along the Y axis… This is probability, right?
Evgen Osmak: Yes, yes, yes. This is the probability to spend a certain amount of effort. The same is with time.
A voice from the audience: And the graduation? 0%, 100%.
Evgen Osmak: No, no, no. This is a division… an integral of these 100%. And this is a function of density-probability. No? Ok. This is a usual probability. Here is, for example, 20%, and there is 19%. If you add all these, you get 100%. It means that in this case, approximately, there is a probability of 25% to get this point. Well, I don’t know.
There is the third point, with a very big probability, for example, 95%, that it won’t take more than… So, we have, averagely, an optimistic and pessimistic value. I show them all three. I show all three to business. Really, all three. I tell them: look, the optimistic forecast is $10 000, the pessimistic - $16 000, experts think - $14 000, and you do whatever you want with it. One more time – this is the reliable information I can give.
Am I an oracle to know how much will it cost?! Will I try to fool someone?! Am I a wizard?! If people look for magicians, they find storytellers. It’s obvious. If someone looks for a Delphic oracle, he finds…
There was a one... who made it into folklore by the expression: “Basically everything is possible.” “Is it possible to do this?” – “Basic…” This is an English expression, because we have English-speaking tops. “Is it possible?” – “Basically everything is possible.” Nice one! You rock! We’ve been waiting for you for so long!
Do you know, what happens next? Ok, look. We are going into discussion, and then – afterparty.
There is a life cycle of a product, a life cycle of a project, and a life cycle of a project PM... It’s sad when… at first it was “basically everything is possible”, and then a life cycle of a project PM is shorter, than that of a project. Because that’s when the phase of thermorectal cryptanalysis (or Rubber-hose cryptanalysis) begins. Well, read about thermorectal cryptanalysis on Lurkmore. Well, you got it.
A voice from the audience: Yes. We’re all IT specialists here.
Evgen Osmak: When they ask “How long? How much?” etc. you better receive a promotion at that very moment.
A voice from the audience: Nice way.
Evgen Osmak: And it works! I haven’t tried it myself, but I’ve seen it working, really.
A fragment from a movie: I believe I can fly, I believe I can soar. I believe I can fly. I believe! I believe! I believe! I believe!
Evgen Osmak: That is the reason why I give this three-point estimate of any big task to business. And I say that… There is a thought that if you use the following formula: (minimum + 4*average + maximum) / 6… There is nothing better than this in Mathematics. I mean, if you need only one estimate, it will tell you nothing. You may use this formula. There’s nothing better than this. But still it’s milk-and water.
One more time: when they mercilessly begin to root one number out of me, I tell them that this is not a commitment, no way. It’s first of all. Secondly, look where I got this number from. And the broader this is… I mean, look… The narrower this one is, the more an expert is sure, that the risks are low. The broader this thing is…
At first, this caused some kind of brainwork inside of businesses. Now, they can’t imagine the other way. They have been working like this for 7 years already. Do you understand? I brought it to them. Guys, I’m not a wizard.
There is a minimum, but it’s impossible. If you want…
Do you know where the danger is? Business asks: “How much will it take you to do this?” And you don’t know which one of these three points is it interested in.
A reliable estimate or an optimistic one? You don’t know. If you haven’t asked, there is a danger: he asked for this (maximum)**(10К). Because of it, in any case, when a resulting project ends here (between the expert estimate and the maximum one)**, yes? We say: “It’s alright, everything went according to a more pessimistic scenario, but we managed to stay within the estimate, so, we are clever cookies!” Yes?
So, we measure regularly whether we stay within this estimate. If we begin to outstep, we are suckers. Do you get it? It means we have no clue about what we do, and should stay out of the profession.
If we stay within it, right?.. Even more, the main zen here is that the most likely value differs from the median value.
Because in average we will get this one. Because of the tail, you see? That is, in average it turns out to be more that the experts say. That’s why everyone know that they have to multiply. But nobody knows by which number: by π or by e.
Maksim Zosim: If you don’t want to show this video, what’s logical, then there is a separate full presentation by Evgen on IT directors community channel. The link is in the description. In the first place, I recommend watching all the videos on the channel. There is a lot of useful information to understand how IT should interact with business.
However, it’s worth remembering the other side of estimates. When you sign up for a fixed price with a customer, you are forced to put the risks associated with the level of a developer, technical complexity and other components of project development into each task’s estimate.
Let's look at a simple example and the tools for using the methodology.
For example, a customer sends you a list of tasks in several task files. Or suppose that it were your experts who had reconciled these tasks, and they should be estimated. At first glance, there are several tasks with detailed descriptions. If you or your specialist looks through them, then intuitively (I can judge by myself) this estimate will be 3-4 days or from 24 to 32 hours. Often this is what partners do. However, let's analyze this document with a three-point estimation tool. Let’s do it not in one line, but divide these tasks into components.
We take each task from the text of the file and copy it to our file. If a task is indivisible, we paste it like that. If it can be divided into parts, then we divide it and specify details for each row. Next, we give estimates for each line: the minimum possible, average according to an expert and the maximum one (the task should not go beyond it even in worst-case scenario). At the end of the file, we add a percentage for testing, coordination and planning for all tasks. If a customer is new, then also the time for deployment of a test infrastructure: databases, storages, access, and so on.
As a result, you see a noticeable difference in numbers.
If you don’t feel like making a template, then you can download it from the link in the description and replace it with your logo. But keep in mind that many customers do not perceive the whole table well. That’s why, depending on the customer, we either show the entire table, or three estimates, or the minimum and the average, as a part of our commercial offer. Or we provide the customer with both files. In the end, you yourself can decide which numbers to show and which estimation methodology to voice to your customer.
The main thing is that you will have a tool and an understanding of the possible limits and risks. The methodology itself is suitable for both detailed estimations of specific objects, and for the analysis of large blocks. For example, when writing technical specifications. You can do it in a single line or divide it into necessary modules of the TS itself. Remember: the deeper you go in the analysis, the better the synthesis of resulting values will turn out to be.
Perhaps you have a question: why are we doing this? The answer is simple. Recently, we have been competing not with other products or customer service quality. We are increasingly competing with a specific price. And more specifically, with an incorrect estimate from the heads of novice partners or with a lack of experience. Without any more or less clear estimation methodology we are simply confronted with random estimates and very low cost for the customer. This will lead to bad consequences for both the customer and the partner. Especially for those who work on a fixed model. On the one hand, you will win a tender for your estimates. On the other hand, with an incorrect estimate, you will end up working at zero profit.
Then you have to sacrifice the quality of your work, jeopardizing further performance of your code. If you go into the red, then you will have to explain why the customer should pay in excess.
Or you will try to include both risks and expenses into following works, which as a result will form a negative attitude towards both you and other partners.
Time after time, we have faced the situation and customer reviews and have long explained why a task estimate is always a range and why you can’t work at a fixed rate. That is why we work on the time and material model in our company.
So, if you want to show the customer a more realistic picture, use a three-point estimation methodology or a random one based on it or some other.
By the way, if you have interesting cases on estimation, share them in the comments. Analyze, estimate and work profitably.
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A video on the importance and structure of the express survey phase in projects is coming up soon.
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Editor: Elena Teplitskaya
Контент-маркетолог TQM systems (1C / BAS) Nataliya Raevskaya