Three ways Project estimates are padded with excess safety margin (contingency), and three ways this safety margin gets wasted that can be adding significant cost to your projects.
Theory of Constraints
The Theory Of Constraints is a concept that was promoted by Eliyahu Goldratt, where business success can be achieved by identifying a constraint in your business, eliminating it and then moving on to identify and eliminate other constraints in a systematic manner.
An extension of this theory was applied to Project Estimates in Eliyahu Goldratt’s book Critical Chain which points to significant potential inefficiencies that occur with typical project estimating and project execution techniques.
If your business is involved in projects in anyway such as pricing and delivering projects to clients, or accepting quotes for projects then what is outlined here will be of interest to you.
Safety Margin (Contingency) Estimates
Eliyahu argues the point that there are three ways that the safety (contingency) component is incorporated into the estimates of a project that has the potential to significantly inflate the real cost of achieving the end result, and then there are three ways that the safety component gets wasted in the execution stage.
The end result being that when its all done the estimate looks to be correct as the implementation more or less matched the inflated estimate. This can create a self full filling prophecy for future estimates where a fat safety margin is consumed by a wasteful implementation process with an equilibrium being reached.
Lets have a look at the three ways how an inflated safety gets incorporated in the project estimate:
- The first one is that the time estimates are based on a pessimistic experience, the end of the distribution curve for the chance of finishing on time. Eliyahu suggests that a probability analysis indicates that when you estimate an 80% chance of completing on time you will have factored in a whopping 200% safety margin.
- The second is that the larger the number of management levels involved, the higher the total estimation, because each level adds its own safety factor.
- And the third is that the estimators also protect their estimations from a global cut by upper management and pack in a bit more safety to start with.
On the implementation side, safety margin is wasted in these ways:
- The first is referred to as the Student Syndrome, there is no rush so start until the last minute. In which case any safety margin you had at the beginning is eroded away.
- The second is multi-tasking. A constraint will exist where a particular function is in high demand and is forced to adopt a multi-tasking approach to meet competing demands. The reality being that multi-tasking eats away lead time due to the context switching that occurs and therefore erodes safety margin.
- The third involves the dependencies between steps; these dependencies cause delays to accumulate and advances to be wasted. So, if a particular step in the project execution finishes earlier than forecast (i.e. the safety is not required) then it does not automatically follow that the next step starts earlier so the safety in the preceding step gets wasted.
It’s likely you will want to debate these and say this doesn’t happen here for this reason or that, and that may be the case if your estimation and execution processes are finely tuned. There is always the question to be asked of those who are supplying to you as a sub-contractor, how can you be so sure that the operation of over inflating safety margin and wasting it is not occurring in their processes?
Eliyahu suggests that it is better to only allow safety margin (contingency) to be applied at the project level and not at minor steps in the project schedule as a way to reduce the chance of over inflated safety margin, and use this same principle when managing the execution plan to minimise the wastage of safety margin.
In a time of increasing competition there is less and less room to be inefficient so keeping what Eliyahu has outlined in mind when evaluating your own competitive positioning is an area that can be explored.
Goldratt, Eliyahu M.. Critical Chain: A Business Novel