Low estimates – high stakes: underestimation of costs at the front-end of projects
International Journal of Managing Projects in Business
ISSN: 1753-8378
Article publication date: 4 January 2016
Abstract
Purpose
The purpose of this paper is to adopt an in-depth perspective on cost estimation, from the development of the initial idea until the budget is agreed, to obtain new insights into issues of underestimation at the front-end.
Design/methodology/approach
The study uses a small sample of projects with exceptional increases in cost estimates during the front-end phase. The authors analyzed the magnitude of cost increases and possible reasons for them.
Findings
The paper concludes that underestimation in the front-end phase was significant in the sample and poses a serious problem in that suboptimal projects are approved. The causes of underestimation include underestimating risk, overestimating opportunities, inadequate estimation methods and skills, reliance on weak information, and strategic/deliberate scope creep and division of projects.
Research limitations/implications
The study builds on a small sample, and hence further studies should be undertaken to verify whether the findings are generalizable.
Practical implications
The sample shows that the projects with the most unrealistic early estimates have disputable relevance. The paper suggests a number of recommendations that might help to counter the problem of unrealistic early cost estimates, which in turn, might allow suboptimal projects to be funded.
Originality/value
The underestimation of costs at the front-end is grossly neglected in the literature compared with whether costs comply with the budget. While cost overruns are an indication of failure in terms of the project’s tactical performance, the contention is that the up-front underestimation of costs might result in an inferior project being selected and thus affect the strategic performance of the project.
Keywords
Citation
Andersen, B., Samset, K. and Welde, M. (2016), "Low estimates – high stakes: underestimation of costs at the front-end of projects", International Journal of Managing Projects in Business, Vol. 9 No. 1, pp. 171-193. https://doi.org/10.1108/IJMPB-01-2015-0008
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited