Tuesday, August 1, 2023

Cost estimates when you just don't know

It's not unusual. 
You're asked to estimate your work, and really: you just don't know.
It comes up a lot in the AGILE space, where many hold that "estimate" and "agile" don't belong in the same sentence, let alone the same project. 

We're supposed to accept "emergence" at whatever cost. That doesn't bode well in the enterprise context. Those guys in the C-suite want something more bounded.

There are methodologies for handling the "just don't know" issue.

Allowances: The first way to handle this comes right out of the construction industry wherein a customer is given an allowance of funds for "emergent" need. Allowances provide flexibility to trade feature, function, and fit among disparate components. Pay a little more for component "A" and accept less for component "B", all within the allowance.

Allowances can work in the intangible space also, where we find many software projects with not-so-clear ways forward. What we call "first impression" requirements that don't have history and precedent to fall back on. It comes down to "Do what you can to get me something working for this allowance". 

Time and Materials .. T&M: This is everyone's standby. Just start working and see where it takes you. T&M has been around almost since the industrial revolution took off. It's best applied to research rather than development, where the target is so elusive that I might NOT know it when I see it. 

Cost reimbursable: A bit more constrained than T&M, and perhaps a contractor's version of allowances, the total scope is within an overall budget (cost envelope), but the project proceeds by increments, reimbursing the cost at each increment. If there's not reasonable progress, the project is redirected or even canceled. 

Some put the cost reimbursable method squarely in the "earned value" camp. Earned value: Show me the value you're producing, and I'll pay you accordingly. From your performance-to-date, taking into account improvements you can apply, forecast the outcome. Are you still within the budget envelope?

Incentives and Penalties: Cost is saved, or avoided, with productivity boosts. Almost every manager thinks in terms of incentives because these days almost every manager is personally on some kind of incentive-driven pay plan. Of course, one can also think in terms of penalties. 

But the utility of the marginal compensation comes into play when evaluating how to stimulate productive work. Everyone has a set-point in mind when it comes to their comp. 
  • Penalize people below their set-point and morale suffers big time, often out of all proportion to the penalty. It's hard to get productivity pumped on the basis of penalties.
  • Bonus people above their set-point enhances morale, but the utility fades quickly, so it doesn't take huge sums to get a boost in productivity.

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