Table of Contents
Most projects are affected by the problem of underestimation of resources. The most underestimated resources are time and cost of the project. Many studies have been conducted to investigate this problem, but no study has fully revealed the cause of the phenomenon. Actual costs end up being higher than forecasted costs. At the same time, the duration of the project is tends to extend. This paper aims to investigate some of the reasons that explain estimation errors in project management. Sometimes, the differences between the forecasted costs may be too large, thereby calling for investigation of the causes of the difference.
Causes of Estimation Errors
There are four steps that can be used to investigate the causes of errors in cost estimation. These steps are considered by investors in decision making. Pickrell (1990) claims that most problems of underestimation are caused by forecasters and promoters’ deception. This was considered the first step of investigation of any case involving estimation errors. His opinion is supported by other scholars like Thomson and Allport.
Wachs (1990) describes the second step that should be considered in identifying errors in cost estimation. He supports the argument of Pickrell, who claims that the cause of estimation errors is mainly intentional deception. His study was mainly purposed to look for reasons that made people cheat. He later studied implications of such lies in project management. However, in his research he had a small sample, and this implied that he did not reach a reliable conclusion.
The third step called for an investigation of transportation and infrastructure costs that are involved in course of implementing the project. The step holds that different projects are implemented in different historical periods and different geographical locations. This implies that different projects will have different financial considerations based on geographical locations.
The final step considers large samples, unlike the study made by Wachs. It investigated whether the main cause of estimation errors was deception. Moreover, the study was aimed at investigating why such deceptions occurred. For this study to be accomplished, large numbers of forecasters and promoters were involved to represent many projects. Surveys and interviews were used to gather information about the same.
However, these studies did not study the differences between projects. Kains (1899) considers a rail project, which has more votes as compared to road construction. The department of transportation has fixed budgets of construction. Officials of this department may at times ask legislators to increase the budget to eliminate the problem of underestimation.
Measuring cost inaccuracy is necessary where there exist differences between actual and forecasted costs. It is important to do this to be able to determine whether the differences are significant or not. These differences are determined at different stages of the project to be able to identify the stage in which errors occurred. This makes it easier for forecasters to be able to identify the stage where they made wrong forecasts.
Underestimation of costs differs from one project to the other depending on its type. This makes it important to consider different projects separately. Shirt-term projects are more prone to underestimation of costs as compared to long-term projects. Despite the fact that many studies were conducted, the problem of cost underestimation has not decreased significantly. Techniques of estimating transportation infrastructure projects might have been improved, but this has not been seen to have effect on the problem of cost underestimation.
Reasons of Cost Underestimation
There are four explanations that are used to enlighten the issue of cost underestimation in project management. These explanations include political, technical, psychological, and economic factors (Richman 2002). Based on these explanations, it would be easier to determine the argument that best fits the problem of cost underestimation.
Technical factors mainly relate to technical issues that cause underestimation problems. These factors include mistakes and insufficient data. They also include lack of experience, which is necessary in forecasting (Morris & Hough 1987).
Economic explanations introduce the aspect of economic rationality. This is where decisions are affected by personal interests. Stakeholders seek to save costs. In doing so, they might underestimate costs of a project. At the same time, the same stakeholders might overstate the benefits to increase the likelihood of profits and revenues. Additionally, forecasters and promoters might tend to underestimate the costs of a project with the aim of saving public’s money. This is seen where forecasters and promoters submit a lower forecast to public officials with the aim of saving public’s money.
Psychological explanations are aimed at explaining mental biases that exist among forecasters and promoters. For example, optimism on the side of forecasters and promoters may lead to the problem of cost underestimation. Optimism is a feeling that forecasters have, which may not reflect reality about a project. This is because optimism may lead to forecasting lower costs than actual costs. These feelings greatly contribute to mental biases. Mental biases in return hinder forecasters' and promoters' ability to make independent decisions.
Political issues are also a great contributor of cost underestimations in project management. These issues are driven by power and interests of politicians. Politicians are seen to make biased decisions intentionally to fulfill their interests (Bertisen & Davis 2008). As a result, projects have insufficient funds.
The Fishbone Diagram
Fishbone diagram can also be used to investigate the issue of costs underestimation in project management. Fishbone diagram is a tool that is used to investigate and analyze occurrences of certain phenomena. It tries to identify causes and sub-causes of certain problems (Ishikawa 1986). As such, it can be used to investigate the causes and sub-causes of continued problem of underestimation in project management. The diagram is organized in such a way that it shows causes and sub-causes and how they lead to the problem. Having identified causes of the problem, it becomes easier to solve the problem.
The diagram puts the problem as a head of fish since it is the main topic of discussion. Sub causes and causes of the problem are placed as the bones of the diagram and are divided into different types. The diagram tries to explain the factors that determine a certain result. It also seeks to determine the root cause of a problem as well as to identify the areas where there is insufficient data. Additionally, the diagram focuses on specific issues without providing irrelevant discussions about the causes of a problem.
The first step in a fishbone diagram is to identify the problem. In our case, the problem is to determine the reason why time and costs frequently exceed their forecasted value. This is followed by representing the information in a chart that is easy and clear for human understanding. An arrow is drawn to represent the spine, and the problem is enclosed in a box at the end of the arrow. The causes are then identified, and they form branches. The causes included should be the main causes only. It is important to identify more detailed causes of the problem with relation to the main causes. These are known as sub-causes and they form sub-branches.
The last step involves identification of the causes that require further investigation. These are the causes that are seen to occur repeatedly. For example, in our case, deception is seen to be a major cause of underestimating costs and it is repeatedly seen among other causes of the same problem.
The fishbone diagram
This method of addressing a problem is advantageous in several ways. It is focused on determining the root causes of a problem. It also encourages participation of members in groups as they contribute to the cause and sub-causes of the problem. Fishbone diagram helps people gain knowledge on causes of certain problems and determine how sub-causes are related to the main causes. Additionally, it helps researchers identify areas in which they need to collect more data.
However, certain conditions are necessary for the fishbone to act as an effective tool of identifying and analyzing a problem. There must be a problem that needs to be resolved. The problem should have causes and sub-causes, which should be related. Moreover, causes and sub-causes should be easily distinguishable.
Comparison between Public and Private Sector Projects
There are fundamental differences between the private and public sectors in that the private sector comprise of privately owned organizations that are not run by the government.They include corporations both profit and non-profit making,partnerships as well as charity organiations.They are unique in the sense thst they are are not owned or run by the governmentThey are owned and financed by individuals,partners or shareholders who are accountable to their owners or members.They have a main objective that is of commercial nature like profit,returns,maket stand or level of sales.Examples are retail outlets,credit organizations and local businesses.
On the other hand,the public sector comprise of those organizations that are operated and owned by the government.The main aim of the public sector is to sensitive services that are extremely basic to the citizens and cannot be left at the hands of private dealers.They provide a cover to avoid any gap and this is by offering the services cheaply or even reely,ased on the nature of the service.
Both public and private differ in their accounting methods. The private sector has their managers bound by accepted accounting principles. These are as set offset principles that ensure financial accuracy and uniformity. In contrary, the public sector is not bound by such financial methods and for example in budgeting.
The private organizations are profit-driven in that the financial managers are generally motivated by profit. The strategies that they set are aimed at high profit consciousness, which is characterized by a high level of competitiveness. In the public sector, the managers do not observe a bottom line for profitability. They are task-oriented, and are motivated by a force to achieve a specific task objective daily.
The context of operation also makes a difference between the public and the private sectors. Whereas the financial manager in a private sector strives to maintain the bottom line based on the profitability, the public sector financial manager faces legislative and regulatory constraints that prevents limits their actions. Bureaucracy is very prevalent and significantly limits job performance.
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The two sectors also differ in their decision making process. In the private sector, the financial management decisions are made from the top down through the business hierarchy as the manager hands off the orders to those below him. Financial managers in the public sector lease with political institutions to navigate between interested groups who are competing. Decisions are arrived at through support, compromises and coalitions. Decisions have to be subjected to public sanction or approval as opposed to handing down and passing off to the next in command.
In conclusion, the problem of underestimation of costs affects many projects. Many scholars have tried to investigate the issue with fruitless efforts. This is because no single scholar has come up with an argument that would explain the continued phenomenon. However, several explanations have been developed to explain the phenomena. These explanations are economical, political, technical, and psychological explanations. These explanations also account for differences between performances of public and private projects.
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Deception has been identified as the main cause of underestimation of time and costs. Strategies have been developed to identify the steps, which can be used to understand deceptive cost estimation. Fishbone diagram can be used to investigate the causes of underestimations since it identifies the causes and sub-causes of the problem. Additionally, the major theory in project management has been identified as the Four Stage theory. It is not applicable to a large extent since some of its stages are not easily distinguishable.