Companies are just plain bad at predicting cost overruns

Anyone who’s rolled out software or applications only to find their wallets lighter than expected, take heart in knowing that you’re not alone. A new study confirms that cost projections are wildly inaccurate in many cases. 

Magne Jørgensen, a researcher for Simula Research Laboratory, reviewed several studies on software estimation costs. His conclusions are disheartening, but probably not too surprising for most IT pros:

  • cost overruns are rampant in software projects, with the average overrun amounting to about 30%
  • despite knowing more about estimation accuracy than we used to, today’s estimates are just as bad as they were in the 1980s, and
  • general estimation models may not be the best fit for most software companies – instead, these companies would be better off developing their own estimation models.

Cost-driven decisions hurt accuracy

According to Jørgensen one of the factors that affects cost overruns is that companies are heavily focused on price. Since companies are usually seeking the lowest-cost option, software providers often seek to provide the lowest estimate, only to run into a situation where they can’t meet their own targets and wind up charging more later.

While no one can dismiss a company’s cost concerns in good conscience, it does serve as a reminder that focusing on the quality of services delivered can be more important than the quoted price.

Ask yourself before choosing providers: If this turned out to be not as low of a price, would I still be satisfied with what the vendor is saying it’ll deliver?

Avoiding overrun headaches: 3 keys

Here are three strategies you may want to employ to keep overruns from becoming a major setback:

  1. Talk expectations instead of price. Instead of saying that you’re looking for a project that will cost X,  list the requirements that you expect the project to meet. Then, you can discuss price without providers feeling like they have to under-bid in order to win your business.
  2. Make quality a priority throughout. While Accounting or Finance might be tempted to pressure you into accepting the lowest bid, lay out what each prospective partner can offer in terms of more than just price.
  3. Over-budget. It’s better to factor in more of a cost overrun than you’re anticipating than to go with the figure you’re told and find out you need to find more funds later.

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