Case Study: Small Project Cost Estimating

In the Kerzner (2003) case study, Small Project Cost Estimating at Percy Company, Paul spends his first five years out of collage performing cost estimates for the Manufacturing Division of Percy Company. Percy issues fixed cost estimates for its projects, as indicated by the lengthy and costly procedure used to generate accurate quotes. Paul was promoted to a new position within the project office. His new responsibility was to coordinate all estimates for all divisions of Percy. During this time he did not perform any cost estimating.

After a year in the project office, Paul was assigned to a small projects division. The first five estimates that Paul created were accurate. However, the sixth estimate was off by $20,000, causing an expensive cost overrun. The case study asks to answer the question, “Why did the overrun occur?”

The case study does not provide enough detail to determine the actual root cause of the cost overrun. However, the case study points to a lengthy and costly procedure used to generate accurate fixed price quotes. Kerzner warns that fixed cost quotes have the “disadvantage of requiring a long period for preparation and adjudication of bids” (2003, p. 820). The case study also indicates that the small projects division is unable to afford the cost of the lengthy estimating procedure. From Paul’s perspective, if he was unable to follow the estimation procedure that he was taught as a member of the Manufacturing Division, he is less likely to generate accurate cost estimates.

The first five projects could have been very similar to previous projects and Paul was able to use previous cost estimates to create his estimates. However, the sixth project could have been very different and required a more thorough cost estimating procedure. In addition, due to the duration that had passed since his previous role in the Manufacturing Division, the cost of materials or labor could have changed and Paul might have been unaware of the change. Regardless of the cause, Percy can solve the problem.

According to Kerzner, an organization should “only consider fixed bid contracts if the manufacturing requirements are known exactly” (2003, p. 820). As indicated by the case study, the small cost projects are unable to “withstand the expenses needed for formal divisional cost estimates” (2003, p. 146). To address this problem, Percy should consider a cost-plus contract format for the small projects division.

References

Kerzner, H. (2003). Project Management Case Studies. New Jersey: John Wiley & Sons.

Kerzner, H. (2003). Project Management: A Systems Approach to Planning, Scheduling, and Controlling. New Jersey: John Wiley & Sons.