Successive Cost Estimation

Revision as of 16:51, 20 February 2022

Abstract

The successive principle is a method for managing uncertainty and can be applied to budgeting and scheduling, as well as other disciplines of Project Management, Systems Engineering, Risk Analysis and Cost Engineering.^[1] It was developed by Steen Lichtenberg, a former professor at the Technical University of Denmark (DTU).

Uncertainty is part of every project and marks the base for risks. Managing risks in a project proactively is of high importance, which can not only be a threat, but also be an opportunity with positive influence on the project success. ^[2] Especially infrastructure and construction projects suffer from underestimation of costs. Depending on the geographical area, the costs for infrastructure projects overrun in 9 of 10 cases and the real costs drift far off the cost estimations. The projects might fail and therefore seriously hazard the involved companies. Too optimistic and subjective estimations can arise from technical, economic, psychological and political pitfalls. ^[3]

The successive principle tries to minimize the subjective influence by successively eliminating uncertainties with a top-down approach and can be contextualized next to other classical risk analysis techniques. It differs from them through focusing on a cooperation of experts from estimating, scheduling, technical specifications, etc. and therefore creates a precise whole picture without disregarding a single aspect. Moreover, it synergizes subjective estimations with statistical theory and faces uncertainty also as an opportunity. ^[4] A diverse analysis team follows a given procedure successively defining new uncertainties and eliminating these through the combination of subjective (psychological) and objective (statistical) techniques. It is implemented into organizations mainly in the Nordic countries and has lead to success even in project with very high uncertainty. Although already being implemented successfully, criticism arises from the extensive preparations, a non balanced composition of the analysis group and human error in calculations. ^[5]

The basic idea and procedure of the Successive Principle is described in detail and a simplified calculation example is given. Furthermore, example applications, as well as limitations and a critical reflection of the method in relation to project management standards are given.

Theory and Principles

The main goal for the development of the Successive Principle was to avoid the many pitfalls when applying classical risk management methods, which lead to cost overruns. It combines psychology, statistics and cost engineering and is based on the following key elements: ^[5]

1. Uncertainty exists and cannot be avoided and therefore needs to be considered and tackled
2. Multidisciplinary, evened groups can evaluate smart and unbiased
3. Eliminating uncertainty by successively detailing and building a quantitative model
4. Getting a holistic view by adding overall influences and everything influencing the project ^[6]

It also differs from traditional project management methods in three further points. ^[6] While typically the areas of large uncertainty are not tackled because of subjectivity, the Successive Principle picks exactly these for detailing and is able to be more precise than a traditional approach, considering more, but less subjective items. Furthermore, the new principle prioritizes the items with highest uncertainty and thus seeks diving into the most difficult items to estimate, which again differs from the traditional approach. Another change is made in the treatment of interrelated areas. The management of schedules, cost, resources and technical issues is now combined, specialists from each area are working together and thus interrelated areas are treated together, in order to not deflect the holistic view on the project. ^[6]

Procedure of the Method

Qualitative Phase

• Definition of objective and scope

• Establishing a group

• Ensure perfect conditions

• Consensus

• Identifiy and order most imporant issues

Quantitative Phase

• Quantification

• Successive specification

• Action plan

Example Calculation

Comparison to Risk Management Standards

Limitations and Critical Reflection

Annotated Bibliography

• Lichtenberg, S. (2000). Proactive management of uncertainty using the Successive Principle - a practical way to manage opportunities and risks. Polyteknisk Press

The main publication explaining the methodology

• Lichtenberg S., Klakegg, O.J. Successful Control of Major Project Budgets. Administrative Sciences. 2016; 6(3):8.

Peer reviewed paper, Latest publication

• Project Management Institute, Inc. (PMI). (2019). Standard for Risk Management in Portfolios, Programs, and Projects. Project Management Institute, Inc. (PMI)

References

1. ↑ Lichtenberg, S., (2006) The Successive Principle – a scientific crystal ball for management. Conference Paper. The international Cost Engineering Council
2. ↑ Project Management Institute, Inc. (PMI). (2019). Standard for Risk Management in Portfolios, Programs, and Projects. Project Management Institute, Inc. (PMI)
3. ↑ Flyvbjerg, B., Skamris Holm, M., Buhl, S. (2002). Underestimating Costs in Public Works Projects: Error or Lie? , Journal of the American Planning Association, 68:3, 279-295
4. ↑ Lichtenberg, S. (2000). Proactive management of uncertainty using the Successive Principle - a practical way to manage opportunities and risks. Polyteknisk Press
5. ↑ ^{5.0 5.1} Lichtenberg, S., Klakegg, O.J. Successful Control of Major Project Budgets. Administrative Sciences. 2016; 6(3):8.
6. ↑ ^{6.0 6.1 6.2} Archibald, R., Lichtenberg, S. (2016). Experiences Using Next Generation Management Practices The Future Has ALready Begun, PM World Journal, 5:8