Low estimates – high stakes: underestimation of costs at the front-end of projects

Abstract

Purpose – The purpose of this paper is to adopt an in-depth perspective on cost estimation, from the development of the initial idea until the budget is agreed, to obtain new insights into issues of underestimation at the front-end. Design/methodology/approach – The study uses a small sample of projects with exceptional increases in cost estimates during the front-end phase. The authors analyzed the magnitude of cost increases and possible reasons for them. Findings – The paper concludes that underestimation in the front-end phase was significant in the sample and poses a serious problem in that suboptimal projects are approved. The causes of underestimation include underestimating risk, overestimating opportunities, inadequate estimation methods and skills, reliance on weak information, and strategic/deliberate scope creep and division of projects. Research limitations/implications – The study builds on a small sample, and hence further studies should be undertaken to verify whether the findings are generalizable. Practical implications – The sample shows that the projects with the most unrealistic early estimates have disputable relevance. The paper suggests a number of recommendations that might help to counter the problem of unrealistic early cost estimates, which in turn, might allow suboptimal projects to be funded. Originality/value – The underestimation of costs at the front-end is grossly neglected in the literature compared with whether costs comply with the budget. While cost overruns are an indication of failure in terms of the project’s tactical performance, the contention is that the up-front underestimation of costs might result in an inferior project being selected and thus affect the strategic performance of the project.