This is a true story. The company names
have been changed.
Estimates are wrong
Acme Corporation’s salesman assured
Standard Inc. that the billing and accounts receivable software, hardware, and
customizations could be bought and implemented for $500 thousand dollars.
After Standard signed the contract,
Acme’s project manager and team were assigned. They met with Standard to work
out more details of their requirements and quickly realized that the salesman
had under-estimated the costs. In order to support their business, Acme would
need additional modules for inventory management, work order management, and additional
details to support regulatory reporting. The price should have been $8 million!
Acme management was horrified and
decided they would not show this new estimate to Standard. They decided to cut
the figure to $6 million. The Marketing VP was interested in these new modules
and agreed to pay thirty-five percent, bringing the number down to $4 million. When
Acme presented this new budget, Standard thought the estimate was completely
unreasonable, but could not agree to eliminate any customizations.
Standard and Acme worked together to
create break down the work into two phases. Phase one would have half the work
and a budget of $2 million, the remaining work and budget would be phase two. The
contract was revised for the new scope of work and price, with additional
provisions for a fixed price and for phase one to be completed within twelve
months.
Behind schedule, over budget
Phase one wasn’t even half over when it
became very obvious that the project was running behind schedule and over
budget. The project manager alerted the Standard sponsor and Acme’s management.
The Standard sponsor told the project manager not to worry about the budget for
now, but just to keep developing the customizations to make sure the project
delivered on time.
For the next four months, the project
manager continued to warn Acme management and the Standard sponsor that that
project was continuing to run over budget and could not be completed for the
expected amount. Both Acme management and the Standard sponsor assured the
project manager that she should continue to do the work and bill Standard.
Standard continued to pay the monthly
invoices until the end of the ninth month, which brought the billings up to the
budgeted $2 million for phase one. More than three months remained in the
schedule, and more than three months work remained to be done.
The invoice for the tenth month was
being processed at Standard just as Standard was taken over by a new owner. The
new owner refused to authorize payment for the tenth month.
Payments stop
The Standard sponsor asked Acme to
continue the work, and the sponsor would convince the new owner of the value of
the project and obtain approval for payment.
At Acme, it became known that Standard
was not paying, and other projects began using resources from Standard’s
project to do paid work. The project manager alerted Acme management and
Standard that the project would run later as resources were dwindling. They
encouraged the project manager to continue the project at whatever pace she
could. By the end of the twelfth month, the original deadline, the estimate to
complete was another five months.
Work and billings continued to the end
of the fourteenth month, when the project fizzled out. Acme never got paid
after month nine. Standard never installed the new product. The work completed
was rolled into the existing product and sold to other customers.
Acme fired the project manager for
allowing the project to run late and over budget.
Conclusion
Management at Acme did not accept responsibility
for the problems that they created on this job. The project manager had made it
clear to them that the project was behind schedule and over budget. They also
knew they weren’t being paid. However, when the project ended disastrously, the
project manager was fired.
The early estimates by the project
manager and team came to $8 million, twenty-five per cent more than the figure
used as the project budget. It was trimmed because Acme management thought the
figure was too high to present to the customer. Unfortunately, unless the work
is eliminated, reducing estimates of effort don’t make the effort go away. This
cut in the estimates was not based on reduced work, and could not be achieved.
The project running over budget was predictable.
It’s curious that Acme management did
not arrange to meet with the new owner. A meeting with the person refusing to
authorize payment would have allowed Acme to discuss the benefits of the
project with the new owner. Alternatively, the meeting may have made it clear
earlier on that there was no hope of the project being completed and paid.
Instead, Acme accepted assurances from the Standard sponsor, who no longer had
authority to pay.
Copyright 2015 Debbie Gallagher
