What are some common pitfalls and mistakes to avoid when doing cost modeling and simulation? (original) (raw)
Last updated on Oct 14, 2024
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Cost modeling and simulation are powerful tools for estimating and optimizing the costs of projects, products, services, or processes. However, they also involve some challenges and risks that can lead to inaccurate or misleading results, wasted resources, or missed opportunities. In this article, you will learn about some common pitfalls and mistakes to avoid when doing cost modeling and simulation, and how to overcome them with best practices and techniques.
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In my experience, the first step is understanding the scope of the work to produce the best estimation in projects. In standard practice, cost estimation is done through analogs, parametric, bottom-up estimation, and three-point estimation. Data is a crucial element in costing. You can gather data from key stakeholders, teams, and previous project managers. If more complex, utilize Subject Matter Experts for their valuable insights to produce accurate project estimations. Once estimation is done, communicate to key stakeholders to get their feedback and thoughts and incorporate the outcomes in the estimation. In my experience, I have seen a small mistake that significantly impacted Projects. Focused work will lead to better outcomes.
When doing cost modeling and simulation, several common pitfalls should be avoided: Over-simplification: Ignoring key variables can lead to inaccurate models. Over-complication: Including too many variables can make the model unwieldy and hard to understand. Data Quality: Using outdated or incorrect data can skew results. Assumptions: Unchecked assumptions can introduce bias. Ignoring Variability: Failing to account for fluctuations in costs over time. Lack of Sensitivity Analysis: Not testing how changes in inputs affect outcomes. Failure to Validate: Not comparing model results with real-world outcomes. Ignoring Stakeholder Input: Missing critical insights and buy-in from key stakeholders.
Common pitfalls in cost modeling and simulation include: overlooking hidden costs, such as maintenance or training expenses; relying too heavily on historical data without considering future trends; neglecting to validate assumptions with stakeholders; ignoring uncertainties and risks that could impact cost estimates; and failing to update models regularly to reflect changing circumstances. Thorough data collection, stakeholder involvement, risk analysis, and periodic review are essential to avoid these mistakes and ensure accurate cost projections.
Begin your Cost modelling journey with a compass, not a map😉. Clearly defined objectives and scope serve as your North Star, guiding every decision. This clarity ensures your cost modelling efforts align precisely with your strategic goals. It is very easy to provide Modelling Cost Down ideas to the Procurement department, but they could do nothing with it. Understand whom you are working with and why.!
Common pitfalls to avoid in cost modeling and simulation include overlooking the importance of accurate data and assumptions, which can lead to misleading results. Failing to account for all relevant variables, such as labor, materials, and overhead, often results in underestimated costs. Additionally, relying too heavily on past projects without adjusting for current market conditions can skew predictions. It's also crucial to involve key stakeholders in the process; neglecting their input can result in misaligned expectations and project scope. Finally, not validating the model through sensitivity analysis can leave significant risks unaddressed, undermining the reliability of the simulation.
In the cost modelling landscape, tools are your allies, but choosing the right ones is an art. Pitfall alert: Don't fall into the trap of using tools for the sake of sophistication. Opt for methods and tools that align seamlessly with your objectives. This strategic selection ensures efficiency and accuracy and avoids the common mistake of drowning in unnecessary complexity. Thanks to my timely intervention in a project, I was able to save one of my previous organizations from selecting a sophisticated premium tool, whereas we needed an upgrade to our existing Macro-enabled Excel workbook.
Os Direcionadores de Custos, ou Cost Drivers, podem se deteriorar com o tempo, quando há complexidade na sua manutenção, principalmente na troca de equipe responsável, o que é normal ao longo do tempo, permitindo acúmulos de “gorduras” nas taxas, que com intuito de assegurar a lucratividade, tiram competitividade das vendas. É necessário um modelo simples e transparente, fácil de recriá-los, como se fosse uma página em branco, O foco do método escolhido deve, sempre, priorizar aumento das vendas. Crie um comitê permanente de custos, com os principais envolvidos, squads ágeis, para constantemente rever taxas e critérios, pois estes serão os fundamentos básicos para o seu modelo de decisão.
L'exactitude de la provenance des données doit être vérifiée avant toute analyse. Pour cela, il est nécessaire de faire le point avec chaque partie prenante qui alimentent les données et se mettre au clair sur la méthode d'alimentation des données. Une fois collectées, je m'assure toujours de vérifier qu'elles soient logiques. Par exemple, mes consommations d'une activité à l'instant T collecté, ne peuvent pas être inférieures à celles collectées le mois d'avant, ou alors cela s'explique par des données mal renseignées ou une opération à expliquer.
Garbage in, garbage out – A universal truth in cost modelling. Pitfall prevention 101: Prioritize the collection of high-quality data. Rigorous data analysis was my secret weapon against inaccuracies. Meticulously, I was analysing the input and output data again and again to make sure that we are giving garbage into the tool also that the numbers we are getting out aren't garbage too.
When managing uncertainty and risk in cost modeling and simulation, it is crucial to recognize that unpredictable factors can heavily influence project outcomes. For example, consider the construction of a renewable energy plant, where fluctuating raw material prices (like steel or solar panels) and environmental regulations can introduce significant risk. Monte Carlo simulations, for instance, allow analysts to run thousands of simulations, showing a range of possible outcomes and highlighting the probability of cost overruns. A 2022 study from Deloitte found that organizations employing Monte Carlo simulations saw a 20% improvement in their ability to predict and mitigate cost-related risks.
Some say change is the only constant, But I say Uncertainty is the only Certainty. In the unpredictable world of cost modelling, uncertainty is a constant companion. Pitfall alarm: Don't sideline uncertainties; instead, manage them. My experience taught me that there are no uncertainties if you are well advised. Now some say that there is still something that could go wrong, then they are uncontrollable, my friend. Don't get too much sucked up into controlling the uncontrollable rather be aware of the uncertainties and try to mitigate them.
Failure to account for uncertainty in cost estimates can lead to unrealistic expectations and unreliable results. It's important to incorporate uncertainty into your models through sensitivity analysis or probabilistic modeling techniques. Rather than assuming a fixed cost for raw materials, a simulation could incorporate uncertainty by using a range of possible costs based on historical data or market trends.
Communicate and present results
The final step in cost modeling and simulation is to communicate and present your results to your stakeholders. Your results should be clear, concise, and relevant to your objectives and scope. You should also explain the assumptions, limitations, and uncertainties of your model and simulation, and how they affect your results. You should use appropriate formats and media to communicate and present your results, such as reports, dashboards, charts, graphs, or tables. You should also use storytelling techniques to highlight the key findings, insights, or recommendations from your results, and how they can help your stakeholders make better decisions or actions.
Don't let your cost models gather dust in the digital attic. Pitfall caution: Neglecting effective communication. Craft compelling narratives around your results. Without narration, they are just numbers. Avoid the mistake of drowning stakeholders in technicalities; instead, present insights in a language that resonates. This approach ensured my hard work translated into actionable decisions and, of course, got me my deserving recognition.
One often overlooked pitfall in cost modeling and simulation is the temptation to rely solely on historical data or simplistic assumptions. Instead, I advocate for a holistic approach that considers both quantitative metrics and qualitative factors. By incorporating insights from diverse stakeholders and leveraging advanced analytical techniques, we can avoid the trap of oversimplification and capture the nuanced complexities inherent in any project. Additionally, it's crucial to remain vigilant against the trap of overconfidence in model accuracy. Constant validation and recalibration against real-world outcomes are essential to ensure the reliability of our predictions and guard against costly misjudgments.
Common pitfalls in cost modeling and simulation for engineering, project management, and energy projects include neglecting uncertainties, oversimplifying assumptions, ignoring stakeholder input, failing to update models, and underestimating implementation complexities. It's crucial to account for dynamic factors, validate data, engage stakeholders, and periodically review and adjust models for accurate forecasts and effective decision-making.
Before using a cost model to make a decision, it should be validated against historical data or real-world outcomes. For example, a cost model for a construction project should be validated against actual costs from similar projects.
EXPONENCIAR LUCRO É GIRAR A ESTRUTURA FIXA. CUSTOS VARIÁVEIS SÃO OS OUTROS QUE, BEM SEPARADOS, NÃO REPRESENTAM PROBLEMA ALGUM. A EMPRESA É CUSTO FIXO. Você sabia que a melhor forma de definir o que é variável ou fixo, é observar o comportamento variável ou fixo em relação às vendas do seu negócio? Isto supera as definições clássicas.
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