Rent total cost prediction

Question

I have a project management course now. One of points of my project requires me to rent a territory, and I need to include its cost in the project's total cost.

The first thing I thought was to count project's total time and multiply it by monthly rent ($6000). But the professor says the project may crash before finishing, so I can not allocate so much money from the start of the project, and there should be another way.

What is the right solution for this problem? How can I predict total cost of renting?

Answer 1

Your professor's wrong. Would you do that for any other cost? For the cost of labor? What happens if the project continues? Do you tell your customer, 'oh sorry, we thought the project would fail so we're going to need another $52,000 for rent'??

There is always uncertainty in estimates, more uncertainty with some things than others. For rent, especially since you seem to know the exact monthly amount, there is little uncertainty of what rent will cost for your targeted duration. There's always risk the project will cease before it finishes, but you cannot build that savings into the project's budget. Instead, because of this uncertainty, you may build in some cost contingency to cover the expense to get out of your lease early.

The only time I can think of loading something less than the $6K/month is when you think you might get a better deal at some stage in the future. You can use expected value calculations to load that possible savings in.

If you are able to put under contract the project using a progressive elaboration process, then you can firmly load the rent expense for the first portion of the project, then load the rest as you move along; however, you would still provide a target in the way of a rough order of magnitude (ROM) for the elements under future elaboration.

Answer 2

I agree with David, your Professor's wrong. Using that approach, you would never be able to estimate anything given that there are always risks to every aspect of the project.

To take it a bit further (and illustrate where he's wrong) - okay, so you cut back on the rental estimate and crash the project. Where does the extra money for crashing come from? Or, what if the project doesn't crash and now you haven't got enough budget for the rental? Or what if your project goes a month longer than planned, but you budgeted on potential crashing? Now you're not a month overbudget, you're X months over-budget.

It sounds like he's confusing budgeting with risk management.

FWIW, you NEVER estimate or budget based on the project going FASTER than expected. :)

So how do you correctly predict cost? You estimate, plan and budget to "most likely" scenario, and then add or adjust contingency based on risk identification and likelihood.

Answer 3

Like others, I'm uncomfortable with the term "crash", but I'll reason from the premise that the Professor's point is that the duration of the project may vary from the initial estimate. (either because the project fails, or because the PM is urged to crash the project and reduce the estimated duration) The other thing the prof said that seems significant is that " I can not allocate so much money from the start"

If the PM is less than confident (i.e. uncertain, i.e. risk), about the duration of the project, then I forsee the following options.

1. Rent on a month to month basis, probably increasing the rent fee, but permitting early termination and potentially allowing allocation of less funds up front (which aligns with what the Professor said, but doesn't make a whole lot of sense).
2. Negotiate an early release clause in the rental contract - probably increasing the cost, but reducing the ultimate risk that we'll be forced to pay rent on the territory after project closure.
3. Prepare some sort of a sublease option - this seems dicey and way more creative than a homework project
4. Transfer risk in some other way? Insurance?
5. Divide the project into smaller sub-projects. Scope out a two month sub-project/sprint, and rent for that period, with an option to extend the rent.

The last seems to be the most likely, but relies on information that the querent did not provide.

I'd be interested to learn the answer when the Professor provides feedback.

Answer 4

Match the 'uncertain' end dates with a variety of options that will give the user the information they need to make their own decision.

For example:

Costs based on the project lasting:

3 months: fixed 3000 + rent $600 * 3 = $4,800 total
6 months: fixed 3000 + rent $600 * 6 = $6,600 total
12 months: fixed 3000 + rent $600 * 12 = $10,200 total
24 months: fixed 3000 + rent $600 * 24 = $17,400 total

If the project length is unknown but there are monthly fixed fixed costs the of course the total is 'unknown' However that doesn't mean that a business person will not ask the question. They frequently will ask such 'seemingly impossible' questions but then it's our task to think about what they need for their decision and give it to them.

Answer 5

Knowing how academic questions are sometimes phrased I wonder if the Professor is, actually, testing your estimation abilities more generally. What he/she may really be looking for is the overall variance in your project schedule which can then be used as a basis for budgeting on a best-case basis.

For example, if you have said that your total project schedule is 12 months correct to +/- 50% then the Professor might want you to say that you should only budget for 6 months of rent since this is minimum time you expect the project to be completed in. Have a look at three-point-estimation as one means of achieving a probabilistic range of estimates.

However, other respondents' points on the reality of real estate contracts (i.e. longer contracts will probably have lower monthly costs, and early termination might mean penalty costs) does make me think that this would, in the real world, offer relatively little benefit (unless you get a massive bonus for completing early?)