We are nearing the end of the general scope document (GSD) series with three topics remaining: project assumptions, the subject of this article, followed by cost estimates and cost benefits analysis, which will be combined into one article. The conclusion of this series will be a comprehensive case study showcasing what happens when the end user fails to develop a general scope document.
A project assumption is a documented fact, statement or interpretation that is not expected to change for the duration of a project. Assumptions are among the statements that a project can make to clearly set expectations.
Things happen, so one must expect the unexpected. Therefore, project assumptions are factors affecting the project that we believe to be true, but that we have not verified to be true. It is important to document our assumptions because there is a level of uncertainty associated with them, which introduces risk to a project.
Examples of project assumptions include time, labor costs, indirect costs and return on investment (ROI).
Time is the most significant cost-related assumption and one that is the most difficult to get right. Its significance lies in that most every other assumption relies, in part, on time. The difficulty lies in accurately determining the time a project will take from its inception to the final project deliverable. An inaccurate assumption has the potential to make almost every other assumption incorrect. For this reason, time assumptions are most often completed for each activity and totaled at the end. A time delay assumption of about 20 percent is then added to account for unexpected or unavoidable delays.
Labor cost assumptions include direct and indirect labor costs. Direct labor cost assumptions are based on the total number of hours each project team member is expected to work multiplied by an hourly wage. Indirect labor cost assumptions are based on time assumptions and wage expectations for administrative personnel who, while not responsible for a specific deliverable, support the project indirectly.
Labor costs for contractors/vendors must be considered. For third parties, labor cost estimates can be obtained by pre-bid inquiries to the respective vendors. To avoid underestimating labor, add a safety margin.
Indirect costs are most often considered as a group rather than as individual items. This group commonly includes utilities, equipment rental, vendor surveillance and, if appropriate, legal and audit assistance.
Miscellaneous expenses such as telephone and computer usage, parking for contractors, security, freight charges/permits must also be addressed.
Return on Investment
People tend to lose their jobs when overestimating the ROI. ROI is an expectation of the average annual return as a percentage of a project’s total cost.
ROI is crucial for large system expansions. Cost assumptions include total capital investment, average after-tax cost savings and average return on investment over a specific period. The capital investment includes the total cost of ownership over the asset’s useful life. Average after-tax savings are savings in time, labor and increased productivity. The average ROI is the average cost savings multiplied by the total capital investment.
Depending on your specific project, you may have additional variables to consider and include in your assumptions. Be cautious when calculating the ROI, as that is what upper management will be looking at and the reason they are “holding your feet to the fire” down the road.