How To Save Costly Project Engineering Time With This Innovative Application of Response Surface Models (RSM)

By Guest Author Nate Kaemingk

Lead engineers are incredibly overworked and their time is disproportionately valuable compared to some more junior engineers. But when it comes to doing project cost estimations, we don't have much of a choice but to ask some of these high-value engineers for the estimates if we want a realistic level of accuracy. Plus, the unfortunate reality is that many project costs end up being too high to justify the screening business case, so the project is canceled, and the high-value engineering time is wasted. I found a unique solution to this time sink using RSM to create a Ballpark Project Cost Estimator.

Not only did the ballpark estimator reduce engineering time spent on early phase projects, it also shortened the market opportunity evaluation timeline. This enabled a level of market opportunity screening that the organization had never experienced before. It ended up being an incredibly useful business tool that I wish more organizations had the benefit of using. I am excited to share the 5 steps to creating your own Ballpark Project Cost Estimator.

1. Build and Define Structured Cost Driver Definitions
Develop a list of items that are most likely to drive project cost. Things like new suppliers, re-use of new or existing product platforms, level of tear up/re-work, project timeline and so forth. 7-15 factors is probably reasonable. Then define very clearly what each scoring level of each factor would be. In one case, we used 1,3,9 ordinal scaling for each level, since that was the numbering we used habitually. In the example, we're using 1, 2, and 3. Any ordinal, interval or ratio scale of measurement can work as long as responses are defined clearly enough. Figure 1 shows a few examples of defined factor level descriptors.

Fig1 - Project cost driver factor level definitions
Figure 1. Project cost driver factor level definitions example. This is the recommended level of structure around each factor scoring level.

2. Survey Qualified Personnel
Once the structure around consistently defining scores is built, ask the project manager and chief engineer to score all of the projects which were run in recent history. We used projects from the last 5–7 years, but what your organization uses will depend on project length and reasonable confidence that people will remember well enough to score fairly.

3. Analyze
With the scores for each factor and the actual finance data for each project, use the Historical Data Model in Design-Expert® software. We're going to mostly use Numeric Factors with Discrete Responses at 3 levels. If you decide to define your inputs on a sliding scale, then you would do this differently.

Fig 2 - Historical data design
Figure 2. Historical Data Design for the sample project. We’re using 3 discrete levels for numerical factors to analyze the structured survey data.

In a real application, I found that I only had enough projects to build a linear model of the predicted expense for a given score of the twelve tri-level ordinal factors. In the sample, since I'm using fewer factors I have enough data for a higher-level model so I'm going to use it just because I can! Tip: when entering the design data, right click in the top left area of the data table and add a comments column. Or, select View > Display Columns > Comments. Put the project name in that column so that we can view it later on during the analysis phase.

In some real applications, there were some areas of the modeled space which had almost no data. But that is actually not a problem at all if we think critically about it. Since future projects will most likely look like projects that have been done in the past, there should be few projects that are in areas of the design space that don't have any data. Figure 2 shows one area of the model that illogically would cost less than zero dollars. This area has no actual data and illustrates this point.

Being aware of this limitation is why we implemented some of the process steps in step 5 around our understanding of the limitations of this tool. Figure 2 also shows the power of the crosshairs window view. It is showing that in the current area, the ballpark project cost is ~$6.5M, with a 95% CI Low of $3.5M and 95% CI High of $9.4M. That's a fairly wide range, but it's good enough to start a conversation about whether the project is worth investing in.

Fig 3 - RSM example
Figure 3. RSM screenshot of the sample data with cross-hairs window open from View > Show Crosshairs Window

4. Test and Add Supporting Information
Once we had the model built, we were able to compare the prediction of the model with some recent engineering project estimates—and they were freakishly accurate. We also added some additional capability when a model projection was made. We found that if you compare the product of all the products of the actual coefficient and factor scores (contrast that with the sum of products of actual coefficient and factor scores used for the Actual Equation), there was a nice correlation between the projects that all had similar scores. So we used that to do a reverse lookup and pull in which projects were similar. (Yes, there is a risk of two equally weighted factors being aliased, but we were OK with that since the use of the result is primarily subjective).

As a result, anytime someone used the model, it would spit out a projected value and a list of the projects that were the closest in terms of similar "product of product" scores. To use Design-Expert's built-in capability here, go to Display Options > Design Points > Show and the actual points you measured will show up on the interactive plots. This will also show the project name that you previously added to the comments column in the design data entry.

5. Develop Process that Supports the Intention of the Tool
In real-world use, we made sure to cover the limitations of the tool with careful consideration of its use within a process. When the tool was done, we knew what it was capable of, but also knew what it wasn't capable of. So we made sure to develop an appropriate process that supported when and where the tool was used. The tool was used early on in project chartering and market profitability analysis. We wanted to avoid ever having an engineer held responsible for a budget that came from the ballpark estimators, we only wanted to use them to reduce the number of weeks our highly talented engineers spent doing estimates that didn't require a high level of accountability.

With some very structured definitions of project cost driver characterization and Design-Expert software we were able to nearly eliminate the time that high-value engineers spent on early-stage project cost estimations. This enabled our product planning, strategy, and budgeting offices to speed up their early stage planning while reducing the load on our overtaxed engineers. We also built some process around the limitations of the tool to ensure that the organization wouldn't end up in a situation without clear lines of accountability. This is a great example of the many ways that DOE, RSM, and statistical methods can streamline business planning.

About the Guest Author
Nate Kaemingk is an experienced project manager, consultant, and founder of Small Business Decisions. He writes about business decision making and the unique business solutions that are possible by combining statistics with business. His focus is on providing every business decision-maker with access to clear, concise, and effective tools to help them make better decisions. For more information, visit his web site above, or e-mail him.