We assume that a contractor’s estimate has fat in it, and we assume that we need tough negotiation to squeeze it out.
The better the contractor is at estimating, the more this process hurts him, because he has nothing left to squeeze.
And in the end, it hurts the buyer as well: the only way the contractor has to survive is to cut quality.
And I immediately thought about the Prisoner’s Dilemma.
Let’s Break It Down
The contractor wants the job, as there’s money in it for him. When asked for the estimate, he would like the cost estimate to be as high as possible. His interest is also to inflate the number because he knows it will come down to negotiations in which the only thing on the table will be cost. He benefits from hiding the details of the work, because then he can charge more. The risk he’s facing is losing the job because the estimate is too high, or making too little money if the work is found out to be too big for the estimate.
Now on the buyer’s side. She wants the job done at the lowest price. In most cases, the buyer does not know how to do the job, otherwise she’d do it herself. (Or, if she’s outsourcing work she does understand, she’ll see through the estimate, if it’s too high). In that case, there can’t be negotiations on the content, but only the estimated cost. She want to pay as little money as possible, and she knows that the contractor is already beefed up the estimate, so there’s sure to be negotiations. It’s her interest to negotiate to reduce the cost. While she is in control until the decision, once committed, she risks entering into a bad deal. As Ron said, if the actual cost is lower, she will get worse quality than she expected.
So if we’re doing contract negotiations, here are the options that can happen
- Everything is going to be great and everyone is happy.
- The deal will be off because of a large estimate
- Settling on a lower estimate and risking quality problems
- When surprises come up, everyone is unhappy: The contractor will need to turn down other opportunities while continuing to work on the case, and the buyer will need to probably pay more than the agreed cost.
In my experience, option 1 doesn’t happen too many times. It happens much less than surprises in the process.
While both contractor and buyer have their self interest in higher priority, it is better for them to collaborate. If the buyer understands the work and risks, she can budget money to small increments of work, without committing to a huge deal with big risks. She can prioritize work and seeing the result. The contractor can display his expertise, and build trust with the buyer. Working together, they can uncover the risks and offer options to decide what to do when they get there. The trust between buyer and contractor allows for flexibility and better decision making. Through collaboration the value is greater for both sides.
If we drive our decisions based only on costs, we are closing options that can be more beneficial for both parties. Collaboration creates happier customers and good service reputation. We can make better decisions if we open our minds to alternatives.
#NoEstimates is about alternatives to estimates. I’m running my “Planning with #NoEstimates” workshop at Agile Testing Days 2015. If you want to learn more, you should come.