The Golden Rule of Being a Contractor
The fallacy that makes us bad at time estimates and how to fix it
There is one thing that all contractors (especially new ones) are very bad at. It’s one of the most challenging things to do properly, and the error is committed by both individuals and monolithic institutions — always and probably forever. Contractors are notorious for underestimating the amount of time it takes to complete a project.
I’ve been contracting for over seven years, and I — to this day — still make this mistake. It wasn’t until a few years ago, when I read a book that explains this false-estimation tendency in scientific terms, that I understood the phenomenon known as the “planning fallacy.” Here, we’ll look at how contractors can use it to their advantage to get paid more fairly, increase their income, and start providing better estimates based on the information at hand.
The inevitable problem: imperfect estimates
Unless you are some divine contracting guru, chances are you’ve been late on a project, and more than once. Late projects, especially in the professional world, are one of the biggest reasons business relationships go sour. Often, it’s not because of the client’s distaste for the late work (if you’re doing a fixed-price contract), but that you — the contractor — realize you spent way too much time on a project and feel, at the end, that the transaction wasn’t fair. Even worse is that you are really the one to blame, which can further damage your self-esteem as an independent person trying to make a living. Late projects and fast estimates inevitably cause considerable psychological pain. They can burn you out.
We imagine everything in a project going perfectly and use our impression as an anchor for our prediction.
If this has happened to you, the good news is you’re not alone. Everyone makes this mistake. In fact, even Nobel Prize–winning scientists do. In his brilliant book, Thinking, Fast and Slow, Daniel Kahneman documents his own bout with overly optimistic estimates, even after discovering the bias that’s to blame, the planning fallacy. The planning fallacy was first articulated in 1979 by Kahneman and Amos Tversky in a paper titled “Intuitive prediction: biases and corrective procedures.” Another aspect of the planning fallacy is that this error still exists even when the contractor (the one creating the estimate) has made the same mistake in the past.
Here is an excerpt from their 1979 paper:
The context of planning provides many examples in which the distribution of outcomes in past experience is ignored. Scientists and writers, for example, are notoriously prone to underestimate the time required to complete a project, even when they have considerable experience of past failures to live up to planned schedules. A similar bias has been documented in engineers’ estimates of the completion time for repairs of power stations (Kidd, 1970). Although this “planning fallacy” is sometimes attributable to motivational factors such as wishful thinking, it frequently occurs even when underestimation of duration or cost is actually penalized.
The planning fallacy usually manifests in the form of ignoring the likelihood of mishaps, accidents, and unpredictable yet probable events. For example, in a typical software development project there is a possibility of a developer or designer getting sick, having a family issue, finding multiple bugs, updates to frameworks, delayed feedback from a client, or even death of one of the assigned contractors. Although each of these cases may be unlikely, the likelihood of at least one of these incidents is actually very probable. The problem here is that our intuition almost always ignores these potential events — we imagine everything in a project going perfectly and use our impression as an anchor for our prediction.
Another problem with this brand of optimism is that even when we do give additional room for “slippage,” it is almost never enough because our initial impression still acts as a benchmark for this slippage. Kahneman and Tversky propose that in order to come up with better estimates, one must ask the external question, “How long do these projects usually take?” By taking yourself outside of the variables in the project, you’re able to see it from a more objective angle. Typically the longer the project, the more exact an estimate it requires, because of the higher risk involved.
The golden rule
It seems the planning fallacy leaves the contractor in a Catch-22 situation. If they increase the estimate, they’re afraid the client won’t buy — but if they reduce the estimate, they’ll get screwed. Here’s the good news: The planning fallacy only exists in the mind of person tasked to complete the work (the internal expert), not the person ordering it. In fact, studies show that the nonexpert actually overestimates the time it will take to complete a project. They practice what is known as the pessimism bias. This is huge insight for contractors, because it proves how increasing the length of time needed works out better for the contractor and the client. The contractor will have enough time to complete it, and the estimate won’t appear crazy to the client.
This brings us to our golden rule of contracting: Anchor your project estimates at double your intuitive estimate. This will always leave you much better off and reduce your likelihood of burnout, and you’ll be able to complete the project to a much more professional degree. Nobody wants an unfinished product, even if it’s cheap. They would rather have something that’s polished, something that has seen iteration and is either development ready or market ready, and doesn’t require hiring someone else to finish or correct your mistakes. By not budgeting enough time, we not only screw ourselves over, we screw the client over.
Optimistic estimates are greedy
When you estimate a tight deadline, you’re often doing it for the sale, which in a way is a form of greed. You want to close the deal, and you’re not thinking of the repercussions of inaccurately estimating the time you need to complete the project properly. In an hourly rate project, this is unethical, and in a fixed-rate project it’s uneconomical.
Moreover, there are multiple theoretical explanations for the existence of the planning fallacy, one being the authorization imperative. This theory proposes that optimistic estimates parallel the concept that it’s better to ask for forgiveness (for lateness), than permission (lengthy deadline). I’m sure every contractor has experienced this before. We estimate low so we can get the sale. This may work for an hourly bid, but if it’s a fixed price, we truly shoot ourselves, and possibly the business relationship, in the foot. Also, since you estimated low, it becomes very difficult in the future for you to bid high with that particular client. You’ve become a low-price commodity tool, not a high-delivering consultant.
So, whatever feelings you have of “giving the client a break,” or being generous for providing a tight frame, these are false. You are doing a disservice to both parties by giving an inaccurate estimate. This why our golden rule of contracting is better for both parties. Often, it’s better to be less optimistic. Prepare for the worst and hope for the best.
We all suffer from making bad estimates, whether it be the time it takes us to complete a short design assignment or the time a huge engineering and construction agency takes to build a bridge. It happens at the organizational level, government level, and personal level. An example of this can be seen in my native Toronto, where the Union Station redevelopment recently increased its total project budget by over $200 million and the deadline by almost four years. The planning fallacy is everywhere.
On the bright side, we also learned that outside observers are actually more pessimistic, and they typically overestimate the time it will take to complete a project. By using the double estimate golden rule, understanding averages, and asking outside experts, we can create healthier projections that are ultimately better for business. Imagine if space travel, civil engineering, or medical projects were not completed to perfection—the world would be chaos. Although there is no science of preparing the best and proper contract or estimate, it’s safe to say that creatives consistently undervalue their work. This can lead to exhaustion and contempt for the very thing they loved in the first place.