414 Research on forecasting

Crespi, I., Pre-election polling: Sources of accuracy and They add a forecast of the remaining cost to the
error, (Russell Sage, New York), 1988. actual cost to date. The remaining cost is calcu-
lated by multiplying the calculated remaining
- J. Scott Armstrong unit cost by the remaining percent complete. The
two algorithms differ in how they calculate the
[Richard R. Lau, Department of Political Sci- remaining unit cost. One uses a linear projection
ence, Rutgers University, New Brunswick, NJ of to-date unit costs. The other uses a moving
08903, USA]. average with a number of periods that depends
upon the stability of the recent project per-
SSDI 0169-2070(94)00558-3
formance; the greater the stability, the more
emphasis is placed on recent trends. Teicholz’s
algorithms include refinements to address a num-
Paul Teicholz, Forecasting Final Cost and ber of technical complications. One, for exam-
Budget of Construction Projects, Journal of ple, attempts to use changes that have taken
Computing in Civil Engineering, 7 (1993), Sll- place in the final total budget to anticipate
529. further changes in project scope. Another, re-
duces severe fluctuations in early estimates of
How does one forecast the final cost of a con- remaining unit cost because such early data
struction project that is underway? Many cost cannot be considered representative.
reporting systems assume that construction work Actual cost and budget data from 121 projects
that has not yet started will be performed at were used to analyze the performance of the
budget and that the final total budget will be the algorithms. The data represents a wide range of
same as the current total budget. Some cost construction projects, performed under a variety
systems allow users to revise estimates for re- of contract forms, and completed over a 15 year
maining work and budgets. Teicholz observes period. The projects ranged in size from $10
that these assumptions are often unrealistic, and million to $250 million.
that users are frequently reluctant to revise their Teicholz compares the forecasting approaches
judgmental assessments regarding remaining on the basis of simplicity, accuracy, timeliness,
work when that might reflect over-budget con- and consistency. His main conclusions are that
ditions. As a consequence, cost-overruns are (1) there is a consistent bias to underestimate the
often underestimated until it is too late in the final cost of a project in the traditional cost
project to do much about them. The purpose of system, and (2) using a sliding moving average
this study is to describe a method for calculating can lead to improved forecasts during the most
a forecasting cost that is based upon data nor- critical early period of a project (before it is 50%
mally collected by a cost system. complete). The sliding moving average was
The problem that Teicholz addresses is distinct about 42% more accurate than the ‘current
from traditional time series forecasting in several practice’ forecasts. He used an area measure to
respects. First, the series have limited duration. accommodate measurements that are not equally
Next, the total to-date cost of a project cannot spaced. The improvement was a little better in the
be projected without relating the cost at a given most critical first half of a project. The linear pro-
time to the amount of the project complete at jection method produced a smaller improvement.
that time. In other words, time by itself cannot In a sense, this paper represents, in a new
be used as the basis for a forecast. Finally, context, the rediscovery of some important find-
project scope can change so that the relationship ings from business forecasting research. Simple
between earned budget and cost changes. mathematical methods perform well. For some
In this paper, Teicholz compares two algo- tasks, they are less subject to bias than human
rithms with the forecasts produced by the cost estimates. Recent data typically has a greater
system of a large construction contractor (Guy F. value than older data for forecasting purposes
Atkinson Co.). The algorithms are both simple. (hence the superiority of exponential smoothing
 Research on forecasting
and other methods that weigh recent data more
heavily than older data). Changes in the future
are likely to be like those that have taken place
in the past. Persistent trends are useful for
forecasting, unstable ones are not. What is most
interesting is how these basic principles are often
ignored in practice, and how their application can
produce substantial improvements in accuracy.
The problem addressed here is of potential
interest to a wide variety of forecasting research-
ers. Given that a simple moving average led to
improvements, what might happen if exponential
smoothing or other simple refinements were
employed? What about the use of learning
curves? What about combinations of forecasts?
How might judgement be effectively incorpo-
rated into the process?
- Fred Collopy
[Paul Teicholz; Dept. of Civil Engineering; Stan-
ford University; Stanford. CA 94305-4020,
USA]
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Michael D. Boldin, Dating Turning Points in the
Business Cycle. fozlrnal of Business, 67, 97-131
In order to analyze and then turn forecast
business cycles, it is necessary to identify the
turning points of those cycles. Boldin examines
the five most popular procedures for identifying
turning points, evaluates their historical perform-
ance, and analyzes the validity of the assump-
tions. Other characteristics of these procedures,
such as ease of replication, timeliness, and flex-
ibility are also considered. These procedures
differ substantially in the degree of technical
sophistication which is required.
The NBER Business Cycle Dating Committee
examines a large number of series and uses a
pragmatic approach for dating the turns. A
second method involves selecting specific rules as
applied to GDP such as “2 consecutive quarters
of negative output define the start of an official
recession.” Third, the Department of Com-
475
merce’s Index of Coincident Series may be used
to date the turning points. The last two ap-
proaches are technicalty more demanding. Stock
and Watson have derived a technique for cal-
culating the probability of a recession, which is
identified as the probabilities reach a specified
level for a period of time. Finally, there is a
Markov switching model which determines when
the economy has transitioned from a period of
growth to a recession.
All of the aforementioned methods exhibit
some difficulties in identifying peaks and
troughs. These problems range from real time
delays in identifying turns, revisions in data, the
identification of false cycles, and computational
difficulties. Most important, because there is no
consensus on the source and characteristics of
business cycles, Boldin concludes that the dating
of turning points requires some pragmatism and
judgment, and that there may always be some
uncertainty about the ‘true’ dates of the cycles.
For example, when these five methods were
applied to data relating to the 1990-1992 U.S.
business cycles, there was no consensus about
the date of the trough.
Boldin’s results demonstrate even after the fact
there may be difficulties in identifying turning
points. Consider how much more difficult it is to
recognize these events in real time and/or to
forecast them. (Some of the newer techniques
for forecasting turns are presented in Stock and
Watson, 1993.) Boldin’s findings reinforce previ-
ous forecast evaluations that document the large
errors that were made in the vicinity of business
cycle turns.
References
Stock J.H. and M.W. ‘Watson,eds., 1993, Business Cycles,
Indicators and Forecasting, National Bureau of Economic
Research, Studies in Business Cycles (University of
Chicago Press, Chicago).
- H.O. Stekler
[Dr. Michael D. Boldin, Federal Reserve Bank
of New York, 33 Liberty Street, New York, New
York 10045-OOOl]
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