Rajiv Dua Bsc. (Eng), PMP: Managing Cost Overruns and Project Management
Rajiv Dua Bsc. (Eng), PMP: Managing Cost Overruns and Project Management
Today's AGENDA
Introductions Seminar Objective Seminar Content
Introduction to Project Management The Triple Constraint and the nine knowledge areas The processes of project Management Cost Overruns Some methods of overcoming Cost Overruns
Seminar Objective
To provide a basic understanding of the fundamental project management principles as per the Project Management Institute (PMI) with particular reference to the Triple Constraint. With this knowledge attempt to discuss Cost Overruns in projects and discuss some methods to overcome these opportunities.
Questions?
What kind of Cost Overruns do some of you think you have in your respective organizations? Why do you think this is or has happened?
What is a Project?
A project is a temporary endeavor undertaken to create a unique product or service or result
Project Attributes
A project has a unique purpose.
Every project should have a well-defined objective.
A project is temporary.
A project has a definite beginning and a definite end.
Project Attributes
A project should have a primary sponsor or customer. A project involves uncertainty
Project Manager
A Project Manager is the key to a projects success. Project Managers work with the Project Sponsors, Project team and other stakeholders involved in a project to ensure successful completion of the project.
Definitions
Project Manager Project Sponsor Project Team Members Functional Line Managers Stakeholders Internal and External Steering Committee
Project Characteristics
Four Key Characteristics
It is an answer to a business opportunity or problem
It has a specific objective...
Triggers of a project
Projects can be created to answer to a business opportunity or problem
It has a specific, usually time-sensitive objective... A project objective can be internally or externally triggered: Internal triggers e.g. a condition impacting the operation of an organization
high costs poor quality new products or services Efficiency of employees
WHAT IS A PROJECT ?
It is confined by definable boundaries
It has defined scope, budget, schedule... Boundaries defining a project include:
Scope: What IS and IS NOT included as part of the project
Budget : How much can be expended for direct and indirect costs
WHAT IS A PROJECT ?
It goes through distinct stages
It has a beginning, a middle and an end... From a project management perspective there are three main stages:
Initiation Execution Wrap-up
ongoing operations are focused on continuing support of an organization ongoing operations have long term strategies ongoing operations focus on multiple objectives ongoing operations dont (normally) end!!
Project Constraints
Every project is constrained in different ways by its scope, time goals, and cost goals. Scope: What is the project trying to accomplish? Time: How long should it take to complete the project? Cost: What should it cost to complete the project? These limitations are referred to as the Triple Constraint of project management.
Managing the triple constraint means making trade-offs between project scope, time and cost goals for a project.
Project Constraints
Stakeholders: The people involved in or affected by the projects activities. These include the the project sponsor, project team, support staff, customers, users, suppliers and even opponents to the project.
Knowledge Areas: the NINE key competencies that project managers must develop.
Scope Management: involves defining and managing all the work required to successfully complete the project.
Time Management: includes estimating how long it will take to complete the work, developing an acceptable project schedule, and ensuring timely completion of the project.
Cost Management: consists of preparing and managing the budget for the project.
Quality Management: ensures the project will satisfy the stated or implied needs for which it was undertaken.
HR Management: concerned with making effective use of the people involved with the project.
Comm. Management: involves generating, collecting, disseminating and storing project information.
Risk Management: includes identifying, analyzing and responding to risks related to the project.
Procure. Management: involves acquiring or procuring goods and services that are needed for a project from outside the performing organization.
Project Mgmt. Integration: is an over-arching function that affects and is affected by all of the other knowledge areas. (This is where it is all brought together.)
Tool and Techniques: these assist the project managers and their teams in carrying out the management functions of the 9 Knowledge Areas. Examples of these include WBS Diagrams and Gantt Charts.
The first two phases focus on planning and are often referred to as project feasibility. The last two phases focus on deliverables and are often referred to as project acquisition.
Concept Phase
A high-level or summary project plan is developed to briefly describe the project and why it is needed. A rough cost estimate is developed. A rough overview of the work involved is developed in a work breakdown structure format.
Work Breakdown Structure (WBS): an outcome oriented document that defines the total scope of the project.
At the concept level the WBS document breaks the work tasks out to no more than three levels (3 level WBS).
Implementation Phase
Project team delivers the required work. A very accurate cost (or final cost) estimate is developed. This phase is where the bulk of the projects time and money should be spent.
This phased approach minimizes the time and money spent developing inappropriate projects. A project must pass the concept phase before continuing into the development phase and so on.
Organizational Frames
Project managers often do not spend enough time understanding the political context of a project in an organization.
To improve the success rate of IT projects, project managers must develop a better understanding of people and organizations.
Organizational Structures
Most organizations focus on the structural frame.
Most people know what an organizational chart is and can follow them. New managers typically try to change the organizational structure when other changes are needed, and to carve out their piece of the pie.
Organizational Structures
Functiona l
little or none
Matrix Weak
limited
Project Strong
moderate to high 50-95% high to almost total 85-100%
Balance d
low to moderate 15-60%
Percentage of performing organizations personnel assigned full-time to project work Project managers role Common title for project managers role
virtually none
0-25%
Process Groups
Initiating processes:
These processes are used to initiate every phase of the project life cycle including the close-out phase. In the concept phase it is used to define the business need for the project, the project sponsor, and the project manager. To end a project the initiating processes are used to ensure that all work is completed, the customers acceptance of the work, the lessons learned document is created and that resources are reassigned.
Planning Processes:
Used to devise and maintain a workable scheme to accomplish the business need that the project was to address. Project plans are created to define each knowledge area as it relates to the project at that point in time. (As the project travels through its life cycle.)
The processes are also used to account for changing conditions on a project and in an organization, project plans are often revised during each phase of the project life cycle.
Executing processes:
These process are used to ensure the coordination of people and other resources follow the project plan and produce the deliverables of either the project or the phase that the project is currently in. Executing processes include: developing the project team providing leadership verifying project scope assuring product quality disseminating information procuring resources and delivering the work.
Controlling processes:
These processes are used to ensure that the project objectives are met. Projects must be continually monitored and their progress measured against the project plan to ensure corrective actions are taken when necessary. Controlling processes include performance and status reviews. Controlling processes are also used to follow project changes and ensure that the changes are identified, analyzed and managed in accordance with the project plan.
Closing processes:
These processes are used to formalize the acceptance of the project or phase and bring it to an orderly end. This often involves archiving project files, documenting lessons learned and receiving formal acceptance of work delivered.
These phases are not discrete, one-time events, but occur at varying levels throughout every phase of the projects life cycle, and even vary in activities and time for each separate project.
Closing
Cost
Cost control
Quality control
Administrative closure
Procurement
Contract closeout
Project Integration Management - the processes involved in coordinating all of the other project management knowledge areas throughout a projects life cycle. The main process involved in project integration management include:
Project Plan Development Project Plan Execution Integrated Change Control
This diagram shows how project integration management pulls together and focuses the knowledge areas throughout the projects life cycle and guides these elements toward successful completion.
Project integration management must occur within the context of the whole organization, not just within a particular project but on-going operations
Project managers must always view their projects in the context of the changing needs of their organizations and respond to requests from senior managers. Project integration management involves integrating knowledge areas within the project Integrating different areas outside the project.
Project Charters
After deciding what project to work on, it is important to let the rest of the organization know. A project charter is a document that formally recognizes the existence of a project and provides direction on the projects objectives and management. Key project stakeholders should sign a project charter to acknowledge agreement on the need and intent of the project; a signed charter is a key output of project integration management.
Scope planning
Involves creating documents that detail the basis for future project decisions, including the criteria for determining if a project or a phase is completed successfully Output of the scope planning process
Scope statement Scope statements supporting detail Scope management plan
A good practice is to develop a preliminary or initial scope statement during project initiation and a more detailed scope statement as the project progresses.
Plans should first and foremost guide project execution by helping the project manager lead the project team and assess project status.
Project Execution
Project execution involves managing and performing the work described in the project management plan.
The majority of time and money is usually spent on execution.
Many people have a poor view of plans based on their experiences. Top managers often require a project management plan, but then no one follows up on whether the plan was followed. For example, one project manager said he would meet with each project team leader within two months to review their project plans. The project manager created a detailed schedule for these reviews. He cancelled the first meeting due to another business commitment. He rescheduled the next meeting for unexplained personal reasons. Two months later, the project manager had still not met with over half of the project team leaders. Why should project members feel obligated to follow their own plans when the project manager obviously did not follow his? Could this cause cost overruns?
Figure 5-4. Intranet Gantt Chart Organized by Project Management Process Groups
Scope Verification
Scope Verification This involves formal acceptance of projects scope by the stakeholders. To receive this acceptance the project team members must develop clear documentation of the projects products and procedures for evaluating those products.
The following table shows the Top 10 factors that cause problems for IT projects.
Rank
1 2 3 4
Technology incompetence
Lack of resources Unrealistic expectations Unclear objectives
5
6 7 8
9
10
Project Management
Most project managers state that scheduling issues are the main reasons for conflicts during a projects life cycle.
0.30
Schedules
End Phases
One of the reasons that schedule problems are so frequent is due to the time it takes to perform respected tasks that are underestimated.
Once the project schedule is in place schedule performance can be calculated by subtracting the estimated time for completing a task, from the actual time it really took to complete.
However, one of the things to keep in mind when doing this, is to include the approved changes or (changes to the baseline) to the calculation. This usually reduces the gap between the estimated and the actual times.
For project managers, time is the least forgiving, and least flexible variable in the project.
Time cannot be stopped, no matter what changes have been requested, what resource conflicts are occurring, or what problems have been encountered.
Activity definition.
This involves identifying the specific activities that the project team members and stakeholders must perform to produce the project deliverables. In some projects identifying all of the tasks is a feat unto itself. Therefore it is very important to ensure that as many as possible are identified, because those that are missed will ultimately throw the project of schedule.
Schedule control.
This involves controlling and managing the changes to the projects schedule. This is where the law gets broken, and most often this is where the proverbial back of the project gets broken.
Activity Sequencing
There are three basic reasons for creating dependencies, often called the types of dependencies, among project activities. They are:
Mandatory dependencies. Discretionary dependencies External dependencies
The construction of a network diagram is fundamental to determining the overall project completion date. Gantt charts display planned and project schedule information but dont display relationships between tasks and dependencies. A network diagram displays dependencies and is required to perform critical path analysis.
Critical Path Method predicts total project duration and allows project managers to make trade-offs where necessary.
If the project manager knows that one of the projects tasks is behind schedule then they can decide what to do about it. For example:
Should they try to renegotiate the schedule? Should they allocate more resources to make for lost time?
Slack
One of the techniques that allow project managers to make these trade-offs is by determining the free slack and total slack for the project.
Free slack is the amount of time an activity can be delayed without delaying the early start of any immediately following activity. Total slack is the amount of time an activity may be delayed from its early start without delaying the planned finish date.
Build C Dur = 30 Critical Path = 10 + 25 + 30 + 15 = 70 days Clearly, Design is on the Critical path since future activities Cannot proceed unless the design is completed The Critical path is the longest path through the project and also when the schedule is least flexible
With this technique it is important to be aware of how the tasks in the schedule affect one another, and to be able to determine which tasks can be fast tracked due to a low risk of potential problems further down the schedule.
The main advantage of fast tracking is a shortened project schedule. The main disadvantage is that unforeseen problems with performing some tasks to soon can greatly lengthen a project schedule. (E.g.. Overlapping or being to anxious)
Assignment
From your WBS/Activity list in PDM format the Sponsor has asked you because of financial constraints to bring back the date of your current end date by 2 weeks thus saving the company resource costs. Is this possible? Alter your PDM to reflect this.
Multitasking Example
PERT Analysis
The PERT analysis method is based on a project network diagram, normally the PDM method, and a weighted average for each project task is calculated using the following formula:
PERT weighted average
PERT applies the critical path method to a weighted average duration estimate. It involves more work because it requires several duration estimates.
Example:
PERT weighted average = 8 workdays + 4 X 10 workdays + 24 workdays = 12 days 6 where: optimistic time= 8 days most likely time = 10 days pessimistic time = 24 days Therefore, youd use 12 days on the network diagram instead of 10 when using PERT for the above example.
*The Standish Group, Latest Standish Group CHAOS Report Shows Project
It is important to spend money up-front on IT projects to avoid spending a lot more later.
*Collard, Ross, Software Testing and Quality Assurance, working paper (1997).
RESOURCE PLAN JB
Pr o ject
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A nalyst
EFFORT WE
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BN
Junio r
JJ
KG
A nalyst DAY S
JB
Pr o ject M anag er
RR
B usiness A nalyst
RT
B usiness A nalyst
TY
B usiness A nalyst
WE
B usiness A nalyst
COST BN
Junio r A nalyst
JJ
T echnical Sp ecialist
T echnical Pr o g r ammer T OT A L
ACTIVITY/TASK Project Charter Requirements Defintion Review Documentation Interview Stakeholders Document Inital Findings Conduct Focus Groups Prepare Requirements Document Finalize Deliverables Phase Total Systems Design Logical Design Physical Design Design Review Meetings Finalize Design Criteria Phase Total Quality M anagement Process Review QM Processes Track to ISO 9002 Standards Prepare QM Review Report Phase Total
M anag er
A nalyst Sp ecialist
5.00
5.00
4,500.00
$5,000.00 $6,500.00 $1,050.00 $6,500.00 $3,500.00 $6,000.00 $1,000.00 $4,000.00 $5,000.00 $2,000.00 $700.00 6,000.00 1,000.00 4,000.00 17,000.00 22,000.00 8,000.00 5,250.00
1.00
2.00 2.00
$500.00
800.00 800.00
1.00
500.00
1.00
5.00
1.00
5.00
TOTAL RESOURCES/COSTS
36.00
2.00
57.00
65.00
22.00
35.00
30.00
47.00
294.00
32,400.00
PROJECT MANAGEMENT
Use a systematic approach Use multiple estimators Document assumptions and techniques used
This inaccuracy is even more prevalent in IT projects involving new technology and software as there are no previous historical examples to compare with. There are typically four reasons attributed to inaccurate cost estimates.
Before the project begins a rough order of magnitude (ROM) budget estimate should be prepared. This estimate is followed by a more accurate (typically higher cost) budget estimate.
Something to consider
As with schedule management the project manager must insist and ensure that proper cost estimates and analysis be performed before the project begins and that the definitive estimate needs to be revised and updated as necessary throughout the project
To overcome these problems project managers and senior managers must review the cost estimates given to them by team members and ask questions to make sure the estimates are not biased. (I.e.. Get stakeholders or team members involved).
Cost Budgeting
India: As many as 274 projects currently under implementation in the Central sector are suffering serious cost and time overruns.**
Pakistan: Pakistan has sustained a cost overrun of Rs 1.798 billion (over $30 million U.S. dollars) in the execution of the 66.5 megawatt Jagran Hydropower Project in the Neelum Valley.*** United States: Northern California lawmakers were outraged over Governor Arnold Schwarzenegger's announcement that commuters should have to pay construction costs on Bay Area bridges. Maybe it takes the Terminator to help control costs!****
*Songini, Marc L., Australian Firm Wrestles With ERP Delays, ComputerWorld (July 12, 2004). **Srinivasan, G., 274 Central sector projects suffer cost, time overruns, The Hindu Business Line (May 4, 2004). ***Mustafa, Khalid, Rs 1.8 billion cost overrun in Jagran hydropower project, Daily Times (November 19, 2002). ****Gannett Company, Governor Refuses to Pay for Bay Bridge Cost Overruns, News10 (August 17, 2004).
Cost variance (CV): this is the budgeted cost of work performed (EV) minus the actual cost of work(AC) performed.
Cost Variance (CV) = EV AC
Schedule variance (SV): this is the budgeted cost of work performed (EV) minus the budgeted cost of work scheduled (PV).
Schedule Variance (SV) = EV PV
Rate of Performance
Rate of performance (RP) is the ratio of actual work completed to the percentage of work planned to have been completed at any given time during the life of the project or activity. Brenda Taylor, Senior Project Manager in South Africa, suggests using this approach for estimating earned value. For example, suppose the server installation was halfway completed by the end of week 1. The rate of performance would be 50 percent (50/100) because by the end of week 1, the planned schedule reflects that the task should be 100 percent complete and only 50 percent of that work has been completed.
Once the overall earned value is determined the CPI for the project can be used to determine the estimate at completion (EAC).
If in the previous example the original budgeted cost for the project was $250,000 then the EAC for the project (after the first week only) would be: EAC = $250,000 / 50% = $500,000
Earned value management analysis is the primary method available for integrating performance, cost and schedule data.
This makes it a powerful tool for project managers and senior management to use as in evaluating project performance. To help alleviate the problems with performing an EVM the organization can make it simpler by requiring that the EVM be calculated for only the summary tasks.
What Is Quality?
Quality: The conformance to requirements and fitness for use.
Conformance to requirements meeting project processes and products to specification Fitness for use computer missing parts
Quality (Another Definition): The characteristics of work performed or items produced that exceeds the explicit, and implicit, requirements expected by the customer.
Quality Control
Quality Control involves monitoring specific project results to ensure that they comply with the relevant quality standards as outlined in the quality management plan. The main goal is to improve quality. There are three main outputs:
Process adjustment
This might include such actions such as purchasing and implementing a new server to improve response time
shutting down an assembly line more often to perform preventative maintenance and retooling on the equipment. (Shutdown Syncrude)
Six Sigma
In this diagram the ovalshaped phases represent areas where you should do testing to help ensure quality on software development projects. By quality auditing and testing the customer should meet his/her acceptance criteria
Improving Quality
Improving Quality
There are five major cost categories related to quality, including:
Prevention Cost:
Preventative actions such as training, detailed studies, and quality surveys all fall under this cost category.
Appraisal Cost:
Inspection, product testing, equipment maintenance, and reporting inspection data all contribute to this cost category.
Improving Quality
Internal Failure Cost:
Scrap, rework, late payment charges, and inventory costs that are a direct result of defects are all included in this category.
Roles
Provide overall direction and decision making to the project
Responsibilities
Meet monthly Review status reports Consider and resolve decision requests Represent peer groups Accept deliverables Acquire project resources Prepare monthly status reports Identify and resolve project issues Manage project activities Develop project plans Coordinate all team activities
Project Manager
Develop design concepts Manage design team activities Deliver project design documents Ensure design compliance with regulations and codes
Risk management
Involves identifying and measuring the risks associated with a project The major components of risk management
Risk management planning Risk identification Qualitative risk analysis - Probability and Impact Quantitative risk analysis Assessing risks on objectives Risk response planning Risk monitoring and control
Risk Management
Questions that might be asked when addressing the Risk Management Plan.
1. Why is it important to take or not to take this risk wrt project objectives? 2. What is the specific risk? 3. How will the risk be mitigated? 4. Who is responsible for the Risk Management Plan 5. When will the milestones associated with the mitigation approach occur? 6. What are resources that are required to mitigate the risk?
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*Kulik, Peter and Catherine Weber, Software Risk Management Practices 2001, KLCI Research Group (August 2001).
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Risk Identification
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Procurement Management
Many organizations are turning to outsourcing to:
Reduce both fixed and recurrent costs and hence cost overruns. Outsourcing vendors are often able to use economies of scale to their advantage. Allow the client organization to focus on its core business.
Procurement Management
Access skill and technologies. Organizations can often gain access to special skills and technologies when they are required by using outsourced vendors. Provide flexibility. Outsourcing can provide extra staff during peak workloads which is more efficient and more economical then trying to find resources internally within the company. Increase accountability. A well-written contract can clarify responsibilities and sharpen focus on key project deliverables.
Contract Types
Fixed price or lump sum contracts Time and Materials cost plus incentive fee cost plus fixed fee cost plus percentage of costs
Canadian Firearms Program: Planned cost: $119 m Final cost: $1bn International Space Station : Planned cost: $8bn Final cost: $26bn Channel Tunnel: Planned cost: 4.9bn Final cost: 10bn Concorde: Planned cost: 90m Final cost:1.1bn
In India of 617 infrastructure projects, only 149 were faced with cost overruns amounting to 22.2% with respect to the latest approved estimates
The cost overrun has come down from 62% in March, 1991 to 20.7% in September, 2004
Reserves
Reserves are funds included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict. There are typically two types of reserves:
Contingency reserves: this reserve allows for future situations that are partially planned for.
Known - Unknowns
Management reserves: this reserve allows for future situations which are unpredictable.
Unknown - Unknowns
Subcontractor overruns
Ensure a bidder for a RFP understands the context of the business of the buyer (customer) before they bid on the contract to ensure that they are aware of the what they are getting themselves into which may provide a better estimate to the buyer thus removing the escalation of cost overruns As a buyer try and obtain a Fixed Price contract as much as possible. This will ensure that the risks are taken on the bearer for that deliverable
Material Overruns
Try and order ahead for delivery by suppliers. This will ensure that your product or service will be in stock. Discourage pickup of material by your personnel. It bleeds profit and uses up labor hours. By allotting some time on a regular basis cross check supplier prices. Choose some frequently ordered materials and get prices to see where you should be buying from
Material overruns
get multiple prices on large material orders ask for discounts on materials you buy frequently and in large quantities. Often just asking will reduce your costs. Learning Curve theory
References
A Guide to the Project Management Body of Knowledge PMBOK 2004 (Body Of Knowledge) Project Management Institute Information Technology Project Management 4th Edition Kathy Schwalbe Project Management: A Managerial Approach, 5th Edition- Jack R. Meredith, Samuel J. Mantel, Jr