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COST CONRTROL MONITORING AND ACCOUNTING

Cost control involves processing of cost accounting reports received from various responsibility centres or operating divisions, relating the cost incurred with standards, analysing the reasons for variances, and presenting the results of monitoring to the project management for making decisions for the future and not of the past.

In construction projects, generally there are two parties whose investments are involved-clients and contractors.

Client involvement starts with his decision to go a head with the project. His expenses continue during design, execution and commissioning stages. After taking into consideration the contract commitments, escalation and contingencies, he formulates his cost budget for the project.

He plans his cash flows and employs an individual or a small group to monitor costs, so as to keep the costs within the budgeted limits and to meet the cash-flow requirement of the project.

Contractor executes contracted works and it is he who bears the cost of input resources and site expenses include the cost of men, materials, machinery and capital. He also incurs expenditure on interest on loans, statutory payments, insurance, depreciation and so on.

Cost control preliminaries

1. Cost control approach: It is to simplify and implement, without creating any interdepartmental and interpersonal conflicts.

Maximisation of profits is generally the main motto of the contractors, the contractors cost control system can be designed to control each stage of accounting operations that contribute to profit. These stages are:

Stages in profit Computation Nature of Control

A. Sales income Sales control B. Less direct cost Direct cost control

C. Gross margin (A-B) D. Less variable overheads Variable overheads control

E. Contribution (C-D) Contribution control F. Less fixed overheads Fixed overhead control

G. Operating profit (E-F) Budgetary control

2. Control Estimates: For cost control, it is necessary to have a master control estimate for establishing overall cost control. It is prepared during planning stage itself. It is made of direct costs, indirect costs and funds allocated for contingencies and escalation.




3. Cost Planning: Cost breakdown levels can be divided as:

Level Scope Cost control responsibility 0 Total project cost Cost accountant 1 Sub-project cost Cost accountant 2 Task/logistics Respective managers/

Contractors /functional heads 3 Work-package costs Cost centres

The costs at each level may be divided into the following cost elements: a) Direct manpower costs-Salary, wages and other costs b) Direct material at-site delivered costs c) Direct equipment, plant and services cost. d) Sub-contract costs e) Indirect on-site costs- variable, fixed f) Indirect external costs- head office overheads, management related and commercial fixed and

variable costs.

4. Budgeting Costs: For control and monitoring purposes, the original detailed cost estimate is typically converted into a project budget. Definition: The project budget is the well co-ordinated management approved financial plan of operations, indicating the amounts required for achieving assigned targets, and the expected receipts from sales or the value of work done.

A project budget reflects the financial plan of the operations, divided into responsibility centres with specific goals clearly outlined along with the costs expected to be incurred.

The primary purpose of having a budget is to assign financial targets and resources to each responsibility centres, to co-ordinate their activities, to form the basis for controlling programme, and to make the participant’s cost consciousness instead of purposeless routine working. The base of the budget is the project plan and its schedule of work.

In a construction project, the client and the contractor have separate budgets.

The client’s construction budget is primarily a capital budget designed to formulate time-phase funds requirement and the sources from which these funds are to be provisioned. It also includes the expenditure on procurement of land, consultant fee, contractors, payment etc.

The contractor’s budget is resources, cost and sales income oriented budget. It includes income and expenditure statements, cash flow, balance sheet etc.

Importance of Project Budget:

1. It is essentially a planning document. It outlines the financial plan of the project. 2. It specifies the future financial course of action for steering the project. 3. It specifies a standard for measuring effectiveness and efficiency with which activities are to be

performed.




4. It is a financial commitment for actions, an instrument for allocation of responsibility, a means of communication, an aid for co-ordination, a tool for motivation, an authority for implementation and a device for controlling performance.

5. A project without a budget is like a missile without guidance system or a ship without navigational instruments.

Problems in Forming the Project Budget:

1. One particular problem in forming a project budget in terms of cost accounts is the inclusion of contingency amounts [funds to cover incidental, unforeseen expenses]. These allowances are included in project cost estimates to accommodate unforeseen events and the resulting costs. However, in advance of the project completion, the source of contingency expenses is not known. Realistically, a budget accounting item for contingency allowance should be established whenever a contingency amount was included in final cost estimate.

2. A second problem in forming a project budget is the inclusion of inflation. Typically final cost estimates are formed in terms of real rupees, and an item reflecting inflation cost is added on as a percentage or lumpsum. This inflation allowance would then be allotted to individual cost items in relation to the actual expected inflation over the period for which costs will be incurred.

Commonly Used budget monitoring parameters are the following:

a) Budget Cost of Work Scheduled (BCWS): It represents a time phased schedule of the budget. b) Budgeted Cost of Work Performed (BCWP): It shows the approved cost of the work performed on

data date. c) Actual Cost for the Work Performed (ACWP): Cost incurred on accomplishing a work on data date.

Cost variance (CV) = BCWP-ACWP

Schedule variance (SV) = BCWP-BCWS

Cost performance index (CPI) = BCWP/ACWP

Schedule performance index (SPI) = BCWP/BCWS

BCWP-ACWP Cost variance % = x 100

BCWP

= CV x 100 / BCWP

BCWP - BCWS Schedule variance % = x 100

BCWS

= SV x 100 / BCWS




In addition to cost amounts, information on material quantities and labour inputs within each job account is also typically retained in the project budget. With this information, actual materials usage and labour employed can be compared to the expected requirements.

Cost accounts may vary according to the project. These accounts record all the transactions associated with project.

Examples of Project Cost accounts

Clearing and Preparing Site 1. Substructure

i) Excavation and Shoring ii) Piling iii) Concrete masonry iv) Mixing and placing v) Formwork vi) Reinforcing

2. Outside utilities (water, gas, sewer, etc.) 3. Superstructure

i) Masonry ii) Structural steel iii) Wood framing, partitions, etc. iv) Exterior finishes (brickwork, terracotta, cutstone,

etc. v) Roofing, drains, gutters, flashing, etc. vi) Interior finish and trim

a) Finish flooring, stairs, doors, trim b) Glass, windows, glazing c) Marble, tile, terrazzo d) Lathing and plastering e) Soundproofing and insulation f) Finish hardware g) Painting and decorating h) Waterproofing and insulation i) Sprinklers and fire protection

vii) Service work a) Electrical work b) Heating and ventilating c) Plumbing and sewage d) Air conditioning e) Fire alarm, telephone, security, miscellaneous

4. Paving, curbs, walks 5. Installed equipment (elevators, revolving doors, mailchutes,

etc.) 6. Fencing




Example of Project budget for a Constructor:

This budget is developed from a project to construct a wharf. The costs are divided into direct and indirect expenses. Within direct costs, expenses are divided into material, subcontract, temporary work and machinery costs.

Material cost (in crores)

Subcontract work

Temporary work

Machinery cost

Total cost

Steel piling 292,172 129,178 16,389 0 437,739 Tie-rod 88,233 29,254 0 0 117,487 Anchor wall 130,281 60,873 0 0 191,154 Backfill 242,230 27,919 0 0 300,149 Coping 42,880 22,307 13,171 0 78,358 Dredging 0 111,650 0 1,750 111,650 Fender 48,996 10,344 0 0 61,090 Other 5,000 32,250 0 0 37,250 Sub-total 849,800 423,775 29,560 1,750 1,304,885 Summary: Total direct cost = 1,304,885 Indirect cost: Common temporary work = 19,320 Common machinery = 80,934 Transportation = 15,550 Office operating costs = 294,458 Total indirect cost = 410,262 Total project cost = 1,715,147

5. Measurement of Cost Performance:

Project earned value, depending upon the nature of the project, can be measured in one or more of the three parameters:- i.e. cost, work hours and quantity of work done. Its progress is expressed in percentage:

Budgeted cost work performed Project progress (%) = X 100

Budgeted cost of total project

6. Cost Reports:

The cost reports of construction/production centres should reflect a comparison of standard and actual costs. In case of functional departments, cost comparison should be made between budgeted and actual costs.

The project cost controller monitors the responsibility centre cost reports. He updates the project budgeted costs, changes order, keeps track of variations in control estimates, and forecasts the trends pertaining to the remaining project costs.

7. Management Role in Cost Control:

Cost control can be called effective if the management: Implements efficient cost control procedures and systems.




Develops and updates the control estimates. Analyses cost trends to discover potential cost problems and takes remedial measure to control

cost. Encourages a cost conscience and time conscience attitude. Continuously examines methods of execution with an object of total project cost reductions.

FORCASTING FOR ACTIVITY COST CONTROL

For the purpose of project management and control, it is not sufficient to consider only the past records of costs and revenues incurred in a project. Good managers should focus upon future revenues, future costs and technical problems.

Cost analysis aims to predict future costs. These cost forecasts serve two main purposes:

1. To appraise the project management of the possible cost over-run or under-run for taking timely corrective actions such as modifying cash flow and updating financial forecasts and project profitability expectations.

2. To update key personnel on anticipated cost changes in their field of responsibility, so as to create cost consciousness for exploring means for minimising wastage and reducing costs.

Job status report explicit estimates of ultimate cost in each category of expense are prepared, which are used to identify the actual progress and status of an expense category.

Estimates might be made from simple linear extrapolations of the productivity or cost of the work to date on each project item.

The forecast total cost, Cf is

Cf = Ct / Pt

Where, Ct is the cost incurred to time t and Pt is the proportion of activity completed at time t.

Alternatively, the use of measured unit cost amounts can be used for forecasting the total cost. The basic formula for forecasting cost from unit costs is,

Cf = W Ct Where, Cf = forecast total cost W = total units of work

Ct = average cost per unit of work experienced up to time t.

The unit cost equation may be replaced with the hourly productivity and the unit cost per hour (or other appropriate time period), resulting in the equation:

Cf = W ht ut Where the cost per work unit (Ct ) is replaced by the time per unit ht , divided by the cost per unit of time, ut .




More elaborate forecasting systems might recognise peculiar problems associated with work on particular items and modify these simple proportional cost estimates.

For example, if productivity is improving as workers and managers become more familiar with the project activities, the estimate of total costs for an item might be revised downward. In this case, the estimating equation would become:

Cf = Ct + (W – Wt) Ct

Where forecast total cost Cf is the sum of cost incurred to date, Ct and the cost resulting from the remaining work (W – Wt) multiplied by the expected cost per unit time period for the remainder of the activity, Ct .

Variance analysis reveals the extent and causes of variances. On the other hand, performance, efficiency determines how efficiently the task was done and what will be its implications on the future trends.

The future trends in productivity cost and time performance can be predicted as under:

Cost performance index (CPI) = BCWP/ACWP

Schedule performance index (SPI) = BCWP/BCWS

Estimated Unit Rate Task productivity Index =

Actual Unit Rate

An index of 1.0 or greater indicates a favourable performance and less than 1.0 implies an unfavourable trend.

Performance indices vary during execution of a project. Minor variations are normal, but the significant changes in indices call for forecasting of the probable performance on completion.

These forecasts can be prepared by extrapolating the past data to produce the best fit curve, and thereafter extending the same for predicting performance on completion as under:

a) Assuming the future trend at the originally planned rate, probable completion value.

= (ACWP – BCWP) + planned BCWS on completion.

b) Assuming that the future rate of progress will continue at the present trend.




Planned BCWS on completion Probable completion value =

Performance index or Trend

There can be situations where the originally specified time and cost objectives are revised.

For example, the original completion time of the project is extended, or agreed contract amount is increased.

In such cases forecasts corresponding to various situations can be worked out using methods given above.

Illustration of Proportion Completion versus Expenditure of an Activity

100%

80%

60% Percent Completion

40%

20%

0%

0% 20% 40% 60% 80% 100%

Percent of Budgeted Expenditure

Planned Expenditure

Forecast expenditure

Actual Expenditure




FINANCIAL ACCOUNTING SYSTEMS AND COST ACCOUNTS

Cost accounts provide only one of the various components in a financial accounting system. Accounting information is generally used for three distinct purposes:

1. Internal reporting to project managers for day-to-day planning, monitoring and control. 2. Internal reporting to managers for aiding strategic planning. 3. External reporting to owners, government, regulators and other outside parties.

External reports are constrained to particular forms and procedures by contractual reporting requirements or by generally accepted accounting practices. Preparation of such external reports is called financial accounting.

In contrast, cost or managerial accounting is intended to aid internal managers in their responsibilities of planning, monitoring and control.

Financial accounts of an organisation always contain project costs. In an organisation all the expenses transactions are recorded in a general ledger.

The general ledger of accounts is the basis for management reports on particular project as well as financial accounts for the entire organisation. Other components of a financial accounting system includes:

1. The accounts payable journal: This is intended to provide records or bills received from vendors, material suppliers, subcontractors and other outside parties. Invoices of charges are recorded as checks issued in payment. Charges to individual cost accounts are posted to general ledger.

2. Accounts receivable journals: To provide opposite function to that of accounts payable. In this journal billings to clients are recorded as well as receipts. Revenues received are posted to general ledger.

3. Job cost ledgers: Summarizes the costs associated with particular project arranged in the various cost accounts used for the project budget.

4. Inventory records: These are maintained to identify the amount of materials available at any time. In traditional book keeping system, day to day transactions are first recorded in journals. With double entry book keeping, each transaction is recorded as both a debit and credit to particular accounts in the ledger.

For example: Payment of a suppliers bill represents a debit or increase to a project cost account and a credit or reduction to company’s cash account. Periodically, the transaction information is transferred to ledger accounts. This process is called Posting and may be done instantaneously or daily in computerized systems.

In receiving accounting information, the concepts of flows and stocks should be kept in mind. Daily transactions reflect flows of rupees entering or leaving the organisation. Similarly, use or receipt of particular materials represents flows from or to inventory.




An account balance represents the resulting cumulative amount of funds resulting from these daily flows. Information on both flows (cash inflow and outflow) and stocks are needed to give an accurate view of an organisation’s state.

In addition, forecasts of future changes are needed for effective management. Information from the ledger is assembled for the organisation’s financial reports, including balance sheets and income statements for each period.

These reports are the basic products of the financial accounting process and are often used to assess the performance of an organisation.

Methods of Accounting

1. Completed –Contract method: In this method income is only reported for completed projects. Work on project underway is only reported on the balance sheet representing an asset if contract billings exceed costs or liability if cost exceeds billings. When a project is completed, total net profit (or loss) is reported in the final period as income.

2. Percentage of Completion method: The actual costs are reported on the income statement plus a proportion of all project revenues equal to the proportion of work completed during the period. The proportion of work completed is computed as the ratio of costs incurred to date and the total estimated cost of the project.

If 20% of project is completed on a particular period at a direct cost of 1,80,000 and on a project with expected revenues of 10,00,000.

Then revenues earned = 1,000,000 x 0.2 = 200,000

The profit for this period = 200,000 – 180,000 = 20,000 for this period.

Note that billings and actual receipts might be in excess or less than the calculated revenues of 200,000. On the balance sheet of an organisation using the percentage of completion method, an asset is usually reported to reflect billings and the estimated or calculated earnings in excess of actual billings.

Example: Consider a 3 year project to construct a plant with the following cash flow for a contractor.

Year Contract expenses Payment Received 1 2 3

700,000 180,000 320,000

900,000 250,000 150,000

Total 12,00,000 13,00,000

Architect determines 60% of completed cost in first year and 75% in the second year. Under the ‘Percentage of Completion method, the net income in one year is 7,80,000 i.e. 60/100 of 13,00,000. So profit = 80,000




Under the “Completed Contract’ method the entire profit of 100,000 (13,00,000 – 12,00,000) would be reported in year 3. 1. The “% of completion method” of reporting period has the advantage of representing the actual

estimated earnings in each period. As a result, the income stream and resulting profits are less susceptible to changes on the completion of a project. But in completed contract method, the income stream and resulting profits are susceptible to precipitate swings on completion of a project.

2. There are tax disadvantages from using the “% of completion” method since corporate taxes on expected profits may become due during the project rather than being deferred until the project completion.

3. % of completion has the disadvantage of relying upon estimates which can be manipulated to obscure the actual position of a company.

4. % of completion accounting provides only rough estimate of the actual profit or status of a project. Also, the completed contract method of accounting is entirely retrospective and provides no guidance for management.

Calculating Net Profit: Example: Suppose that a company began six jobs in a year, completing three jobs and having three jobs still underway at the end of the year. Details of the six jobs are shown in table given below. What would be the company’s net profit? i) “Percentage-of-completion” ii) “Completed contract method” accounting conventions?

Net Profit on Completed Contracts ( Amounts in thousands) Job 1 Job 2 Job 3

Total Net Profit on Completed Jobs

1,436 356 - 738

1,054 Status of jobs underway Job 4 Job 5 Job 6 Original contract price 4,200 3,800 5,630

Contract Changes (Change orders, etc.) 400 600 -300

Total Cost to Date 3,600 1,710 620

Payments Received or Due to Date 3,520 1,830 340

Estimated Cost to Complete 500 2,300 5,000

As shown in the table, a net profit of 1,054,000 was earned on the three completed jobs. Under the ‘completed contract method’, this total would be total profit. Under the ‘percentage of completion method’, the year’s expected profit on the projects underway would be added to this amount.

For Job 4, the expected profits are calculated as follows:

Current contract price = original contract price + contract charges = 4,200 + 400 = 4,600




Credit or Debit to date = Total costs to date – Payments received or due to date = 3,600 – 3,520 = - 80

Contract value of uncompleted work = Current contract price – payments received or due = 4,600 – 3,520 = 1,080

Credit or Debit to come = Contract value of uncompleted work – Estimated cost to complete = 1,080 – 500 = 580

Estimated final gross profit = Credit or debit to date + Credit or debit to come = - 80 + 580 = 500

Estimated total project costs = Contract price – Gross profit = 4,600 – 500 = 4,100

Estimated profit to date = Estimated final gross profit x Proportion of work complete = 500 (3,600 / 4,100) = 439

Similar calculations for the other jobs underway indicate estimated profits to date of 166,000 for Job 5 , and -32,000 for Job 6. As a result, the net profit using “percentage of completion” method would be 1,627,000 for the year. Note that this figure would be altered in the event of multi-year projects in which net profits on projects completed or underway in this year were claimed in earlier projects.

Control of Project Cash Flows:

Cash flow is the movement of money into or out of a company.

It ensures that sufficient cash is available to meet the demand.

It provides a reliable indicator to lending institutions that advances made can be paid according to an agreed programme.

It ensures that cash resources are fully utilised to the benefit of the owner and investor of the company.

Main points in the determination of cash flows are:

1. Payments (cash outflow): This is the aggregate of the payments which a contractor will make over a period of time for the resources he uses in a project. Ex: labour, plant, materials etc;

2. Receipts (cash inflow): These are the receipts which a contractor will receive over a period for the work he has completed.

3. Timing of Payment: The size of the deficiency can be estimated and the time period over which this deficiency applies can be assessed.




Use of S- Curve: It is used to forecast the cash requirements of a project. The cumulative expenditure for a project normally takes the shape of letter‘s’. By plotting the cumulative expenditure against cumulative project duration, it is possible to calculate project cash requirements.

The s-curve shape arises during early contract stage, because of lesser number of activities and hence, the expenditure curve is relatively flat.

100%

80%

Percent Revised Completion Estimate

of Future 60% Expenditure

40%

20%

0%

0% 20% 40% 60% 80% 100%

Percent of Budgeted Expenditure

As the other activities commence, expenditure increases and the curve develops into steeper middle portion. Towards the end of the project, many activities will be completed and there will be rundown of construction work, resulting in a flattened curve.

Planned Expenditure

Actual Expenditure




¼ expenditure

1/3 duration 1/3 duration 1/3 duration Cumulative Expenditure

½ expenditure

¼ expenditure

Duration

1/4 th of the expenditure represents the activity build up period of 1/3 rd the contract duration and a further quarter occupies rundown period of 1/3 rd contract duration. Half of the cumulative expenditure is gained over the centre are third of ‘s’ curve.

Cash flow status report:

1. Costs: This is a summary of charges as reflected by the job cost accounts, including expenditures and estimated costs.

2. Billings: This row summarizes the state of cash flow with respect to the owner of the facility; this row would not be included for the reports to owners. The amount of allowable billing is specified under the terms of contract between an owner and an engineering, architect or constructor. In this case, total billings have exceeded the estimated project completion proportion.

3. Payables: The payables row summarizes the amount owed by the contractor to material suppliers, labour, sub-contractors. The total payables is equal to the total project expenses shown in the first row of costs.

4. Receivables: This row summarizes the cash flow of receipts from the owner. Note that the actual receipts from the owner may differ from the amounts billed due to delayed payments or retainage on the part of the owner. The net-billed equals the gross billed less retention by the owner.

5. Cash Position: This row summarizes the cash position of the project as if all expenses and receipts for the project were combined in a single account.

An Example of a Cash Flow Status Report

Cost Charges Estimated %Complete Projected Charge Billing Contract Gross bill % Billed Profit

Total Payables Paid Open Retention Labour Receivables Net bill Received Retention Open Cash Position

Paid Unpaid Net Cash balance




Job status reported provides a primary tool for project cost control. Different reports with varying amounts of detail and item reports would be prepared for different individuals involved in a project.

Reports to upper management would be summaries, reports to particular staff individuals would emphasize their responsibilities (purchasing, payroll, etc.) and detailed reports would be provided to the individual project managers.

These schedule and cost reports would have to be tempered by the actual accomplishments and problems occurring in the field.

Ex: If work already completed is of sub-standard quality, these reports would not reveal such problem. Even though the reports indicated a project on time and on budget, the possibility of re-work or inadequate facility performance due to quality problems would quickly reverse the rosy situation.

Schedule Control

In addition to cost control, project managers must also give attention to monitoring schedule. Construction typically involves a deadline for work completion, so contractual agreement will force attention to schedules.

Delays in construction represent additional costs due to late facility occupancy or other factors.

In cost control, costs incurred are compared to budgeted costs, in the same way, in schedule control, actual activity durations may be compared to expected durations.

In this process of forecasting, the time to complete particular activities may be required.

Df = W ht

Where, Df is the forecast duration W is the amount of work

ht is the observed productivity to time t.

It is important to devise efficient and cost effective methods for gathering information on actual project accomplishments. Generally, observations of work completed are made by inspectors and project t managers and then work completed is estimated.

Once estimates of work completed and time expanded on particular activities is available, deviations from the original duration estimate can be estimated.




100 %

80 % Revised estimate of

Future progress

60 %

40 %

20 %

0 %

0 % 20 % 40 % 60 % 80 % 100 %

Fig. Shows scheduled project progress versus actual progress on a project. This fig is constructed by summing up the % of each activity, which is completed at different points in time. This summation can be weighted by the magnitude of effect associated with each activity.

From the fig. the project was a head of the original schedule for a period including point A, but is now late at point B by an amount equal to the horizontal distance between the planned progress and actual progress observed to date.

Scheduled adherence and the current status of a project can also be represented on geometrical models of a facility.

For example, an animation of the construction sequence can be shown on a computer screen, with different colours or other coding scheme indicating the type of activity underway on each component of the facility.

In evaluating schedule progress, it is important to bear in mind that some activities possess float or scheduling leeway, whereas delays in activities on the critical path will cause project delays.

In particular, the delay in planned progress at time t may be soaked up in activities float or may cause project delay.

As a result, it is preferable to update the project schedule to get an accurate portrayal of the schedule adherence.

After applying a scheduling algorithm, a new project schedule can be obtained.

Improving the Scheduling Process

Despite considerable attention by researchers and practitioners, the process of construction, planning and scheduling still presents problem and opportunities for improvement.

B

A




Most of the project scheduling is performed with critical path scheduling method, project cash flow analysis and resource constrained scheduling. Many commercial software programs are available to perform these tasks.

The most important innovations in construction scheduling are likely to appear in the areas of data storage, ease of use, data representation, communication and diagnostic or interpretation aids.

Integration of scheduling beneficial innovation; many scheduling systems do not provide such integration of information.

With regard to ease of use, the introduction of interactive scheduling systems, graphical output devices and automated data acquired should produce a very different environment than has existed.

In the past, scheduling was performed as a batch operation with output contained in lengthy table of numbers. The lower costs associated with computer systems as well as improved software make “user friendly” environments a real possibility for field operations on large projects.

Finally, information representation is an area which needs substantial improvements. A network model of project activities is an extremely useful device to represent a project but activity inter-relationships cannot be represented in network models.

What is needed is a much more flexible and complete representation of project information.

RELATING COST AND SCHEDULE INFORMATION

Actual project involves a complex inter-relationship between time and cost. Additional resources applied to a project activity might result in a shorter duration but higher costs.

The project manager can easily recognise the relation between time and cost in projects. But it is difficult to find effective project control systems which include both elements.

Project costs and schedules are recorded and reported in separate application programs. Project manager must then perform the tedious task of relating the two sets of information.

The primary difficulty in integrating schedule and cost information is the level of details required for the effective integration. A single project activity involves numerous cost account categories.

Ex: An activity for the preparation of a foundation would involve cement, workers, concrete forms, reinforcement, transportation of materials and other resources. Even a more disaggregated activity definition such as erection of foundation forms would involve numerous resources such as forms, nails, carpenters, labour and material transportation.

Different cost accounts would normally be used to record these various resources. Similarly, numerous activities might involve expenses associated with particular cost accounts.

Ex: a particular material such as standard piping might be used in numerous schedule activities. To integrate cost and schedule information the charges for specific activities and specific cost accounts must be the basis of analysis.




A method of relating time and cost information is to define individual work elements representing the resources in a particular project activity. Work elements represent an element in a two-dimensional matrix of activities and cost accounts.

A numbering or identifying system for work elements would include both the relevant cost account and the associated activity. In some cases, it might also be desirable to identify work elements by the responsible organisation or individual.

In this case, a three-dimensional representation of work elements required with the third dimension corresponding to responsible individuals.

Illustration of a Cost Account and Project activity Matrix:

DIRECT COST CONTROL

It involves the evaluation and analysis of the following variances:

a) Direct cost variance b) Direct materials variance c) Direct labour cost variance d) Other direct expenses variance.

Project activity group

Cost amount for super structure 204.1 204.2 204.3 204.4 204.5 204.6 204.7

I st floor X X X X X

II nd floor X X X

III rd floor X X X X

IV th floor X X X

V th floor X X X X




Main Cost Variance Breakdown:

Nature of Cost Variances

Sales Value Production cost Administration Variances Variances Cost Variances

Work done Work done Variable Fixed Quantity Price Overheads Overheads Variance Variance Variance Variance

Variable Cost Variance Fixed cost Variance

Prod. Overhead Adm. Overhead Variances Variances

Variable Overhead Direct cost Variances Variances

Indirect Labour Indirect materials Indirect Other Cost Variances Variances Variances

Labour Cost Material Cost Other Direct Expenditure Variances Variances Variances

Productivity Rate Equipment cost Other Direct Variance Variance Variance Variance

Usage price Variance Variance




INDIRECT COST BEHAVIOUR

An estimate at the time of costing by computing all the indirect costs in detail or evaluating by using predetermined company norms. The estimator will add these indirect costs to the direct costs for calculating the final product cost. But this is not adequate for planning, budgeting and control costs.

In order to analyse the cost behaviour a planner or the cost accountant further splits up each item of indirect costs into three broad categories i.e.; variable costs, fixed cost and semi-variable costs.

a) Variable costs: It tends to vary directly with the volume of production, i.e. work done or output. No production means no cost. Cost rises as the volume of production increases. These costs changes at a constant rate (assumed) to changes in the volume of production as shown below.

Variable cost

Cost

Volume of output

Examples of indirect variable costs are telephone running expenses, camp messing expenses and office stationary expenses.

b) Fixed costs: It do not show any applicable fluctuations with changes in production levels. These costs are either one-time costs like the camp construction cost or periodic costs such as supervisor’s salary for a period of six months or are monthly receiving expenses like monthly rent for project office and monthly depreciation for project construction equipment.

Fixed cost Cost

Volume of output




c) Semi-variable costs: These are partly fixed and partly variable in nature. Examples of these are telephone expenses which consists of fixed installation expenses and variable operating expenses which vary with the volume of work or production activities.

Variable cost component Cost

Fixed Cost component

Volume of Output




12. Cost Control, Monitoring and Accounting

12.1 The Cost Control Problem

During the execution of a project, procedures for project control and record keeping become indispensable tools to managers and other participants in the construction process. These tools serve the dual purpose of recording the financial transactions that occur as well as giving managers an indication of the progress and problems associated with a project. The problems of project control are aptly summed up in an old definition of a project as "any collection of vaguely related activities that are ninety percent complete, over budget and late." The task of project control systems is to give a fair indication of the existence and the extent of such problems.

In this chapter, we consider the problems associated with resource utilization, accounting, monitoring and control during a project. In this discussion, we emphasize the project management uses of accounting information. Interpretation of project accounts is generally not straightforward until a project is completed, and then it is too late to influence project management. Even after completion of a project, the accounting results may be confusing. Hence, managers need to know how to interpret accounting information for the purpose of project management. In the process of considering management problems, however, we shall discuss some of the common accounting systems and conventions, although our purpose is not to provide a comprehensive survey of accounting procedures.

The limited objective of project control deserves emphasis. Project control procedures are primarily intended to identify deviations from the project plan rather than to suggest possible areas for cost savings. This characteristic reflects the advanced stage at which project control becomes important. The time at which major cost savings can be achieved is during planning and design for the project. During the actual construction, changes are likely to delay the project and lead to inordinate cost increases. As a result, the focus of project control is on fulfilling the original design plans or indicating deviations from these plans, rather than on searching for significant improvements and cost savings. It is only when a rescue operation is required that major changes will normally occur in the construction plan.

Finally, the issues associated with integration of information will require some discussion. Project management activities and functional concerns are intimately linked, yet the techniques used in many instances do not facilitate comprehensive or integrated consideration of project activities. For example, schedule information and cost accounts are usually kept separately. As a result, project managers themselves must synthesize a comprehensive view from the




different reports on the project plus their own field observations. In particular, managers are often forced to infer the cost impacts of schedule changes, rather than being provided with aids for this process. Communication or integration of various types of information can serve a number of useful purposes, although it does require special attention in the establishment of project control procedures.

12.2 The Project Budget

For cost control on a project, the construction plan and the associated cash flow estimates can provide the baseline reference for subsequent project monitoring and control. For schedules, progress on individual activities and the achievement of milestone completions can be compared with the project schedule to monitor the progress of activities. Contract and job specifications provide the criteria by which to assess and assure the required quality of construction. The final or detailed cost estimate provides a baseline for the assessment of financial performance during the project. To the extent that costs are within the detailed cost estimate, then the project is thought to be under financial control. Overruns in particular cost categories signal the possibility of problems and give an indication of exactly what problems are being encountered. Expense oriented construction planning and control focuses upon the categories included in the final cost estimation. This focus is particular relevant for projects with few activities and considerable repetition such as grading and paving roadways.

For control and monitoring purposes, the original detailed cost estimate is typically converted to a project budget, and the project budget is used subsequently as a guide for management. Specific items in the detailed cost estimate become job cost elements. Expenses incurred during the course of a project are recorded in specific job cost accounts to be compared with the original cost estimates in each category. Thus, individual job cost accounts generally represent the basic unit for cost control. Alternatively, job cost accounts may be disaggregated or divided into work elements which are related both to particular scheduled activities and to particular cost accounts. Work element divisions will be described in Section 12.8.

In addition to cost amounts, information on material quantities and labour inputs within each job account is also typically retained in the project budget. With this information, actual materials usage and labour employed can be compared to the expected requirements. As a result, cost overruns or savings on particular items can be identified as due to changes in unit prices, labour productivity or in the amount of material consumed.

The number of cost accounts associated with a particular project can vary considerably. For constructors, on the order of four hundred separate cost accounts might be used on a small project. These accounts record all the transactions associated with a project. Thus, separate accounts might exist for different types of materials, equipment use, payroll, project office, etc. Both physical and non-




physical resources are represented, including overhead items such as computer use or interest charges. Table 12-1 summarizes a typical set of cost accounts that might be used in building construction. Note that this set of accounts is organized hierarchically, with seven major divisions (accounts 201 to 207) and numerous sub-divisions under each division. This hierarchical structure facilitates aggregation of costs into pre-defined categories; for example, costs associated with the superstructure (account 204) would be the sum of the underlying subdivisions (i.e. 204.1, 204.2, etc.) or finer levels of detail (204.61, 204.62, etc.). The sub-division accounts in Table 12-1 could be further divided into personnel, material and other resource costs for the purpose of financial accounting, as described in Section 12.4.

TABLE 12-1 Illustrative Set of Project Cost Accounts 201 Clearing and Preparing Site 202 202.1 202.2 202.3 202.31202.32202.33

Substructure Excavation and ShoringPilingConcrete MasonryMixing and PlacingFormworkReinforcing

203 Outside Utilities (water, gas, sewer, etc.) 204 204.1 204.2 204.3 204.4 204.5 204.6 204.61204.62204.63204.64204.65204.66204.67204.68204.69204.7 204.71204.72204.73204.74204.72

Superstructure Masonry ConstructionStructural SteelWood Framing, Partitions, etc.Exterior Finishes (brickwork, terra cotta, cut stone, etc.)Roofing, Drains, Gutters, Flashing, etc. Interior Finish and TrimFinish Flooring, Stairs, Doors, TrimGlass, Windows, GlazingMarble, Tile, TerrazzoLathing and PlasteringSoundproofing and InsulationFinish HardwarePainting and DecoratingWaterproofingSprinklers and Fire Protection Service WorkElectrical WorkHeating and VentilatingPlumbing and SewageAir ConditioningFire Alarm, Telephone, Security, Miscellaneous

205 Paving, Curbs, Walks 206 Installed Equipment (elevators, revolving doors, mail chutes, etc.)




207 Fencing

In developing or implementing a system of cost accounts, an appropriate numbering or coding system is essential to facilitate communication of information and proper aggregation of cost information. Particular cost accounts are used to indicate the expenditures associated with specific projects and to indicate the expenditures on particular items throughout an organization. These are examples of different perspectives on the same information, in which the same information may be summarized in different ways for specific purposes. Thus, more than one aggregation of the cost information and more than one application program can use a particular cost account. Separate identifiers of the type of cost account and the specific project must be provided for project cost accounts or for financial transactions. As a result, a standard set of cost codes such as the MASTERFORMAT codes may be adopted to identify cost accounts along with project identifiers and extensions to indicate organization or job specific needs. Similarly the use of databases or, at a minimum, inter-communicating applications programs facilitate access to cost information, as described in Chapter 14.

Converting a final cost estimate into a project budget compatible with an organization's cost accounts is not always a straightforward task. As described in Chapter 5, cost estimates are generally disaggregated into appropriate functional or resource based project categories. For example, labour and material quantities might be included for each of several physical components of a project. For cost accounting purposes, labour and material quantities are aggregated by type no matter for which physical component they are employed. For example, particular types of workers or materials might be used on numerous different physical components of a facility. Moreover, the categories of cost accounts established within an organization may bear little resemblance to the quantities included in a final cost estimate. This is particularly true when final cost estimates are prepared in accordance with an external reporting requirement rather than in view of the existing cost accounts within an organization.

One particular problem in forming a project budget in terms of cost accounts is the treatment of contingency amounts. These allowances are included in project cost estimates to accommodate unforeseen events and the resulting costs. However, in advance of project completion, the source of contingency expenses is not known. Realistically, a budget accounting item for contingency allowance should be established whenever a contingency amount was included in the final cost estimate.

A second problem in forming a project budget is the treatment of inflation. Typically, final cost estimates are formed in terms of real dollars and an item




reflecting inflation costs is added on as a percentage or lump sum. This inflation allowance would then be allocated to individual cost items in relation to the actual expected inflation over the period for which costs will be incurred.

Example 12-1: Project Budget for a Design Office

An example of a small project budget is shown in Table 12-2. This budget might be used by a design firm for a specific design project. While this budget might represent all the work for this firm on the project, numerous other organizations would be involved with their own budgets. In Table 12-2, a summary budget is shown as well as a detailed listing of costs for individuals in the Engineering Division. For the purpose of consistency with cost accounts and managerial control, labour costs are aggregated into three groups: the engineering, architectural and environmental divisions. The detailed budget shown in Table 12-2 applies only to the engineering division labour; other detailed budgets amounts for categories such as supplies and the other work divisions would also be prepared. Note that the salary costs associated with individuals are aggregated to obtain the total labour costs in the engineering group for the project. To perform this aggregation, some means of identifying individuals within organizational groups is required. Accompanying a budget of this nature, some estimate of the actual man-hours of labour required by project task would also be prepared. Finally, this budget might be used for internal purposes alone. In submitting financial bills and reports to the client, overhead and contingency amounts might be combined with the direct labour costs to establish an aggregate billing rate per hour. In this case, the overhead, contingency and profit would represent allocated costs based on the direct labour costs.

TABLE 12-2 Example of a Small Project Budget for a Design Firm

Personnel Architectural Division Engineering Environmental Division Total

Other Direct Expenses Travel Supplies Communication Computer Services Total

Budget Summary

$ 67,251.0045,372.00

28,235.00$140,858.00

2,400.001,500.00

600.00 1,200.00$ 5,700.00

$ 175,869.60

$ 95,700.00




Overhead

Contingency and Profit

Total

$ 418,127.60

Senior Engineer Associate Engineer Engineer Technician

Total

Engineering Personnel

Detail

$ 11,562.0021,365.00

12,654.00

$ 45,372.00

Example 12-2: Project Budget for a Constructor

Table 12-3 illustrates a summary budget for a constructor. This budget is developed from a project to construct a wharf. As with the example design office budget above, costs are divided into direct and indirect expenses. Within direct costs, expenses are divided into material, subcontract, temporary work and machinery costs. This budget indicates aggregate amounts for the various categories. Cost details associated with particular cost accounts would supplement and support the aggregate budget shown in Table 12-3. A profit and a contingency amount might be added to the basic budget of $1,715,147 shown in Table 12-3 for completeness. TABLE 12-3 An Example of a Project Budget for a Wharf Project (Amounts in Thousands

of Dollars) Material

Cost Subcontract

Work Temporary

Work Machinery

Cost Total Cost Steel Piling Tie-rod Anchor-WallBackfillCopingDredgingFenderOtherSub-total

$292,17288,233

130,281242,23042,880

048,996

5,000$849,800

$129,17829,25460,87327,91922,307

111,65010,344

32,250$423,775

$16,389000

13,17100

0$29,560

$000000

1,750 0$1,750

$437,739117,487191,154300,14978,358

111,65061,090

37,250$1,304,885

Summary Total of direct cost $1,304,885




Indirect Cost Common Temporary Work

Common Machinery Transportation

Office Operating Costs Total of Indirect Cost

Total Project Cost

19,32080,93415,550

294,458 410,262.$1,715,147

12.3 Forecasting for Activity Cost Control

For the purpose of project management and control, it is not sufficient to consider only the past record of costs and revenues incurred in a project. Good managers should focus upon future revenues, future costs and technical problems. For this purpose, traditional financial accounting schemes are not adequate to reflect the dynamic nature of a project. Accounts typically focus on recording routine costs and past expenditures associated with activities. Generally, past expenditures represent sunk costs that cannot be altered in the future and may or may not be relevant in the future. For example, after the completion of some activity, it may be discovered that some quality flaw renders the work useless. Unfortunately, the resources expended on the flawed construction will generally be sunk and cannot be recovered for re-construction (although it may be possible to change the burden of who pays for these resources by financial withholding or charges; owners will typically attempt to have constructors or designers pay for changes due to quality flaws). Since financial accounts are historical in nature, some means of forecasting or projecting the future course of a project is essential for management control. In this section, some methods for cost control and simple forecasts are described.

An example of forecasting used to assess the project status is shown in Table 12-4. In this example, costs are reported in five categories, representing the sum of all the various cost accounts associated with each category:

• Budgeted Cost The budgeted cost is derived from the detailed cost estimate prepared at the start of the project. Examples of project budgets were presented in Section 12.2. The factors of cost would be referenced by cost account and by a prose description.

• Estimated total cost The estimated or forecast total cost in each category is the current best estimate of costs based on progress and any changes since the budget was formed. Estimated total costs are the sum of cost to date, commitments and exposure. Methods for estimating total costs are described below.

• Cost Committed and Cost Exposure!! Estimated cost to completion in each category in divided into firm commitments and estimated additional




cost or exposure. Commitments may represent material orders or subcontracts for which firm dollar amounts have been committed.

• Cost to Date The actual cost incurred to date is recorded in column 6 and can be derived from the financial record keeping accounts.

• Over or (Under) A final column in Table 12-4 indicates the amount over or under the budget for each category. This column is an indicator of the extent of variance from the project budget; items with unusually large overruns would represent a particular managerial concern. Note that variance is used in the terminology of project control to indicate a difference between budgeted and actual expenditures. The term is defined and used quite differently in statistics or mathematical analysis. In Table 12-4, labour costs are running higher than expected, whereas subcontracts are less than expected.

The current status of the project is a forecast budget overrun of $5,950. with 23 percent of the budgeted project costs incurred to date.

TABLE 12-4 Illustration of a Job Status Report

Factor Budgeted

Cost Estimated Total Cost

Cost Committed

Cost Exposure

Cost To Date

Over or (Under)

LabourMaterial

SubcontractsEquipment

OtherTotal

$99,40688,499

198,45837,543

72,693496,509

$102,34288,499

196,32337,543

81,432506,139

$49,59642,50683,35223,623

49,356248,433

---45,99397,832

--- ---

143,825

$52,746---

15,13913,920

32,076113,881

$2,9360

(2,135)0

8,7395,950

For project control, managers would focus particular attention on items indicating substantial deviation from budgeted amounts. In particular, the cost overruns in the labour and in the "other expense category would be worthy of attention by a project manager in Table 12-4. A next step would be to look in greater detail at the various components of these categories. Overruns in cost might be due to lower than expected productivity, higher than expected wage rates, higher than expected material costs, or other factors. Even further, low productivity might be caused by inadequate training, lack of required resources such as equipment or tools, or inordinate amounts of re-work to correct quality problems. Review of a job status report is only the first step in project control.

The job status report illustrated in Table 12-4 employs explicit estimates of ultimate cost in each category of expense. These estimates are used to identify the actual progress and status of an expense category. Estimates might be made from




simple linear extrapolations of the productivity or cost of the work to date on each project item. Algebraically, a linear estimation formula is generally one of two forms. Using a linear extrapolation of costs, the forecast total cost, Cf , is:

(12.1)

where Ct is the cost incurred to time t and pt is the proportion of the activity completed at time t. For example, an activity which is 50 percent complete with a cost of $40,000 would be estimated to have a total cost of $40,000/0.5 = $80,000. More elaborate methods of forecasting costs would disaggregate costs into different categories, with the total cost the sum of the forecast costs in each category.

Alternatively, the use of measured unit cost amounts can be used for forecasting total cost. The basic formula for forecasting cost from unit costs is:

(12.2)

where Cf is the forecast total cost, W is the total units of work, and ct is the average cost per unit of work experienced up to time t. If the average unit cost is $50 per unit of work on a particular activity and 1,600 units of work exist, then the expected cost is (1,600)(50) = $80,000 for completion.

The unit cost in Equation (12.2) may be replaced with the hourly productivity and the unit cost per hour (or other appropriate time period), resulting in the equation:

(12.3)

where the cost per work unit (ct) is replaced by the time per unit, ht, divided by the cost per unit of time, ut.

More elaborate forecasting systems might recognize peculiar problems associated with work on particular items and modify these simple proportional cost estimates. For example, if productivity is improving as workers and managers become more familiar with the project activities, the estimate of total costs for an item might be revised downward. In this case, the estimating equation would become:

(12.4)




where forecast total cost, Cf, is the sum of cost incurred to date, Ct, and the cost resulting from the remaining work (W - Wt) multiplied by the expected cost per unit time period for the remainder of the activity, ct.

As a numerical example, suppose that the average unit cost has been $50 per unit of work, but the most recent figure during a project is $45 per unit of work. If the project manager was assured that the improved productivity could be maintained for the remainder of the project (consisting of 800 units of work out of a total of 1600 units of work), the cost estimate would be (50)(800) + (45)(800) = $76,000 for completion of the activity. Note that this forecast uses the actual average productivity achieved on the first 800 units and uses a forecast of productivity for the remaining work. Historical changes in productivity might also be used to represent this type of non-linear changes in work productivity on particular activities over time.

In addition to changes in productivities, other components of the estimating formula can be adjusted or more detailed estimates substituted. For example, the change in unit prices due to new labour contracts or material supplier's prices might be reflected in estimating future expenditures. In essence, the same problems encountered in preparing the detailed cost estimate are faced in the process of preparing exposure estimates, although the number and extent of uncertainties in the project environment decline as work progresses. The only exception to this rule is the danger of quality problems in completed work which would require re-construction.

Each of the estimating methods described above require current information on the state of work accomplishment for particular activities. There are several possible methods to develop such estimates, including:

• Units of Work Completed For easily measured quantities the actual proportion of completed work amounts can be measured. For example, the linear feet of piping installed can be compared to the required amount of piping to estimate the percentage of piping work completed.

• Incremental Milestones Particular activities can be sub-divided or "decomposed" into a series of milestones, and the milestones can be used to indicate the percentage of work complete based on historical averages. For example, the work effort involved with installation of standard piping might be divided into four milestones:

o Spool in place: 20% of work and 20% of cumulative work. o Ends welded: 40% of work and 60% of cumulative work. o Hangars and Trim Complete: 30% of work and 90% of cumulative

work.




o Hydro tested and Complete: 10% of work and 100% of cumulative work.

Thus, a pipe section for which the ends have been welded would be reported as 60% complete.

• Opinion Subjective judgments of the percentage complete can be prepared by inspectors, supervisors or project managers themselves. Clearly, this estimated technique can be biased by optimism, pessimism or inaccurate observations. Knowledgeable estimators and adequate field observations are required to obtain sufficient accuracy with this method.

• Cost Ratio The cost incurred to date can also be used to estimate the work progress. For example, if an activity was budgeted to cost $20,000 and the cost incurred at a particular date was $10,000, then the estimated percentage complete under the cost ratio method would be 10,000/20,000 = 0.5 or fifty percent. This method provides no independent information on the actual percentage complete or any possible errors in the activity budget: the cost forecast will always be the budgeted amount. Consequently, managers must use the estimated costs to complete an activity derived from the cost ratio method with extreme caution.

Systematic application of these different estimating methods to the various project activities enables calculation of the percentage complete or the productivity estimates used in preparing job status reports.

In some cases, automated data acquisition for work accomplishments might be instituted. For example, transponders might be moved to the new work limits after each day's activity and the new locations automatically computed and compared with project plans. These measurements of actual progress should be stored in a central database and then processed for updating the project schedule. The use of database management systems in this fashion is described in Chapter 14.

Example 12-3: Estimated Total Cost to Complete an Activity

Suppose that we wish to estimate the total cost to complete piping construction activities on a project. The piping construction involves 1,000 linear feet of piping which has been divided into 50 sections for management convenience. At this time, 400 linear feet of piping has been installed at a cost of $40,000 and 500 man-hours of labour. The original budget estimate was $90,000 with a productivity of one foot per man-hour, a unit cost of $60 per man hour and a total material cost of $ 30,000. Firm commitments of material delivery for the $30,000 estimated cost have been received.




The first task is to estimate the proportion of work completed. Two estimates are readily available. First, 400 linear feet of pipe is in place out of a total of 1000 linear feet, so the proportion of work completed is 400/1000 = 0.4 or 40%. This is the "units of work completed" estimation method. Second, the cost ratio method would estimate the work complete as the cost-to-date divided by the cost estimate or $40,000/$ 90,000 = 0.44 or 44%. Third, the "incremental milestones" method would be applied by examining each pipe section and estimating a percentage complete and then aggregating to determine the total percentage complete. For example, suppose the following quantities of piping fell into four categories of completeness:

complete (100%) hangars and trim complete (90%)ends welded (60%) spool in place (20%)

380 ft 20 ft 5 ft 0 ft

Then using the incremental milestones shown above, the estimate of completed work would be 380 + (20)(0.9) + (5)(0.6) + 0 = 401 ft and the proportion complete would be 401 ft/1,000 ft = 0.401 or 40% after rounding.

Once an estimate of work completed is available, then the estimated cost to complete the activity can be calculated. First, a simple linear extrapolation of cost results in an estimate of $40,000/0.4 = $100,000. for the piping construction using the 40% estimate of work completed. This estimate projects a cost overrun of 100,000 - 90,000 = $10,000.

Second, a linear extrapolation of productivity results in an estimate of (1000 ft.)(500 hrs/400 ft.)($60/hr) + 30,000 = $105,000. for completion of the piping construction. This estimate suggests a variance of 105,000 - 90,000 = $15,000 above the activity estimate. In making this estimate, labour and material costs entered separately, whereas the two were implicitly combined in the simple linear cost forecast above. The source of the variance can also be identified in this calculation: compared to the original estimate, the labour productivity is 1.25 hours per foot or 25% higher than the original estimate.

Example 12-4: Estimated Total Cost for Completion

The forecasting procedures described above assumed linear extrapolations of future costs, based either on the complete experience on the activity or the recent experience. For activities with good historical records, it can be the case that a typically non-linear profile of cost expenditures and completion proportions can be estimated. Figure 12-1 illustrates one possible non-linear relationships derived from experience in some particular activity. The progress on a new job can be compared to this historical record. For example, point A in Figure 12-1 suggests a higher expenditure than is normal for the completion proportion. This point




represents 40% of work completed with an expenditure of 60% of the budget. Since the historical record suggests only 50% of the budget should be expended at time of 40% completion, a 60 - 50 = 10% overrun in cost is expected even if work efficiency can be increased to historical averages. If comparable cost overruns continue to accumulate, then the cost-to-complete will be even higher.

Figure 12-1 Illustration of Proportion Completion versus Expenditure for an Activity

12.4 Financial Accounting Systems and Cost Accounts

The cost accounts described in the previous sections provide only one of the various components in a financial accounting system. Before further discussing the use of cost accounts in project control, the relationship of project and financial accounting deserves mention. Accounting information is generally used for three distinct purposes:

• Internal reporting to project managers for day-to-day planning, monitoring and control.

• Internal reporting to managers for aiding strategic planning. • External reporting to owners, government, regulators and other outside

parties.




External reports are constrained to particular forms and procedures by contractual reporting requirements or by generally accepted accounting practices. Preparation of such external reports is referred to as financial accounting. In contrast, cost or managerial accounting is intended to aid internal managers in their responsibilities of planning, monitoring and control.

Project costs are always included in the system of financial accounts associated with an organization. At the heart of this system, all expense transactions are recorded in a general ledger. The general ledger of accounts forms the basis for management reports on particular projects as well as the financial accounts for an entire organization. Other components of a financial accounting system include:

• The accounts payable journal is intended to provide records of bills received from vendors, material suppliers, subcontractors and other outside parties. Invoices of charges are recorded in this system as are checks issued in payment. Charges to individual cost accounts are relayed or posted to the General Ledger.

• Accounts receivable journals provide the opposite function to that of accounts payable. In this journal, billings to clients are recorded as well as receipts. Revenues received are relayed to the general ledger.

• Job cost ledgers summarize the charges associated with particular projects, arranged in the various cost accounts used for the project budget.

• Inventory records are maintained to identify the amount of materials available at any time.

In traditional bookkeeping systems, day to day transactions are first recorded in journals. With double-entry bookkeeping, each transaction is recorded as both a debit and a credit to particular accounts in the ledger. For example, payment of a supplier's bill represents a debit or increase to a project cost account and a credit or reduction to the company's cash account. Periodically, the transaction information is summarized and transferred to ledger accounts. This process is called posting, and may be done instantaneously or daily in computerized systems.

In reviewing accounting information, the concepts of flows and stocks should be kept in mind. Daily transactions typically reflect flows of dollar amounts entering or leaving the organization. Similarly, use or receipt of particular materials represent flows from or to inventory. An account balance represents the stock or cumulative amount of funds resulting from these daily flows. Information on both flows and stocks are needed to give an accurate view of an organization's state. In addition, forecasts of future changes are needed for effective management.

Information from the general ledger is assembled for the organization's financial reports, including balance sheets and income statements for each period. These reports are the basic products of the financial accounting process and are often used to assess the performance of an organization. Table12-5 shows a typical




income statement for a small construction firm, indicating a net profit of $ 330,000 after taxes. This statement summarizes the flows of transactions within a year. Table 12-6 shows the comparable balance sheet, indicated a net increase in retained earnings equal to the net profit. The balance sheet reflects the effects of income flows during the year on the overall worth of the organization.

TABLE 12-5 Illustration of an Accounting Statement of Income Income Statement

for the year ended December 31, 19xx Gross project revenues

Direct project costs on contracts Depreciation of equipment Estimating Administrative and other expenses Subtotal of cost and expenses

Operating Income Interest Expense, net Income before taxes Income tax Net income after tax Cash dividends Retained earnings, current year Retention at beginning of year Retained earnings at end of year

$7,200,000

5,500,000200,000150,000

650,0006,500,000

700,000 150,000

550,000 220,000

330,000 100,000

230,000 650,000$880,000.

TABLE 12-6 Illustration of an Accounting Balance Sheet Balance Sheet

December 31, 19xx Assets Amount

Cash Payments Receivable Work in progress, not claimed Work in progress, retention Equipment at cost less accumulated depreciation Total assets

$150,000750,000700,000200,000

1,400,000$3,200,000

Liabilities and Equity Liabilities Accounts payable Other items payable (taxes, wages, etc.) Long term debts Subtotal Shareholders' funds

$950,00050,000

500,0001,500,000




40,000 shares of common stock (Including paid-in capital) Retained Earnings Subtotal Total Liabilities and Equity

820,000 880,0001,700,000

$3,200,000

In the context of private construction firms, particular problems arise in the treatment of uncompleted contracts in financial reports. Under the "completed-contract" method, income is only reported for completed projects. Work on projects underway is only reported on the balance sheet, representing an asset if contract billings exceed costs or a liability if costs exceed billings. When a project is completed, the total net profit (or loss) is reported in the final period as income. Under the "percentage-of-completion" method, actual costs are reported on the income statement plus a proportion of all project revenues (or billings) equal to the proportion of work completed during the period. The proportion of work completed is computed as the ratio of costs incurred to date and the total estimated cost of the project. Thus, if twenty percent of a project was completed in a particular period at a direct cost of $180,000 and on a project with expected revenues of $1,000,000, then the contract revenues earned would be calculated as $1,000,000(0.2) = $200,000. This figure represents a profit and contribution to overhead of $200,000 - $180,000 = $20,000 for the period. Note that billings and actual receipts might be in excess or less than the calculated revenues of $200,000. On the balance sheet of an organization using the percentage-of-completion method, an asset is usually reported to reflect billings and the estimated or calculated earnings in excess of actual billings.

As another example of the difference in the "percentage-of-completion" and the "completed-contract" methods, consider a three year project to construct a plant with the following cash flow for a contractor:

Year Contract Expenses Payments Received 1 2 3

Total

$700,000180,000

320,000$1,200,000

$900,000250,000

150,000$1,300,000

The supervising architect determines that 60% of the facility is complete in year 1 and 75% in year 2. Under the "percentage-of-completion" method, the net income in year 1 is $780,000 (60% of $1,300,000) less the $700,000 in expenses or




$80,000. Under the "completed-contract" method, the entire profit of $100,000 would be reported in year 3.

The "percentage-of-completion" method of reporting period earnings has the advantage of representing the actual estimated earnings in each period. As a result, the income stream and resulting profits are less susceptible to precipitate swings on the completion of a project as can occur with the "completed contract method" of calculating income. However, the "percentage-of-completion" has the disadvantage of relying upon estimates which can be manipulated to obscure the actual position of a company or which are difficult to reproduce by outside observers. There are also subtleties such as the deferral of all calculated income from a project until a minimum threshold of the project is completed. As a result, interpretation of the income statement and balance sheet of a private organization is not always straightforward. Finally, there are tax disadvantages from using the "percentage-of-completion" method since corporate taxes on expected profits may become due during the project rather than being deferred until the project completion. As an example of tax implications of the two reporting methods, a study of forty-seven construction firms conducted by the General Accounting Office found that $280 million in taxes were deferred from 1980 to 1984 through use of the "completed-contract" method.

It should be apparent that the "percentage-of-completion" accounting provides only a rough estimate of the actual profit or status of a project. Also, the "completed contract" method of accounting is entirely retrospective and provides no guidance for management. This is only one example of the types of allocations that are introduced to correspond to generally accepted accounting practices, yet may not further the cause of good project management. Another common example is the use of equipment depreciation schedules to allocate equipment purchase costs. Allocations of costs or revenues to particular periods within a project may cause severe changes in particular indicators, but have no real meaning for good management or profit over the entire course of a project. As Johnson and Kaplan argue:

Today's management accounting information, driven by the procedures and cycle of the organization's financial reporting system, is too late, too aggregated and too distorted to be relevant for managers' planning and control decisions....

Management accounting reports are of little help to operating managers as they attempt to reduce costs and improve productivity. Frequently, the reports decrease productivity because they require operating managers to spend time attempting to understand and explain reported variances that have little to do with the economic and technological reality of their operations...

The management accounting system also fails to provide accurate product costs. Cost are distributed to products by simplistic and arbitrary measures, usually direct




labour based, that do not represent the demands made by each product on the firm's resources.

As a result, complementary procedures to those used in traditional financial accounting are required to accomplish effective project control, as described in the preceding and following sections. While financial statements provide consistent and essential information on the condition of an entire organization, they need considerable interpretation and supplementation to be useful for project management.

Example 12-5: Calculating net profit

As an example of the calculation of net profit, suppose that a company began six jobs in a year, completing three jobs and having three jobs still underway at the end of the year. Details of the six jobs are shown in Table 12-7. What would be the company's net profit under, first, the "percentage-of-completion" and, second, the "completed contract method" accounting conventions?

TABLE 12-7 Example of Financial Records of Projects Net Profit on Completed Contracts (Amounts in thousands of dollars) Job 1 Job 2 Job 3 Total Net Profit on Completed Jobs

$1,436356

- 738$1,054

Status of Jobs Underway Job 4 Job 5 Job 6 Original Contract Price Contract Changes (Change Orders, etc.) Total Cost to Date Payments Received or Due to Date Estimated Cost to Complete

$4,200400

3,6003,520

500

$3,800600

1,7101,8302,300

$5,630- 300

620340

5,000

As shown in Table 12-7, a net profit of $1,054,000 was earned on the three completed jobs. Under the "completed contract" method, this total would be total profit. Under the percentage-of completion method, the year's expected profit on the projects underway would be added to this amount. For job 4, the expected profits are calculated as follows:

Current contract price = Original contract price + Contract Changes = 4,200 + 400 + 4,600

Credit or debit to date = Total costs to date - Payments received or due to date = 3,600 - 3,520 = - 80

Contract value of uncompleted work

= Current contract price - Payments received or due = 4,600 - 3,520 = 1,080

Credit or debit to come = Contract value of uncompleted work - Estimated Cost to




Complete = 1,080 - 500 = 580

Estimated final gross profit = Credit or debit to date + Credit or debit to come = - 80. + 580. = 500

Estimated total project costs = Contract price - Gross profit = 4,600 - 500 = 4,100

Estimated Profit to date = Estimated final gross profit x Proportion of work complete = 500. (3600/4100)) = 439

Similar calculations for the other jobs underway indicate estimated profits to date of $166,000 for Job 5 and -$32,000 for Job 6. As a result, the net profit using the "percentage-of-completion" method would be $1,627,000 for the year. Note that this figure would be altered in the event of multi-year projects in which net profits on projects completed or underway in this year were claimed in earlier periods.

12.5 Control of Project Cash Flows

Section 12.3 described the development of information for the control of project costs with respect to the various functional activities appearing in the project budget. Project managers also are involved with assessment of the overall status of the project, including the status of activities, financing, payments and receipts. These various items comprise the project and financing cash flows described in earlier chapters. These components include costs incurred (as described above), billings and receipts for billings to owners (for contractors), payable amounts to suppliers and contractors, financing plan cash flows (for bonds or other financial instruments), etc.

As an example of cash flow control, consider the report shown in Table 12-8. In this case, costs are not divided into functional categories as in Table 12-4, such as labour, material, or equipment. Table 12-8 represents a summary of the project status as viewed from different components of the accounting system. Thus, the aggregation of different kinds of cost exposure or cost commitment shown in Table 12-0 has not been performed. The elements in Table 12-8 include:

• Costs This is a summary of charges as reflected by the job cost accounts, including expenditures and estimated costs. This row provides an aggregate summary of the detailed activity cost information described in the previous section. For this example, the total costs as of July 2 (7/02) were $ 8,754,516, and the original cost estimate was $65,863,092, so the approximate percentage complete was 8,754,516/65,863,092 or 13.292%. However, the project manager now projects a cost of $66,545,263 for the project, representing an increase of $682,171 over the original estimate. This new estimate would reflect the actual percentage of work completed as well as other effects such




as changes in unit prices for labour or materials. Needless to say, this increase in expected costs is not a welcome change to the project manager.

• Billings This row summarizes the state of cash flows with respect to the owner of the facility; this row would not be included for reports to owners. The contract amount was $67,511,602, and a total of $9,276,621 or 13.741% of the contract has been billed. The amount of allowable billing is specified under the terms of the contract between an owner and an engineering, architect, or constructor. In this case, total billings have exceeded the estimated project completion proportion. The final column includes the currently projected net earnings of $966,339. This figure is calculated as the contract amount less projected costs: 67,511,602 - 66,545,263 = $966,339. Note that this profit figure does not reflect the time value of money or discounting.

• Payables The Payables row summarizes the amount owed by the contractor to material suppliers, labour or sub-contractors. At the time of this report, $6,719,103 had been paid to subcontractors, material suppliers, and others. Invoices of $1,300,089 have accumulated but have not yet been paid. A retention of $391,671 has been imposed on subcontractors, and $343,653 in direct labour expenses have been occurred. The total of payables is equal to the total project expenses shown in the first row of costs.

• Receivables This row summarizes the cash flow of receipts from the owner. Note that the actual receipts from the owner may differ from the amounts billed due to delayed payments or retain age on the part of the owner. The net-billed equals the gross billed less retention by the owner. In this case, gross billed is $9,276,621 (as shown in the billings row), the net billed is $8,761,673 and the retention is $514,948. Unfortunately, only $7,209,344 has been received from the owner, so the open receivable amount is a (substantial!) $2,067,277 due from the owner.

• Cash Position This row summarizes the cash position of the project as if all expenses and receipts for the project were combined in a single account. The actual expenditures have been $7,062,756 (calculated as the total costs of $8,754,516 less subcontractor retentions of $391,671 and unpaid bills of $1,300,089) and $ 7,209,344 has been received from the owner. As a result, a net cash balance of $146,588 exists which can be used in an interest earning bank account or to finance deficits on other projects.

Each of the rows shown in Table 12-8 would be derived from different sets of financial accounts. Additional reports could be prepared on the financing cash flows for bonds or interest charges in an overdraft account.

TABLE 12-8 An Example of a Cash Flow Status Report




Costs 7/02

Charges 8,754,516

Estimated 65,863,092

% Complete13.292

Projected 66,545,263

Change 682,171

Billings 7/01

Contract 67,511,602

Gross Bill 9,276,621

% Billed 13.741

Profit 966,339

Payables 7/01

Paid 6,719,103

Open 1,300,089

Retention 391,671

Labour 343,653

Total8,754,516

Receivable 7/02

Net Bill 8,761,673

Received 7,209,344

Retention 514,948

Open 2,067,277

Cash Position Paid 7,062,756

Received 7,209,344

Position 146,588

The overall status of the project requires synthesizing the different pieces of information summarized in Table 12-8. Each of the different accounting systems contributing to this table provides a different view of the status of the project. In this example, the budget information indicates that costs are higher than expected, which could be troubling. However, a profit is still expected for the project. A substantial amount of money is due from the owner, and this could turn out to be a problem if the owner continues to lag in payment. Finally, the positive cash position for the project is highly desirable since financing charges can be avoided.

The job status reports illustrated in this and the previous sections provide a primary tool for project cost control. Different reports with varying amounts of detail and item reports would be prepared for different individuals involved in a project. Reports to upper management would be summaries, reports to particular staff individuals would emphasize their responsibilities (e.g. purchasing, payroll, etc.), and detailed reports would be provided to the individual project managers. Coupled with scheduling reports described in Chapter 10, these reports provide a snapshot view of how a project is doing. Of course, these schedule and cost reports would have to be tempered by the actual accomplishments and problems occurring in the field. For example, if work already completed is of sub-standard quality, these reports would not reveal such a problem. Even though the reports indicated a project on time and on budget, the possibility of re-work or inadequate facility performance due to quality problems would quickly reverse that rosy situation.

12.6 Schedule Control

In addition to cost control, project managers must also give considerable attention to monitoring schedules. Construction typically involves a deadline for work completion, so contractual agreements will force attention to schedules. More generally, delays in construction represent additional costs due to late facility occupancy or other factors. Just as costs incurred are compared to budgeted costs,




actual activity durations may be compared to expected durations. In this process, forecasting the time to complete particular activities may be required.

The methods used for forecasting completion times of activities are directly analogous to those used for cost forecasting. For example, a typical estimating formula might be:

(12.5)

where Df is the forecast duration, W is the amount of work, and ht is the observed productivity to time t. As with cost control, it is important to devise efficient and cost effective methods for gathering information on actual project accomplishments. Generally, observations of work completed are made by inspectors and project managers and then work completed is estimated as described in Section 12.3. Once estimates of work complete and time expended on particular activities is available, deviations from the original duration estimate can be estimated. The calculations for making duration estimates are quite similar to those used in making cost estimates in Section 12.3.

For example, Figure 12-2 shows the originally scheduled project progress versus the actual progress on a project. This figure is constructed by summing up the percentage of each activity which is complete at different points in time; this summation can be weighted by the magnitude of effort associated with each activity. In Figure 12-2, the project was ahead of the original schedule for a period including point A, but is now late at point B by an amount equal to the horizontal distance between the planned progress and the actual progress observed to date.




Figure 12-2 Illustration of Planned versus Actual Progress over Time on a Project

Schedule adherence and the current status of a project can also be represented on geometric models of a facility. For example, an animation of the construction sequence can be shown on a computer screen, with different colours or other coding scheme indicating the type of activity underway on each component of the facility. Deviations from the planned schedule can also be portrayed by colour coding. The result is a mechanism to both indicate work in progress and schedule adherence specific to individual components in the facility.

In evaluating schedule progress, it is important to bear in mind that some activities possess float or scheduling leeway, whereas delays in activities on the critical path will cause project delays. In particular, the delay in planned progress at time t may be soaked up in activities' float (thereby causing no overall delay in the project completion) or may cause a project delay. As a result of this ambiguity, it is preferable to update the project schedule to devise an accurate portrayal of the schedule adherence. After applying a scheduling algorithm, a new project schedule can be obtained. For cash flow planning purposes, a graph or report similar to that shown in Figure 12-3 can be constructed to compare actual expenditures to planned expenditures at any time. This process of re-scheduling to indicate the




schedule adherence is only one of many instances in which schedule and budget updating may be appropriate, as discussed in the next section.

Figure 12-3 Illustration of Planned versus Actual Expenditures on a Project

12.7 Schedule and Budget Updates

Scheduling and project planning is an activity that continues throughout the lifetime of a project. As changes or discrepancies between the plan and the realization occur, the project schedule and cost estimates should be modified and new schedules devised. Too often, the schedule is devised once by a planner in the central office, and then revisions or modifications are done incompletely or only sporadically. The result is the lack of effective project monitoring and the possibility of eventual chaos on the project site.

On "fast track" projects, initial construction activities are begun even before the facility design is finalized. In this case, special attention must be placed on the coordinated scheduling of design and construction activities. Even in projects for which the design is finalized before construction begins, change orders representing changes in the "final" design are often issued to incorporate changes desired by the owner.




Periodic updating of future activity durations and budgets is especially important to avoid excessive optimism in projects experiencing problems. If one type of activity experiences delays on a project, then related activities are also likely to be delayed unless managerial changes are made. Construction projects normally involve numerous activities which are closely related due to the use of similar materials, equipment, workers or site characteristics. Expected cost changes should also be propagated throughout a project plan. In essence, duration and cost estimates for future activities should be revised in light of the actual experience on the job. Without this updating, project schedules slip more and more as time progresses. To perform this type of updating, project managers need access to original estimates and estimating assumptions.

Unfortunately, most project cost control and scheduling systems do not provide many aids for such updating. What is required is a means of identifying discrepancies, diagnosing the cause, forecasting the effect, and propagating this effect to all related activities. While these steps can be undertaken manually, computers aids to support interactive updating or even automatic updating would be helpful.

Beyond the direct updating of activity durations and cost estimates, project managers should have mechanisms available for evaluating any type of schedule change. Updating activity duration estimations, changing scheduled start times, modifying the estimates of resources required for each activity, and even changing the project network logic (by inserting new activities or other changes) should all be easily accomplished. In effect, scheduling aids should be directly available to project managers. Fortunately, local computers are commonly available on site for this purpose.

Example 12-6: Schedule Updates in a Small Project

As an example of the type of changes that might be required, consider the nine activity project described in Section 10.3 and appearing in Figure 12-4. Also, suppose that the project is four days underway, with the current activity schedule and progress as shown in Figure 12-5. A few problems or changes that might be encountered include the following:

1. An underground waterline that was previously unknown was ruptured during the fifth day of the project. An extra day was required to replace the ruptured section, and another day will be required for clean-up. What is the impact on the project duration?

o To analyze this change with the critical path scheduling procedure, the manager has the options of (1) changing the expected duration of activity C, General Excavation, to the new expected duration of 10 days or (2) splitting activity C into two tasks (corresponding to the work done prior to the




waterline break and that to be done after) and adding a new activity representing repair and clean-up from the waterline break. The second approach has the advantage that any delays to other activities (such as activities D and E) could also be indicated by precedence constraints.

o Assuming that no other activities are affected, the manager decides to increase the expected duration of activity C to 10 days. Since activity C is on the critical path, the project duration also increases by 2 days. Applying the critical path scheduling procedure would confirm this change and also give a new set of earliest and latest starting times for the various activities.

2. After 8 days on the project, the owner asks that a new drain be installed in addition to the sewer line scheduled for activity G. The project manager determines that a new activity could be added to install the drain in parallel with Activity G and requiring 2 days. What is the effect on the schedule?

o Inserting a new activity in the project network between nodes 3 and 4 violates the activity-on-branch convention that only one activity can be defined between any two nodes. Hence, a new node and a dummy activity must be inserted in addition to the drain installation activity. As a result, the nodes must be re-numbered and the critical path schedule developed again. Performing these operations reveals that no change in the project duration would occur and the new activity has a total float of 1 day.

o To avoid the labour associated with modifying the network and re-numbering nodes, suppose that the project manager simply re-defined activity G as installation of sewer and drain lines requiring 4 days. In this case, activity G would appear on the critical path and the project duration would increase. Adding an additional crew so that the two installations could proceed in parallel might reduce the duration of activity G back to 2 days and thereby avoid the increase in the project duration.

3. At day 12 of the project, the excavated trenches collapse during Activity E. An additional 5 days will be required for this activity. What is the effect on the project schedule? What changes should be made to insure meeting the completion deadline?

o Activity E has a total float of only 1 day. With the change in this activity's duration, it will lie on the critical path and the project duration will increase.

o Analysis of possible time savings in subsequent activities is now required, using the procedures described in Section 10.9.




Figure 12-4 A Nine Activity Example Project




Figure 12-5 Current Schedule for an Example Project Presented as a Bar Chart

As can be imagined, it is not at all uncommon to encounter changes during the course of a project that require modification of durations, changes in the network logic of precedence relationships, or additions and deletions of activities. Consequently, the scheduling process should be readily available as the project is underway.

12.8 Relating Cost and Schedule Information

The previous sections focused upon the identification of the budgetary and schedule status of projects. Actual projects involve a complex inter-relationship between time and cost. As projects proceed, delays influence costs and budgetary problems may in turn require adjustments to activity schedules. Trade-offs between time and costs were discussed in Section 10.9 in the context of project planning in which additional resources applied to a project activity might result in a shorter duration but higher costs. Unanticipated events might result in increases in both time and cost to complete an activity. For example, excavation problems may easily lead to much lower than anticipated productivity on activities requiring digging.

While project managers implicitly recognize the inter-play between time and cost on projects, it is rare to find effective project control systems which include both elements. Usually, project costs and schedules are recorded and reported by separate application programs. Project managers must then perform the tedious task of relating the two sets of information.

The difficulty of integrating schedule and cost information stems primarily from the level of detail required for effective integration. Usually, a single project activity will involve numerous cost account categories. For example, an activity for the preparation of a foundation would involve labourers, cement workers, concrete forms, concrete, reinforcement, transportation of materials and other resources. Even a more disaggregated activity definition such as erection of foundation forms would involve numerous resources such as forms, nails, carpenters, labourers, and material transportation. Again, different cost accounts would normally be used to record these various resources. Similarly, numerous activities might involve expenses associated with particular cost accounts. For example, a particular material such as standard piping might be used in numerous different schedule activities. To integrate cost and schedule information, the disaggregated charges for specific activities and specific cost accounts must be the basis of analysis.

A straightforward means of relating time and cost information is to define individual work elements representing the resources in a particular cost category




associated with a particular project activity. Work elements would represent an element in a two-dimensional matrix of activities and cost accounts as illustrated in Figure 12-6. A numbering or identifying system for work elements would include both the relevant cost account and the associated activity. In some cases, it might also be desirable to identify work elements by the responsible organization or individual. In this case, a three dimensional representation of work elements is required, with the third dimension corresponding to responsible individuals. More generally, modern computerized databases can accommodate a flexible structure of data representation to support aggregation with respect to numerous different perspectives; this type of system will be discussed in Chapter 14.

With this organization of information, a number of management reports or views could be generated. In particular, the costs associated with specific activities could be obtained as the sum of the work elements appearing in any row in Figure 12-6. These costs could be used to evaluate alternate technologies to accomplish particular activities or to derive the expected project cash flow over time as the schedule changes. From a management perspective, problems developing from particular activities could be rapidly identified since costs would be accumulated at such a disaggregated level. As a result, project control becomes at once more precise and detailed.

Figure 12-6 Illustration of a Cost Account and Project Activity Matrix

Unfortunately, the development and maintenance of a work element database can represent a large data collection and organization effort. As noted earlier, four hundred separate cost accounts and four hundred activities would not be unusual for a construction project. The result would be up to 400x400 = 160,000 separate work elements. Of course, not all activities involve each cost account. However, even a density of two percent (so that each activity would have eight cost accounts and each account would have eight associated activities on the average) would




involve nearly thirteen thousand work elements. Initially preparing this database represents a considerable burden, but it is also the case that project bookkeepers must record project events within each of these various work elements. Implementations of the "work element" project control systems have typically foundered on the burden of data collection, storage and book-keeping.

Until data collection is better automated, the use of work elements to control activities in large projects is likely to be difficult to implement. However, certain segments of project activities can profit tremendously from this type of organization. In particular, material requirements can be tracked in this fashion. Materials involve only a subset of all cost accounts and project activities, so the burden of data collection and control is much smaller than for an entire system. Moreover, the benefits from integration of schedule and cost information are particularly noticeable in materials control since delivery schedules are directly affected and bulk order discounts might be identified. Consequently, materials control systems can reasonably encompass a "work element" accounting system.

In the absence of a work element accounting system, costs associated with particular activities are usually estimated by summing expenses in all cost accounts directly related to an activity plus a proportion of expenses in cost accounts used jointly by two or more activities. The basis of cost allocation would typically be the level of effort or resource required by the different activities. For example, costs associated with supervision might be allocated to different concreting activities on the basis of the amount of work (measured in cubic yards of concrete) in the different activities. With these allocations, cost estimates for particular work activities can be obtained.

12.10 Problems

1. Suppose that the expected expenditure of funds in a particular category was expected to behave in a piecewise linear fashion over the course of the project. In particular, the following points have been established from historical records for the percentage of completion versus the expected expenditure (as a percentage of the budget):

Percentage of Completion Expected Expenditure 0% 20% 40% 60% 80% 100%

0% 10% 25% 55% 90% 100%




a. Graph the relationship between percentage complete and expected expenditure. b. Develop a formula or set of formulas for forecasting the ultimate expenditure on this activity given the percentage of completion. Assume that any over or under expenditure will continue to grow proportionately during the course of the project. c. Using your formula, what is the expected expenditure as a percentage of the activity budget if: I. 15% of funds have been expended and 15% of the activity is complete. ii. 30% of funds have been expended and 30% of the activity is complete. iii. 80% of funds have been expended and 80% of the activity is complete.

2. Repeat Problem 1 parts (b) and (c) assuming that any over or under expenditure will not continue to grow during the course of the project.

3. Suppose that you have been asked to take over as project manager on a small project involving installation of 5,000 linear feet (LF) of metal ductwork in a building. The job was originally estimated to take ten weeks, and you are assuming your duties after three weeks on the project. The original estimate assumed that each linear foot of ductwork would cost $10, representing $6 in labour costs and $4 in material cost. The expected production rate was 500 linear feet of ductwork per week. Appearing below is the data concerning this project available from your firm's job control information system:

Week

Weekly Unit Costs ($/Lf) Quantity Placed (Lf) Total Cost

Labour Materials Total Week To Date Week To Date 1 2 3

12.00 8.57 6.67

4.00 4.00 4.00

16.00 12.5710.67

250 350 450

250 600

1,050

4,0004,4004,800

4,000 8,400 13,200

a. Based on an extrapolation using the average productivity and cost for all three weeks, forecast the completion time, cost and variance from original estimates. b. Suppose that you assume that the productivity achieved in week 3 would continue for the remainder of the project. How would this




affect your forecasts in (a)? Prepare new forecasts based on this assumption.

4. What criticisms could you make of the job status report in the previous problem from the viewpoint of good project management?

5. Suppose that the following estimate was made for excavation of 120,000 cubic yards on a site:

Resource Quantity Cost

MachinesLabour Trucks

Total

1,200 hours6,000 hours2,400 hours

$60,000150,000

75,000$285,000

After 95,000 cubic yards of excavation was completed, the following expenditures had been recorded:

Resource Quantity Cost

MachinesLabour Trucks

Total

1,063 hours7,138 hours1,500 hours

$47,835142,527

46,875$237,237

a. Calculate estimated and experienced productivity (cubic yards per hour) and unit cost (cost per cubic yard) for each resource. b. Based on straight line extrapolation, do you see any problem with this activity? If so, can you suggest a reason for the problem based on your findings in (a)?

6. Suppose the following costs and units of work completed were recorded on an activity:

MonthMonthly

ExpenditureNumber of

Work Units Completed1 $1,200 30




2 3 4 5 6

$1,250 $1,260 $1,280 $1,290 $1,280

32 38 42 42 42

Answer the following questions:

a. For each month, determine the cumulative cost, the cumulative work completed, the average cumulative cost per unit of work, and the monthly cost per unit of work. b. For each month, prepare a forecast of the eventual cost-to-complete the activity based on the proportion of work completed. c. For each month, prepare a forecast of the eventual cost-to-complete the activity based on the average productivity experienced on the activity. d. For each month, prepare a forecast of the eventual cost-to-complete the activity based on the productivity experienced in the previous month. e. Which forecasting method (b, c or d) is preferable for this activity? Why?

7. Repeat Problem 6 for the following expenditure pattern:

MonthMonthly

ExpenditureNumber of

Work Units Completed1 2 3 4 5 6

$1,200 $1,250 $1,260 $1,280 $1,290 $1,300

30 35 45 48 52 54

8. Why is it difficult to integrate scheduling and cost accounting information in project records?

9. Prepare a schedule progress report on planned versus actual expenditure on a project (similar to that in Figure 12-5) for the project described in Example 12-6.




10. Suppose that the following ten activities were agreed upon in a contract between an owner and an engineer.

Original Work Plan Information Activity Duration (months) Predecessors Estimated Cost ($ thousands)

A B C D E F G H I J

2 5 5 2 3 8 4 4 11 2

--- --- B C B ---

E, F E, F B

E, F

7 9 8 4 1 7 6 5 10 7

Original Contract Information Total Direct Cost Overhead Total Direct and Overhead Profit Total Contract Amount

$6464

128 12.8$140.8

First Year Cash Flow Expenditures Receipts

$56,000 $60,800

The mark-up on the activities' costs included 100% overhead and a profit of 10% on all costs (including overhead). This job was suspended for one year after completion of the first four activities, and the owner paid a total of $60,800 to the engineer. Now the owner wishes to re-commence the job. However, general inflation has increased costs by ten percent in the intervening year. The engineer's discount rate is 15 percent per year (in current year dollars). For simplicity, you may assume that all cash transactions occur at the end of the year in making discounting calculations in answering the following questions:

a. How long will be remaining six activities require? b. Suppose that the owner agrees to make a lump sum payment of the remaining original contract at the completion of the project. Would the engineer still make a profit on the job? If so, how much? c. Given that the engineer would receive a lump sum payment at the end of the project, what amount should he request in order to earn his




desired ten percent profit on all costs? d. What is the net future value of the entire project at the end, assuming that the lump sum payment you calculated in (c) is obtained?

11. Based on your knowledge of coding systems such as MASTERFORMAT and estimating techniques, outline the procedures that might be implemented to accomplish:

a. automated updating of duration and cost estimates of activities in light of experience on earlier, similar activities. b. interactive computer based aids to help a project manager to accomplish the same task.




The Basics of Cost

Analysis




2




3

Contents of this Module• Section 1 - Cost Analysis• Section 2 – Defining Costs• Section 3 – Source Selections• Section 4 - Cost Data Requirements• Section 5 – Field Pricing Support• Section 6 - Cost Allowability




Section 1 - Cost Analysis

Definition




5

Definition of Cost AnalysisThe review and evaluation of the separate cost elements and profit in an offeror’s or contractor’s proposal (including cost or pricing data or information other than cost or pricing data), and the application of judgment to determine how well the proposed costs represent what the cost of the contract should be, assuming reasonable economy and efficiency.




6

Price and Cost Analysis Compared

• Price Analysis is the process of examining and evaluating a proposed price without evaluating its separate cost elements and proposed profit.– Determines whether the price is fair and reasonable.

• Cost Analysis– Evaluates the separate cost elements, profit, and facilities capital

cost of money (if proposed).– Used to evaluate/determine any or all of the following:

• cost and/or price reasonableness • cost realism• most probable cost and/or price

– It is the more costly method in terms of time and manpower.




7

Cost Analysis: When to apply it.

• It is performed if certified cost or pricing data are required. • It may be used to evaluate information other than cost or

pricing data, e.g., non-certified cost data.• Normally, it is not needed if adequate price competition exists.

In this case, it still may be used if the price is determined to be unreasonable or you are considering a cost realism evaluation .

• Cost analysis is one of the approaches that should be used when a cost realism evaluation is required.

• When you perform a cost analysis, you should also include a price analysis to verify price reasonableness.




Section 2Defining Costs

Performing a Cost AnalysisExamples: Proposed Price by

Major Cost Element




9

engineeringmanufacturingfield serviceILS

direct labor

travelvendortooling

odc

raw materialpurchased partsstandard commercialitemssubcontracts

direct material

direct cost

engineeringmanufacturingfield serviceILSmaterialhandling

burden (O/H) G&A

engineeringmanufacturingfield serviceILSmaterialhandlingG&A

FCCM (COM)

indirect cost

cost profit

Contract Price

Contract Price = Cost + Profit




10

Total Contract Cost

• …is the sum of the direct & indirectcosts allocable to the contract,incurred or to be incurred, less anyallocable credits, plus anyapplicable cost of money (CostAccounting Standard 414).




11

Direct Costs (FAR 31.202)

• Definition: Direct costs are identifiable to a final cost objective (a particular contract).

Examples: direct material and direct labor.

• All costs identified specifically with a contract are direct costs for that contract and shall not be charged to another contract directly, or indirectly.

• No cost shall be charged to a contract as a direct cost, if other costs incurred for the same purpose in like circumstances have been charged as an indirect cost.




12

Indirect Costs• Definition: Indirect costs are not directly

identifiable with a final cost objective (e.g. aparticular contract), but identified with two or morefinal cost objectives.

• The distribution of indirect costs to variouscontracts should roughly be based on the benefitsreceived on each contract.

• No cost shall be charged to a contract as an indirectcost if other costs incurred for the same purpose inlike circumstances have been charged as a directcost to that contract or any other contract.




13

Alternative Direct Cost Treatment

• For practicality, any direct cost of minor dollar amount may be treated as an indirect cost if this treatment:– Is consistently applied across all contracts,

and

– Produces substantially the same results as treating the cost as a direct cost




14

Proposal Major Cost Elements• Direct Labor Cost

– Labor Categories– Labor Rates– Labor Hours

• Direct Material Cost– The Actual Materials

• Raw material• Purchased parts and/or

assemblies– Subcontracts– Miscellaneous material– Discounts, Scrap, Inventory

Shrinkage, & Freight-in

• Indirect Costs– Material Handling– Fringe Benefits– Overhead (or burden)– G&A Expenses

• Other Direct Costs– Nonrecurring costs– Subcontracts– Travel

• Profit or Fee• Cost of Money• Escalation




15

Cost Analysis: First Step• Pre-solicitation involvement by the price/cost analyst

(FSO) and engineer (ESO) is recommended– Price/cost input

• Section B set-up, Price/Cost Evaluation Template, Section L price/cost data requirements, and Section M price/cost evaluation factors

– Engineering and price/cost input• SOW/PWS

• Read the solicitation, section B, and SOW/PWS– What is being purchased?

• Not as easy as looking at the Section B CLINs and/or SLINs– What are the solicitation requirements for the contractor and the

government?




16

Cost Analysis: Second Step• Read the contractor’s proposal price/cost narrative

– It will discuss the contractor’s proposal structure, assumptions, rationale, etc.

• The length and quality will vary• An important source of proposal information

• Study/know the proposal set-up• Check the math:

– Is the arithmetic correct? The Section B unit prices multiplied by the quantities result in the total amounts?

– Do the amounts “foot”? Do they add-up and/or calculate correctly?

– Do the numbers “track”? Can the figures be traced among the support schedules?




17

Cost Analysis: Third Step

• What is the basis of the proposed cost?– How did you come up with this number?– What is your rationale?– What are your assumptions?– What are the calculations you used?

• The contractor’s responses provide the answer to the question:– Why is this price and/or cost reasonable?




18

Cost Estimating Methods Used by the Contractor

• Common methods:– Round Table: Experts get together and make

judgments on projected costs – Comparison: Adjustments are made to a past or current

item to derive the cost– Parametric: Projections are based on formulas, or cost

estimating relationships – Detailed: A thorough review is made, with detailed

information comprising the estimate

An offeror may use any generally accepted estimating methods that are equitable and consistently applied in similar situations.




19

Basic Cost Element BreakdownProposed Price By Cost ElementItem/Service:RFP:CLIN:SLIN:Date/Time: 4/21/2006 13:43File Name:

Base PeriodCost Element: Hours Rate Base AmountMaterial:Direct Material 100 Scrap/Discount/Miscellaneous 1% 100 1 Material Handling 2% 101 2 Total Material 103 Direct Labor:Labor Category 1 5 5.00 25 Labor Category 2 6 2.00 12 Total 11 3.36 37 Fringe Benefits 3% 37 1 Overhead 4% 38 2 Other Direct Costs (ODC's) Subcontracts 100 Travel 50 Total ODC's 150 Subtotal 193 G&A Expenses 5% 193 10 Total Costs 202 Profit 1% 202 2 Unit Price 204 Quantity 2 Total Price 409




20

Basic Cost Element BreakdownCost Element: Hours Rate Base AmountMaterial:Direct Material 100 Scrap/Discount/Miscellaneous 1% 100 1 Material Handling 2% 101 2 Total Material 103 Direct Labor:Labor Category 1 5 5.00 € 25 Labor Category 2 6 2.00 € 12 Total 11 3.36 € 37 Fringe Benefits 3% 37 1 Overhead 4% 38 2 Other Direct Costs (ODC's): Subcontracts 100 Travel 150 Transportation 50 Total ODC's 300 Subtotal 193 G&A Expenses 5% 193 10 Total Costs 202 Profit 1% 202 2 Unit Price 204 Quantity 2 Total Price 409




21

Example: Loaded Labor RateCost Element Breakdown

Loaded Labor Rate Calculation TemplateItem/Service:RFP:CLIN:SLIN:Date/Time: 2/28/2006 11:08File Name:

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17)

(3)*(4) (5)*(6) (5)+(6) (7)*(8) (7)+(8) (8)*(9) (8)+(9) (11)*(12) (11)+(12) (13)*(14) (13)+(14) (15)*(16)

Rates: 1.00% 2.00% 3.00% 4.00% 1% Est EstBase Composite Adj Labor Total

CLIN/SLIN Labor Category WGT Lbr Rate L Rate Esc LR FB ST O/H ST G&A TC Profit LLR Hours PriceAutomotive Mechanic 40% 1.00 € 0.40 €Metal Body Repairman 20% 2.00 € 0.30 €Elec Tech/Mechanic 30% 3.00 € 0.20 €Fuel/Elec Sys Mechanic 10% 4.00 € 0.10 €

0001AA Composite 100% 1.00 € 0.01 € 1.01 € 0.02 € 1.03 € 0.03 € 1.06 € 0.04 € 1.10 € 0.01 € 1.11 € 100 111.46 €




22

SAMPLE COST BREAKDOWN2001 2002 2003 Total

MaterialDirect MaterialHandlingShrinkageShop SuppliesScrap

905

23

905

23

1086

33

Total Mat’l 100 100 120 320

LaborLabor RateLabor Hours

254

304

354

Total Labor 100 120 140 360

Labor O/HODC

105

105

105

3015

S/T 215 235 275 725G&AProfit/FeeCOM

2015

5

2015

5

2015

5

604515

Total Price 255 275 315 845




6. Time-Cost Trade-Off analysis

6.1. Introduction

It is common for people to want to shorten project duration. It may be the project is behind schedule or the scheduled project deadline has been moved forward. By knowing the critical path, the project manager and his or her team can use several duration compression techniques to shorten the project schedule.

Crashing is a technique for making cost and schedule time trade-offs to obtain the greatest amount of time compression for the least incremental cost. This technique is also known as time cost trade-offs.

Crashing is a process for reducing the duration of critical path activities by allocating more resources to those activities or by changing their scope. In this case some (or all) of the activities can be speeded up (crashed) by increasing the amount of money spent on them.

If the minimum time for an activity is used, the activity is said to be totally crashed. If somewhere between the normal time and minimum time is used then the activity is said to be partially crashed.

If the relationship between the time spent on an activity and its cost is linear then the problem as to which activities to partially crash, totally crash or not crash at all can be formulated as one in linear programming.

The objective is to minimise the total cost of completing the project by the specified date. Of course, if the desired finish date is too short, the problem may be infeasible.

CPM was initially set up to address the time cost trade-off dilemma often presented to project managers, where there is a complex relationship between project time-to-complete and cost-to-complete.

6.2. Estimating Cost and Duration

Consider the following: • Rent increases with time. • Running costs – water, electricity and gas would increase with time. • If the project’s duration is reduced, employee labour rate will increase if the workers have to

work overtime. • Contract labour on a fixed rate is not affected by time, but their productivity may reduce if they

work long hours. • Fixed price contracts may not be affected by time.

If you shorten the duration of a project, some costs will reduce (plant hire), while others will increase (overtime). On large complex projects you need a model like CPM to work out the overall effect of these types of changes. Accountants, for various reasons, classify costs in two general categories: direst cost also known as variable cost, and indirect cost, sometimes referred to as fixed cost.

DIRECT COSTS • Some of the examples of Direct Costs are materials, equipment, labour wages, overtime

premium, subcontractors, freight, sales tax.




2• They vary directly with your volume of output.

• They generally increase as the duration of a project is shortened.

INDIRECT COSTS

• Some of the examples of indirect costs are insurance, start-up, security, marketing, goodwill,

supervision, overheads, interest charges, contractual penalties, clerical costs.

• They are fixed periodic costs.

• They generally decrease as the duration of a project is shortened.

The Critical Path Method is a deterministic scheduling technique in which each activity has two sets

of times. The first is the normal time that we used in our scheduling so far. The other time is the

crash time, which is the shortest time required to complete an activity. Associated with each time

are the normal coast and the crash cost respectively. Usually we can shorten an activity’s duration

by adding more resources hence the crash cost is higher than the normal cost.

Normal Duration, Normal Cost

Determine the most cost-effective plan for the project. That is the plan you would come up with if

you were going to bid against competitors for the same project or resources (and indeed most

projects are competing, at one level or another).

We should always follow three simple steps.

1. Determine the most cost-effective technical approach. (determine which method will allow you

to complete any given activity while spending the least amount of money)

2. Make an estimate of how long the most cost-efficient method will take to complete. (this is

meant to give you an advantage if you are “bidding” for the work. You must be careful not to

underestimate durations. Engineers, especially those without a lot of experience, are notoriously

optimistic when estimating time, and will often think “effort” rather than “duration.” Ignore any

external special conditions at this point, such as bad weather or sick leave. Assume that things

will go as planned.

3. Selectively adjust your estimate for any activity that is subject to common problems. (If you

know that while pouring concrete you have a 20% chance of rain, you then adjust the duration

of the pour accordingly. If pouring would take 10 days without interruption, then adjust it to 12

days. Likewise, there is a certain probability that, while your software developers are writing

programs, the network will go down at some point. At this stage, you are anticipating common

problems. These are occurrences that do not necessarily require additional resources, but they




3will add to the duration of the activity. Be sure to adjust only those activities subject to common

problems. Leave all the other estimates alone.

Now in terms of normal duration, activity crashing is the compression of activity duration beyond

the most efficient combination of resources (normal duration), while maintaining quality

requirements. Examples are

• using overtime

• doubling up resources, more men on the job!

• lot splitting

• subcontracting portions

• using faster resources, air freight, bigger machines,

Costs of Crashing Activities:

• overtime premium

• subcontractor's profit

• coordination effort

• multiple setups

• more expensive resources

• other...

EXAMPLE 1

Consider the following situation in a project of relocating an office complex. It was found that the

duration for erecting the movable partitions and their attachments varied as the number of workers

assigned was increased from 2 to 8 workers. Table 1 below shows the resulting durations and costs

in man-hours.

Table 1: Duration and Cost for “erecting the movable partitions and their attachments”

Number of Personnel assigned Duration (hours) Direct Cost (person-hours)

2 25

3 14

4 10

5 9

6 8

7 8

8 8




4OPTIMUM DURATION

Figure 1: Total cost curve as a function of direct and indirect costs

Unless planned at the Optimum Duration level, further crashing of activities adds to their total cost

(overtime, special shipping, etc), which may defeat the reason you got the bid in the first place:

cost. Crashing activities also adds to your team’s stress level, which increases the chance of failure.

When having to crash activities to meet an external deadline, it is an opportunity to reach for the

Optimum Duration and actually reduce total cost as you reduce duration.

Simulating all the costs will give you the overall effect of time changes on project costs. This

technique can also be used for project acceleration where you need to know the trade-off between

the cost of accelerating a project to meet certain milestones compared with the penalties of failing to

achieve them.

EXAMPLE 2

Suppose you wish to have a ditch dug in your backyard. The high school kid next door will do it in

a five days for $50, or you can hire a ditch-witch for $160 and do it in an afternoon. The indirect

costs associated with keeping the lawn torn up is $10 per day.

(a) Find the normal cost and the normal duration.

(b) Find the fully crashed point

(c) If the kid next door would take a $20 bonus to finish in 3 days determine the new total cost

for hiring him.

(d) Is the new total cost in part (c) an acceptable alternative?

Cost ($)

Duration of the project




56.3. Schedule Compression

Two main last resort techniques are known as crashing, which looks at cost-schedule trade-offs, and

fast tracking, which looks at the possibility of performing activities in parallel that would normally

be done in sequence.

Fast tracking involves doing project tasks at the same time rather than in sequence. Fast tracking

requires, by necessity, that the task dependencies allow such parallel work.

What else can be done to shorten the critical path?

• See if some activities might be further broken down to allow fast-tracking. If dependencies

between activities originally did not allow fast-tracking, breaking up these activities might open

new possibilities to accomplish tasks in parallel. Maybe some activities do not have to be

completely finished before a successor activity can be started. Thinking creatively about the

different activities on the critical path can help to possibly take them off the critical path, which

helps to shorten the overall project schedule.

• Check the duration estimates of the critical activities – in Microsoft Project a simple double

click on the task duration will open a Task Information dialog box. Often, duration estimates are

based on rules of thumb or include fudge factors. Breaking down the critical activities to a more

detailed breakdown might adjust the durations upward. Although this does not help to shorten

the critical path, it can save you from any surprises during the execution of the project, which

can also be beneficial.

An additional tool for project schedule development is simulation. Simulation is the process of

calculating project and activity durations using different assumptions, constraints, and resource

allocations. Two commonly used types of simulation are Monte Carlo simulation and what-if

analyses. Monte Carlo simulations are probabilistic analyses used to calculate a distribution of

likely results (in our case likely project or task durations). What-if-analysis take advantage of logic

networks by simulating various scenarios, such as what if a major component for a system is

delayed. Both these techniques allow additional insight into the duration of projects and project

activities.

6.4. Performing Time-Cost Trade-Off

It is based on the following assumptions:

1. Each activity has two pairs of duration and cost estimates: normal and crash. The normal time is

the estimated length of time required to perform the activity under normal conditions, according

to the plan (In PERT it is the expected time estimated using the three time used, [(a + 4m +b)/6]

and under the assumption of resource loadings that are normal. The normal cost is the estimated




6cost to complete the activity in the normal time. The crash cost is the estimated cost to complete

the activity in the crash time.

2. An activity’s duration can be incrementally accelerated from its normal time to its crash time by

applying more resources – assigning more people, working overtime, using more equipment,

and so on. Increased costs will be associated with expediting the activity.

3. An activity cannot be completed in less than its crash time, no matter how many additional

resources are applied. For example, activity A cannot be completed in less than 5 weeks, no

matter how many more resources are used or how much money is spent.

4. The resource necessary to reduce an activity’s estimated duration from its normal time to its

crash time will be available when needed.

5. Each activity has its own cost per time period for accelerating the activity’s duration from its

normal time to its crash time. Within the range between an activity’s normal and crash points, if

the relationship between time and cost is linear this acceleration cost per time period is

calculated as shown in lecture handout 1: (Such a linearity assumption enables us to use linear

programming to determine just which activities should be crashed and by how much.

EXAMPLE 3

Consider the simple project in Figure 2 and answer the following questions.

Figure 2: Network with Normal and Crash Times and Their Costs Activity: Normal estimate (weeks, $) Crash estimate (weeks, $)

A:N = 7, $50,000 B: N = 9, $80,000

C = 5, $62,000 C = 6, $110,000

C: N = 10, $40,000 D: N=8, $30,000 C = 9, $45,000 C = 6, $42,000

(a) Find the critical path.

(b) What is the total project cost?

(c) How long would the project take if all the activities were performed in their minimum possible

time (crash time)? What would be the total cost?

(d) Calculate the cost-per-week rate to accelerate for each activity.

(e) Using the time-cost trade-off method, reduce the project duration as much as possible. What is

the new total cost?

1

3

4

2




7Table 2 displays the incremental acceleration in total project completion and the associated incremental increase in total project cost. It indicates that reducing the total project duration by 1 week would increase the total project cost by $5,000. To reduce it by 2 weeks would cost $11,000, and to reduce it by 3 weeks would cost $23,000.

Table 2: Time-Cost Trade-Off CD (18 weeks) $200,000

Step CP (weeks) Activities to Crash (1 week) Extra Cost ($) Total Cost($) 1 CD (18) C (C now is at minimum time) 5,000 205,000 2 CD (17) D (only activity to crash) 6,000 211,000 3 CD, AB (16) D (D now at minimum time) 6,000 A 6,000 223,000 4 CD, AB (15) C and D at its fully crashed time

(f) Compare this new total cost as a result of Time-Cost Trade-Off to the total crash cost determined in (c)? If the new project deadline is 15 weeks, is it necessary to perform all the activities in their minimum possible time (crash time)? Why or why not?

If all four activities were crashed, the total cost of the project would be $259,000, but it would still not be completed any earlier than 15 weeks. Using the time-cost trade-off method, we were able to reduce the project duration from 18 weeks to 15 weeks at an additional cost of $23,000 by selectively crashing the critical activities with the lowest acceleration cost per time period. Crashing all the activities would have resulted in a waste of $36,000 because no reduction in total project duration beyond 15 weeks could be achieved.

6.5. Criteria for Selecting Activities to Crash

There are several characteristics that mark or highlight an activity that exists on the Critical Path as a better candidate for crashing.

1. Must be on the Critical Path. Crashing noncritical activities that already have slack only buys more slack and doesn’t shorten the project duration. Only critical path activities drive the project and crashing them will shorten the project duration.

2. Precedes multiple activities. When an activity bottlenecks numerous succeeding activities, it is a great candidate to shorten. Once this activity is shortened, it allows the multiple activities to begin.

3. Long duration. An activity that has a long duration offers more potential time gain from crashing it.

4. Lower cost per period gained. Activities that cost less to crash are preferred. These include those requiring lower paid, lower skilled workers or other resources that are otherwise sitting idle.

5. Early in the project (the Sunshine Rule). If you fail in crashing the activity and it takes longer than planned, it is still early in the project. Thus you still have recovery time. Also, typically demand on resources early in the project is lower than other times, and they should be readily available.

6. Labour-intensive. When an activity is low skill labour intensive, it is easy to add people to help complete the project early. When an activity requires high skills to complete, it may be hard to find qualified individuals who are capable of completing the task.




87. Subject to common problems

Try to pick activities that are subject to higher probability of common problems. Shortening the duration lowers the exposure time and lessens the chances of having a problem.

6.6. The Least Cost Plan for the all crash time schedule

EXAMPLE 4

The following data were obtained from a study of the times required to thoroughly examine a

chemical plant:

Crash Schedule Normal Schedule Activity Time (weeks) Cost ($000) Time (weeks) Cost ($000)

1-2 3 6 5 4 1-3 1 5 5 3 2-4 5 7 10 4 3-4 2 6 7 4 2-6 2 5 6 3 4-6 5 9 11 6 4-5 4 6 6 3 6-7 1 4 5 2 5-7 1 5 4 2

(a) Find the all-normal schedule and cost.

Code: Normal time, Crash time

6, 2

5, 3 5, 1

10, 5 11, 5

5, 1 7, 2 6, 4 4, 1

The Critical path is 1-2-4-6-7 and the minimum duration for the project is 31 weeks. The cost is

$31,000.

(b) Find the all crash schedule and cost.

(c) Find the total extra cost required to accelerate all activities from all normal (part (a)) to all crash

(part (b)).

(d) Find the least cost plan for the all-crash time schedule. Start from the all crash problem in part

(b).

(e) Perform crashing of activities to reduce the project duration to its possible minimum.

(f) Does the result from part (e) agree with your result in part (d)?

1 7

5

6

4

3

2




9Path Normal duration (wks) Fully crashed duration (wks)

Activity Acceleration cost per week ($) Max weeks to crash

12467 $53,000

path (weeks) Crashing cost Expansion Saving ($) New total cost ($)

EXAMPLE 5 (NON LINEAR ACCEERATION COST)

The network for shooting a TV commercial as shown in the table has a fixed cost of $90 per day,

but shortening the project duration can save money. Find the least cost schedule.

Activity Normal Time Crash Time Cost Increase ($) (1st, 2nd, 3rd day)

1-2 7 4 30, 50, 70

2-3 9 6 40, 45, 65

1-3 12 10 60, 60

2-4 11 9 35, 60

3-4 3 3 -




10

7, 4 1 1, 9

9, 6

12, 10 3, 3

1-2-4: 18 days

1-2-3-4: 19 days

1-3-4: 15 days

Critical path is 1-2-3-4 and the duration is 19days.

Table 3: Time-Cost Trade-Off for Shooting a TV Commercial

1-2-3-4 (19 days) $1,710 Step CP (days) Activities to crash by 1 day Cost Change($) Total Cost($)1 1-2-3-4 (19)

1-2-4 (18) 1-3-4 (15)

1-2 (30) 30 – 90 = -60 1,650

2 1-2-3-4 (18) 1-2-4 (17) 1-3-4 (15)

2-3 (40) 40 – 90 = -50 1,600

3 1-2-3-4 (17) 1-2-4 (17) 1-3-4 (15)

1-2 (50) 2-3 (45), 2-4 (35)

50 – 90 = -40 1,560

4 1-2-3-4 (16) 1-2-4 (16) 1-3-4 (15)

1-2 (70) 2-3 (45), 2-4 (35)

70 – 90 = -20 1,540

5 1-2-3-4 (15) 1-2-4 (15) 1-3-4 (15)

2-3 (45) 2-4 (35) 1-3 (60)

45+35+60-90=50 1,590

6 1-2-3-4 (14)

1-2-4 (14) 1-3-4 (14)

2-3 (65) 2-4 (60) 1-3 (60)

65+60+60-90=95 1,685

1-2-3-4 (13) 1-2-4 (13) 1-3-4 (13)

Fully crashed

1

3

4

2




XII- COST CONTROL, MONITORING & ACCOUNTING

• The Cost Control Problem • The Project Budget • Forecasting for Activity Cost Control • Financial Accounting Systems and Cost Accounts • Control of Project Cash Flows • Schedule Control • Schedule and Budget Updates • Relating Cost and Schedule Information




12.1 The Cost Control Problem

• During the execution of a project, procedures for project control and record keeping become indispensable tools to managers and other participants in the construction process. These tools serve the dual purpose of recording the financial transactions that occur as well as giving managers an indication of the progress and problems associated with a project. The problems of project control are aptly summed up in an old definition of a project as "any collection of vaguely related activities that are ninety percent complete, over budget and late." The task of project control systems is to give a fair indication of the existence and the extent of such problems.





• For schedules, progress on individual activities and the achievement of milestone completions can be compared with the project schedule to monitor the progress of activities. Contract and job specifications provide the criteria by which to assess and assure the required quality of construction. The final or detailed cost estimate provides a baseline for the assessment of financial performance during the project. To the extent that costs are within the detailed cost estimate, then the project is thought to be under financial control.

• For control and monitoring purposes, the original detailed cost estimate is typically converted to a project budget, and the project budget is used subsequently as a guide for management.





• Information on material quantities and labor inputs within each job account is also typically retained in the project budget. With this information, actual materials usage and labor employed can be compared to the expected requirements. As a result, cost overruns or savings on particular items can be identified as due to changes in unit prices, labor productivity or in the amount of material consumed.





• For the purpose of project management and control, it is not sufficient to consider only the past record of costs and revenues incurred in a project. Good managers should focus upon future revenues, future costs and technical problems

• For this purpose, traditional financial accounting schemes are not adequate to reflect the dynamic nature of a project. Accounts typically focus on recording routine costs and past expenditures associated with activities.





Some methods for cost control and simple forecasts are described

• Budgeted CostThe budgeted cost is derived from the detailed cost estimate prepared at the start of the project.

• Estimated total costThe estimated or forecast total cost in each category is the current best estimate of costs based on progress and any changes since the budget was formed.

• Cost Committed and Cost Exposure!! Estimated cost to completion in each category in divided into firm commitments and estimated additional cost or exposure. Commitments may represent material orders or subcontracts for which firm dollar amounts have been committed.





Some methods for cost control and simple forecasts are described

• Cost to DateThe actual cost incurred to date can be derived from the financial record keeping accounts.

• Over or (Under)Indicates the amount over or under the budget for each category. This cost is an indicator of the extent of variance from the project budget; items with unusually large overruns would represent a particular managerial concern.




12.4 Financial Accounting Systems & Cost Accounts

• Accounting information is generally used for three distinct purposes: – Internal reporting to project managers for day-to-day planning, monitoring

and control.

– Internal reporting to managers for aiding strategic planning.

– External reporting to owners, government, regulators and other outside parties

• External reports are constrained to particular forms and procedures by contractual reporting requirements or by generally accepted accounting practices. Preparation of such external reports is referred to as financial accounting. In contrast, cost or managerial accounting is intended to aid internal managers in their responsibilities of planning, monitoring and control.




12.4 Financial Accounting Systems & Cost Accounts

• Project costs are always included in the system of financial accounts associated with an organization.Other components of a financial accounting system include: – The accounts payable journal is intended to provide records of bills

received from vendors, material suppliers, subcontractors and other outside parties. Invoices of charges are recorded in this system as are checks issued in payment. Charges to individual cost accounts are relayed or posted to the General Ledger.

– Accounts receivable journals provide the opposite function to that of accounts payable. In this journal, billings to clients are recorded as well as receipts. Revenues received are relayed to the general ledger.

– Job cost ledgers summarize the charges associated with particular projects, arranged in the various cost accounts used for the project budget.

– Inventory records are maintained to identify the amount of materials

available at any time.




12.5 Control of Project Cash Flows

• The development of information for the control of project costs with respect to the various functional activities appearing in the project budget. Project managers also are involved with assessment of the overall status of the project, including the status of activities, financing, payments and receipts.

• These components include

– costs incurred (as described above),

– billings and receipts for billings to owners (for contractors),

– payable amounts to suppliers and contractors,

– financing plan cash flows (for bonds or other financial instruments), etc.




12.6 Schedule Control

• In addition to cost control, project managers must also give considerable attention to monitoring schedules. Construction typically involves a deadline for work completion, so contractual agreements will force attention to schedules. More generally, delays in construction represent additional costs due to late facility occupancy or other factors. Just as costs incurred are compared to budgeted costs, actual activity durations may be compared to expected durations. In this process, forecasting the time to complete particular activities may be required.




12.7 Schedule and Budget Uptades

• Scheduling and project planning is an activity that continues throughout the lifetime of a project. As changes or discrepancies between the plan and the realization occur, the project schedule and cost estimates should be modified and new schedules devised.

• On "fast track" projects, initial construction activities are begun even before the facility design is finalized. In this case, special attention must be placed on the coordinated scheduling of design and construction activities. Even in projects for which the design is finalized before construction begins, change ordersrepresenting changes in the "final" design are often issued to incorporate changes desired by the owner.




12.8 Realting Cost and Scheduling Information

• While project managers implicitly recognize the inter-play between time and cost on projects, it is rare to find effective project control systems which include both elements. Usually, project costs and schedules are recorded and reported by separate application programs. Project managers must then perform the tedious task of relating the two sets of information.

• The difficulty of integrating schedule and cost information stems primarily from the level of detail required for effective integration. Usually, a single project activity will involve numerous cost account categories.

– For example, an activity for the preparation of a foundation would involve laborers, cement workers, concrete forms, concrete, reinforcement, transportation of materials and other resources.




12.8 Realting Cost and Scheduling Information

• Even a more disaggregated activity definition such as erection of foundation forms would involve numerous resources such as forms, nails, carpenters, laborers, and material transportation. Again, different cost accounts would normally be used to record these various resources. Similarly, numerous activities might involve expenses associated with particular cost accounts.

– For example, a particular material such as standard piping might be used in numerous different schedule activities. To integrate cost and schedule information, the disaggregated charges for specific activities and specific cost accounts must be the basis of analysis.




Cost Management

Erin BognarDeputy Director, Planning and Integration




2

Traditional Cost Management vs.Earned Value Cost Management

There is an important and fundamental difference between the data available for analysis in a:

Traditional Cost Management environment

Earned Value Cost Management environment




3

Traditional Cost Management

F0

10

20

30

40

50

60

70

Budget 5 10 15 20 25 30 35 40 45 50 55 60

Actuals 10 20 30 40 50 60

J M A M J J A S O N D

Time NowTime Now

0

10

20

30

40

50

60

70

Budget 5 10 15 20 25 30 35 40 45 50 55 60

Actuals 10 20 30 40 50 60

J M A M J J A S O N D

Time NowTime Now

The graph shows the relationship of the budget (planned) versus what was actually spent.




4

Earned Value Cost Management

0

20

40

60

80

BCWS 5 10 15 20 25 30 35 40 45 50 55 60

ACWP 10 20 30 40 50 60

BCWP 8 15 25 30 35 45

J F M A M J J A S O N D

In EVMS there are three data sources: BudgetActualsEarned Value




5

In Summary

Traditional Cost Management provides:How much money and time a particular job is likely to require prior to starting and once startedHow much money was spent at any given time.

EVM Cost Management adds:What work has been accomplished to date for the funds expended (what you got for what you spent)




6

What is Cost Management?

“Includes the processes required to ensure that the project is completed with the approved budget”

PMBOK Guide 2004




7

What are the Cost Management Processes?

.1 Inputs .1 Inputs .1 Inputs.1 Enterpirse environmental factors .1 Project scope statement .1 Cost baseline.2 Organizational process assets .2 Work breakdown structure .2 Project funding requirements.3 Project scope statement .3 WBS dictionary .3 Performance reports.4 Work breakdown structure .4 Activity cost estimates .4 Work performance information.5 WBS dictionary .5 Activity cost estimate detail .5 Approved change requests.6 Project management plan .6 Project Schedule .6 Project management plan

-Schedule management plan .7 Resource Calendars -Staffing management plan .8 Contract .2 Tools and Techniques -Risk register .9 Cost Management Plan .1 Cost change control system

.2 Performance measurement analysis.2 Tools and Techniques .2 Tools and Techniques .3 Forecasting

.1 Analogous estimating .1 Cost aggregation .4 Project performance reviews

.2 Determine resource cost rates .2 Reserve analysis .5 Project management software

.3 Bottom-up estimating .3 Parametric estimating .6 Variance management

.4 Parametric estimating .4 Funding limit reconciliation

.5 Project management software .3 Outputs

.6 Vendor bid analysis .3 Outputs .1 Cost estimate (updates)

.7 Reserve analysis .1 Cost baseline .2 Cost baseline (updates)

.8 Cost of quality .2 Project funding requirements .3 Performance measurements.3 Cost management plan (updates) .4 Forecasted completion

.3 Outputs .4 Requested changes .5 Requested changes.1 Activity cost estimates .6 Recommended corrective actions.2 Activity cost estimate detail .7 Organizational process assets (updates).3 Requested changes .8 Project management plan (updates).4 Cost management plan (updates)

7.1 Cost Estimating 7.2 Cost Budgeting 7.3 Cost Control

PROJECT COSTMANAGEMENT




8

KnowledgeAreas

Project Phases/Process Group Map

Initiating Planning ExecutingMonitoring

& Controlling

Closing

Cost Cost Estimating Cost ControlManagement Cost Budgeting

Project Management Process Groups

Vs..




9

Implementation of Cost Management Processes

Dev

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Work BreakdownStructure

ActivityDurations

Chart of Accounts

Resource Req.

ResourceRates

ExpertOpinion

HistoricalInformation

What will you do with the cost information when the job is done?

WBS and level of cost collection should consider not only the natural division of work but also consider future use of cost information− future proposals− comparative cost analysis - “best

method of performance”




10


Dev

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ActivityDurations

Chart of Accounts

Resource Req.

ResourceRates

ExpertOpinion


Strive for consistency between the Estimating and Accounting chart of accounts

What level of cost detail is necessary and sufficient?




11

WBS Est'dNo. Description Cost 8 9 10 11 12 13 14 15 16 17 18 19

5 5

9 9

6 6

2

2 2

6 4

8 4 4 4

Total $76k 5 5 9 13 8 12 4 8 4 4 4

Construction Week

1.04.07 Brick Veneer

$10k

$18k

$12k

$2k

$4k

$10k

$20k

1.04.05 Insulation

1.04.06 Doors and Windows

1.04.03 Roof

1.04.04 Sheathing and Barrier

1.04.04 Foundation

1.04.02 Framing


Dev

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ActivityDurations

Chart of Accounts

Resource Req.

ResourceRates

ExpertOpinion


Doc

umen

t Cos

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Allocate Cost to Work Activities

(Budget)




12


Dev

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ActivityDurations

Chart of Accounts

Resource Req.

ResourceRates

ExpertOpinion


Doc

umen

t Cos

t Bas

elin

e


(Budget)

DevelopCost Management

Plan

•Management of Cost Variances•Cost Change

Control•Performance Measurement

Develop a “going-in” strategy or plan on not just how to control overruns but how to reduce costs:− Incentives− Competitive

Procurements− Methods Improvements

• Questioning Attitudes• Technology

Deployment• Value Engineering• Trade-off Analysis




13

Are any performance measurement techniques placing you at risk?

Contract payment schedules are often tied to your WBS structure and chosen earned value techniques

− Consider potential work suspension and resumption risks• Should PM/CM activities be modified milestones versus level of effort?

− Consider learning curves• less experience (early in contract) - higher cost/unit• more experience (later in contract) - lower cost/unit• improvement comes with practice




14

What Metrics Do You Use for Cost Analysis?

BCWS BCWP ACWP

EVMS Metrics & Analysis

EAC VACBAC

SPISV

VAC

CPI

CV TCPI

CV%

SV%

SPI

SV

VACCPI

CV

TCPICV%SV

%

SPI

SV

VAC

CPI CV

TCPI

CV%

SV%




so Plan for Success

Change is inevitable, success is optional-Yogi Berra




16

Identifying Deviations

COSTS ($)

TIME

Time Now

BCWP

BCWS

TimeNow

ScheduledCompletion

ProjectedCompletion

ACWP

SV

CV

ProjectedDelay inProject

Completion

BAC

EAC (Projected ACWP at Completion)

Projected CostUnderrun atCompletion(VAC)

0

To date SV inunits of time

What is your plan for controlling internal change?

Evaluate cost uncertainty and your risk events upfront− Establish a reserve and develop risk mitigation plans

Monitor cost and schedule performance for deviations

Accurately record changesto the baseline

Bring expected costs withinacceptable limits




17

What is your plan for controlling external change?

Monitor correspondence/field directionMonitor cost and schedule performance for variancesIsolate change impacts (scope, schedule, and cost)Inform stakeholders of changes− Agree to a Not-to-Exceed Value

Document changes − Schedule− Performance reports − Field notes/logs

Timely negotiations

After the smoke clears, it is not necessarily what was said and done by either

party that determines the outcome; it is what the

documents say was said or done.

Performance Reporting

Variance ReportsDaily Logs

Change Notices


Scope

As-PlannedSchedule/

Cost Estimate

As-BuiltSchedule/

Actual Costs




18

Recap of Cost Management Processes

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ActivityDurations

Chart of Accounts

Resource Req.

ResourceRates

ExpertOpinion


Doc

umen

t Cos

t Bas

elin

e


(Budget)

Lessons-Learned

Re-Plan

Manage Work Orders

Manage Procurements

Analysis/Corrective

Action

Manage Disbursements

Phys

ical

Pro

gres

s R

epor

ts

PerformanceMeasurement

Reports

ChangeControl

DevelopCost Management

Plan

•Management of Cost Variances•Cost Change

Control•Performance Measurement




Chapter 7:Project Cost Management

Information Technology Project Management,Fourth Edition




2Information Technology Project Management, Fourth Edition

Learning Objectives

Understand the importance of project costmanagement.

Explain basic project cost management principles,concepts, and terms.

Discuss different types of cost estimates and methodsfor preparing them.





Learning Objectives

Understand the processes involved in cost budgetingand preparing a cost estimate and budget for aninformation technology project.

Understand the benefits of earned value managementand project portfolio management to assist in costcontrol.

Describe how project management software can assistin project cost management.





What is Cost and Project Cost Management?

Cost is a resource sacrificed or foregone to achieve a specific objective, or something given up in exchange.

Costs are usually measured in monetary units, such as dollars.

Project cost management includes the processes required to ensure that the project is completed within an approved budget.





Project Cost Management Processes

Cost estimating: Developing an approximation orestimate of the costs of the resources needed tocomplete a project.

Cost budgeting: Allocating the overall cost estimateto individual work items to establish a baseline formeasuring performance.

Cost control: Controlling changes to the projectbudget.





Basic Principles of Cost Management

Most members of an executive board have a betterunderstanding and are more interested in financial termsthan IT terms, so IT project managers must speak theirlanguage.

Profits are revenues minus expenses.

Life cycle costing considers the total cost of ownership,or development plus support costs, for a project.

Cash flow analysis determines the estimated annualcosts and benefits for a project and the resulting annualcash flow.





Basic Principles of Cost Management Tangible costs or benefits are those costs or benefits that an

organization can easily measure in dollars. Intangible costs or benefits are costs or benefits that are

difficult to measure in monetary terms. Direct costs are costs that can be directly related to producing

the products and services of the project. Indirect costs are costs that are not directly related to the

products or services of the project, but are indirectly related toperforming the project.

Sunk cost is money that has been spent in the past; whendeciding what projects to invest in or continue, you should notinclude sunk costs.





Basic Principles of Cost Management

Learning curve theory states that when many items areproduced repetitively, the unit cost of those items decreasesin a regular pattern as more units are produced.

Reserves are dollars included in a cost estimate to mitigatecost risk by allowing for future situations that are difficultto predict. Contingency reserves allow for future situations that may be

partially planned for (sometimes called known unknowns)and are included in the project cost baseline.

Management reserves allow for future situations that areunpredictable (sometimes called unknown unknowns).





Cost Estimating

Project managers must take cost estimates seriously ifthey want to complete projects within budgetconstraints.

It’s important to know the types of cost estimates, howto prepare cost estimates, and typical problemsassociated with IT cost estimates.





Table 7-2. Types of Cost Estimates





Cost Management Plan

A cost management plan is a document that describeshow the organization will manage cost variances on theproject.

A large percentage of total project costs are often laborcosts, so project managers must develop and trackestimates for labor.





Cost Estimation Tools and TechniquesBasic tools and techniques for cost estimates: Analogous or top-down estimates: Use the actual cost of

a previous, similar project as the basis for estimating thecost of the current project. Bottom-up estimates: Involve estimating individual work

items or activities and summing them to get a projecttotal. Parametric modeling: Uses project characteristics

(parameters) in a mathematical model to estimate projectcosts. Computerized tools: Tools, such as spreadsheets and

project management software, that can make working withdifferent cost estimates and cost estimation tools easier.





Typical Problems with IT Cost Estimates

Developing an estimate for a large software project is a complex task that requires a significant amount of effort.

People who develop estimates often do not have much experience.

Human beings are biased toward underestimation.

Management might ask for an estimate, but really desire a bid to win a major contract or get internal funding.





Sample Cost Estimate

Before creating an estimate, know what it will be used for, gather as much information about the project as possible, and clarify the ground rules and assumptions for the estimate.

If possible, estimate costs by major WBS categories. Create a cost model to make it easy to change and

document the estimate.





Cost Budgeting

Cost budgeting involves allocating the project costestimate to individual work items over time.

The WBS is a required input for the cost budgetingprocess because it defines the work items.

Important goal is to produce a cost baseline:

A time-phased budget that project managers use tomeasure and monitor cost performance.





Cost ControlProject cost control includes:

Monitoring cost performance.

Ensuring that only appropriate project changes are includedin a revised cost baseline.

Informing project stakeholders of authorized changes to theproject that will affect costs.

Many organizations around the globe have problems withcost control.





Earned Value Management Terms The planned value (PV), formerly called the budgeted cost of

work scheduled (BCWS), also called the budget, is that portion ofthe approved total cost estimate planned to be spent on an activityduring a given period.

Actual cost (AC), formerly called actual cost of work performed(ACWP), is the total of direct and indirect costs incurred inaccomplishing work on an activity during a given period.

The earned value (EV), formerly called the budgeted cost ofwork performed (BCWP), is an estimate of the value of thephysical work actually completed.

EV is based on the original planned costs for the project oractivity and the rate at which the team is completing work on theproject or activity to date.





Rate of Performance Rate of performance (RP) is the ratio of actual work

completed to the percentage of work planned to have beencompleted at any given time during the life of the project oractivity.

For example, suppose the server installation was halfwaycompleted by the end of week 1. The rate of performancewould be 50 percent (50/100) because by the end of week1, the planned schedule reflects that the task should be 100percent complete and only 50 percent of that work has beencompleted.





Rules of Thumb for Earned Value Numbers

Negative numbers for cost and schedule variance indicate problems in those areas.

A CPI or SPI that is less than 100 percent indicates problems.

Problems mean the project is costing more than planned (over budget) or taking longer than planned (behind schedule).





Figure 7-4. Earned Value Calculations for a One-Year Project After Five Months





Figure 7-5. Earned Value Chart for Project after Five Months

If the EV line is below the AC or PV line, there are problems in those areas.





Project Portfolio Management Many organizations collect and control an entire suite

of projects or investments as one set of interrelatedactivities in a portfolio.Project portfolio management has five levels:1. Put all your projects in one database.2. Prioritize the projects in your database.3. Divide your projects into two or three budgets based on

type of investment.4. Automate the repository.5. Apply modern portfolio theory, including risk-return

tools that map project risk on a curve.





Chapter Summary

Project cost management is traditionally a weak area inIT projects, and project managers must work toimprove their ability to deliver projects withinapproved budgets.

Main processes include:

Cost estimating

Cost budgeting

Cost control




Project Management Planning

Introduction

Planning is the Seed for Success Without a project plan, project success will be difficult. Team members would have limited understanding of expectations, activities may not be properly defined, and resource requirements may not be understood.

This section provides an overview of planning and focuses on the project plan elements.

Responsibilities The responsibilities for project planning are summarized below:

• Project Managers are responsible for developing the project plan for a specific project. It is an activity, which requires training, focus and appropriate management and communication skills.

• State organizations are responsible for developing internal procedures to ensure that the planning process is completed consistently with the state organization’s business plan. IT projects must be well thought out, support the key stakeholder goals, and include processes that allow the project to be tracked and controlled until completion.

• State organizations are also responsible for assigning the Project Manager and ensuring that there are adequate resources assigned to managing a project. Direct project management costs should not be rolled into overhead costs. Management is a full time job for most projects.

Terminology As with all the sections of this methodology, a full glossary of terms is provided in Appendix A: Glossary; however, a sub-set of terms relative to this section includes:

Activity is a task or series of tasks performed over a defined period of time.

Budget refers to an estimate of funds and/or resources planned to cover a program or project.

Configuration Management are processes including procedures and tools to control project deliverable(s) in terms of release and revision. A system of procedures that monitors emerging project scope against the scope baseline. Requires documentation and management approval on any change to the baseline. Project Plan is a management summary document that gives the essentials of a specific project in terms of its objectives, justification, and how the objectives are to be achieved. It describes how major activities of the project management function are to be accomplished, and describes methods of overall project control. The project plan evolves through successive stages of the planning process.

Quality is a composite of attributes (including performance features and characteristics) of the product and process required to satisfy the need for which the project is undertaken.

Resource is something that lies ready for use or that can be drawn upon for aid or to take care of a need. Resource Planning is the identification of resource components required to complete the project.

Project Management Best Practices Release: 2.0 Section 3 - Page 1





Introduction

Requirements is a description of product functions that collectively will satisfy the overall business goal.

Risk is any factor that potentially can jeopardize the successful completion of a project.

Risk Management is the art and science of identifying, analyzing, and responding to risk factors throughout the life of a project.

Stakeholders are individuals or organizational entities whose stake in the project is sufficient for them to play a role in affecting the outcome of the project.

Work Breakdown Structure is a division of tasks that define, organize, and display the work to be accomplished to achieve the specified product or services.






Planning Process & Project Plan

What is Project Planning? Project planning defines the project activities and describes how the activities will be accomplished. The purpose of project planning is to define each task, estimate the time and resources required, and provide a framework for management review and control. The project planning activities and goals include defining:

• The specific work to be performed

• Estimates to be documented for tracking, and controlling the project

• Commitments that are planned, and agreed to by stakeholders

• Project assumptions and constraints

• The size of the project in terms of dollars and resources

• Project schedule

• Project risks

Repetition of these major activities is necessary to establish the project plan. Typically, several iterations of the planning process are required.

The Planning Process The planning processes discussed in this document are conducted to ensure successful completion of project deliverables. The planning process includes a group of techniques that provides the detailed list of activities that are to be completed, and how the work will get done, by whom, when, and for how much. In summary, the project plan provides the specifics of:

• WHAT (Objective, scope, and statement of work)

• HOW (Approach, work breakdown structures)

• WHO (Project organization and resource schedule)

• WHEN (Schedule and milestones)

• WHERE (Facilities required)

• WHAT-IF (Contingency Plans is the event of Risk Events)







Overview of Planning Process

DOC ATP

Approval

Resource PlanDiagram Network Schedule

EstimDelPhase/Act/Task

DeliverablesPhase/Act/Task

Project Structure

Project Summary Project Charter

Importance of the Project Plan A project plan is a formal, written document that is used to prepare for, manage and control a project.

The project plan forms the basis for all management efforts associated with a project. It is a document that is also expected to change over time. The information associated with the plan evolves as the project moves through its various stages and is to be updated as new information unfolds about the project in the Execution Phase.







Steps in the Planning Process The planning process consists of the following basic tasks:

• Define the problem, the goal(s), the objectives and the success factors for this specific project

• Develop the Project Schedule

Define the tasks to be performed

Establish the general sequence and create the WBS

Define the organization used to execute project

Estimate task duration

Estimate resources for each task

Identify all deliverables associated with project

Identify precise and measurable milestones

Document task relationships

Define critical path

Establish start and end dates for each task

Define and create the schedule

• Define a budget for performing the tasks.

• Identify the known risks and suggested approaches to prevent or mitigate.

• Define the process used for ensuring quality.

• Define the process used for configuration management and project requirements.

Overview of Project Scheduling Following the definition of project activities, the activities are associated with time to create a project schedule. The project schedule provides a graphical representation of predicted tasks, milestones, dependencies, resource requirements, task duration, and deadlines. The project’s schedule interrelates all tasks on a common time scale. The project schedule should be detailed enough to show each WBS task to be performed, the title of the persons responsible for completing the task, the start and end date of each task, and the expected duration of the task.

Like the development of each of the project plan components, developing a schedule is an iterative process. Milestones may suggest additional tasks, tasks may require additional resources, and task completion may be measured by additional milestones. For large, complex projects, detailed sub-schedules may be required to show an adequate level of detail.







During the life of the project, actual progress is frequently compared with the original schedule. This allows for evaluation of development activities. The accuracy of the planning process can also be assessed. This assessment can be used to improve the planning process.






Activity Definition and Sequencing

Develop Project Tasks One of the most important parts of the project planning process is the definition of project activities. Activity sequencing involves dividing the project into smaller, more manageable components or tasks and then specifying the order of completion. The list of activities is called a Work Breakdown Structure (WBS). The goal is to integrate the WBS, the schedule, and the budget into a written plan.

The WBS reflects all activities such as project management, requirements definition, design, implementation, transition management, testing, training or installation. The project manager is responsible for defining all level tasks associated with a project and then further decomposing them as planning continues.

An activities list is typically shown in one of two ways. It can be shown as an outline or it can be graphically presented. Two samples of WBS are shown below. These samples are not complete, but are provided for examples of format only.

1.0 MANAGEMENT 1.1 Finalize Project Plan

1.1.1 Review Project Plan with Project Team 1.1.2 Update Project Plan to create baseline

1.2 Track Project 1.2.1 Prepare status reports 1.2.2 Collect/analyze project metrics

1.3 Perform Quality Activities 1.3.1 Finalize QA Plan 1.3.2 Conduct Reviews 1.3.3 Conduct Audits 1.3.4 Review and Act on Recommendations

1.4 Perform Configuration Management 1.4.1 Finalize CM Plan 1.4.2 Develop Project Library 1.4.3 Manage Change Board 1.4.4 Maintain Configuration Items

1.5 Report Status 1.5.1 Schedule and conduct Status Meetings 1.5.2 Meet with Executive Management 1.5.3 Prepare Staff evaluations

1.6 Conduct Close-Out Activities 1.6.1 Finalize User Sign-off 1.6.2 Conduct Lessons Learned 1.6.3 Document PIER 1.6.4 Archive Records 1.6.5 Celebrate Success

2.0 DESIGN 2.1 Prepare Preliminary Design

2.1.1 Develop Enterprise Architecture 2.1.2 Prepare Data Flow Diagrams







2.1.3 Prepare Logical Data Model2.2 Develop Design Specifications

2.2.1 Prepare Physical Data Model 2.2.2 Prepare Data Dictionary

2.3 Document Design Specifications 2.4 Review Design

3.0 DEVELOPMENT/INTEGRATION 3.1 Procure Software Packages

3.1.1 Procure Database 3.1.2 Procure User Interface Building Tool 3.3.3 Procure Operating System

3.2 Develop Software 3.2.1 Develop Server Application 3.2.2 Develop User Interface 3.2.3 Develop XYZ Interface

3.3 Procure Hardware 3.3.1 Procure Server 3.3.2 Procure Workstations

3.4 Perform Integration Testing 3.5 Convert Data

3.5.1 Develop Conversion Plan 3.5.2 Convert Data

3.6 Develop User Manuals 3.7 Transition Management

4.0 ACCEPTANCE TESTING 4.1 Plan Acceptance Test 4.2 Conduct Acceptance Test 4.3 Develop Test Report

5.0 INSTALLATION 5.1 Develop Installation Plan 5.2 Site Preparation 5.3 Install at Locations

5.3.1 Headquarters 5.3.2 Site 1







Sometimes, instead of depicting the WBS as an outline, it is shown graphically, as below:

WBS

SampleWork BreakdownStructure (WBS)

Design Development/Integration

AcceptanceTesting

Installation

Plan Project Prepare PreliminaryDesign

Develop Software

Develop Installation Plan

Plan AcceptanceTest

Management

Develop Project Plan

Update Project Plan

Track Project

Prepare status report

Collect/analyzeproject metrics

Perform QualityActivities

Prepare QA Plan

Conduct Reviews

Conduct Audits

Perform CM

Prepare CM Plan

Develop Project Library

Manage Change Board

Maintain Configuration Items

Develop EnterpriseArchitecture

Prepare Data FlowDiagrams

Prepare Logical DataModel

Prepare DetailedDesign

Prepare PhysicalData Model

Prepare Data Dictionary

Document Design

Review Design

Develop DesignSpecification

Develop Server Application

Develop User Interface

Develop XYZInterface

Procure Hardware

Procure Software Packages

Perform Integration Testing

Convert Data

Develop User Manual

Transition Management

Procure Server

Procure Workstations

Procure Databases

Procure User InterfaceBuilding Tool

Procure Operating System

Develop Conversation Plan

Convert Data

Conduct AcceptanceTest

Develop Test Report

Site Preparation

Install at Locations

Headquarters

Site One

Review Act on Recommendations

Report Status

Schedule & Conduct Status Meetings

Meet with Executive Management

Prepare Staff Evaluations

Close-Out Activities

Finalize User Sign-Off

Conduct Lessons Learned

Document PIER

Archive Records

Celebrate Success

WBS tasks are developed by asking, “What tasks need to be done to accomplish the project objectives?”

As levels of the WBS become lower, the scope, complexity, and cost of each subtask become smaller. The lowest level tasks, or work packages, are independent, manageable units that are planned, budgeted, scheduled, and controlled on their own.

As efforts of similar scope and type are planned, the basic WBS tasks remain somewhat similar, but each project requires a specific set of tasks that address the uniqueness of the project's requirements. Certain







top level elements, such as project management, are included in the WBS of every project, regardless of its type, size, or complexity. Other items, like installation, may not apply to every project.

There is no simple formula to define how detailed a work breakdown needs to look. There are, however, some helpful guidelines for completion:

• Break down the work until accurate estimates of cost and resources needed to perform the task are provided.

• Ensure that clearly defined starting and ending events are defined for the task. This may correspond to the production of a deliverable or the occurrence of an event.

• Verify that the lowest level tasks can be performed within a “reasonable” period of time. If the time period to complete a task is too long, an accurate project status in the implementation phase may not be possible. An industry standard rule of thumb is to make work packages that can be completed in timeframes of two elapsed weeks.

• Verify that people who work on the project are all assigned a WBS task. Have a firm rule: if the task is not on the WBS, it is not worked on.

The WBS evolves over the course of planning. It is highly probable that it will evolve as the scheduling, estimation, and resource allocation portions of the plan are completed.

The WBS has multiple uses. It is both a task list for planning and a structure for providing report status during the implementation phase. As individual low level tasks are completed, the project progress is assessed. It also serves as a useful management communication tool by which results can be compared with expectations.

One of the difficult parts of talking about projects generically, is the wide range of such projects. Typically, in a small project, there is a single project development phase. In large or complex systems, however, there are often multiple phases, which are then grouped into projects, and these can be grouped into a program.

Sometimes these phases or projects are driven by the need to achieve certain levels of functionality prior to the availability of the complete solution. Other times, the projects are defined to partition the development effort and to reduce the risks associated with larger project efforts.

For large systems, the decomposition of the system into smaller components needs to be done early in the initiating process. The rationale for the decomposition must be known; otherwise, different results derived from different reasons for the system decomposition may occur. For example, if a project is defined simply to accommodate user needs, the project may cross multiple functional areas of a system. If, on the other hand, a system is divided into phases simply to reduce risk, a functional division might occur where the projects represent completion of entire functional areas of the system. The way in which the projects are handled differs widely.







Define Task Relationships If a project is broken down into phases, be sure that the WBS reflects this.

Then, break the WBS down by deliverable. The WBS denotes a hierarchy of task relationships. Subtask completion eventually rolls up into task completion, which ultimately results in deliverable completion, phase completion and project completion. If the tasks are not organized efficiently, it becomes difficult to schedule and allocate resources to the tasks.

Defining Deliverables Deliverables associated with the project are shown in the WBS and are reflected in the Work Product Identification (WPI) portion of the Project Plan. A sample of a WPI template is shown below. All deliverables are listed in the order of planned development. As the schedule is created, the due date is filled in. The responsibility for the deliverable is assigned as it is known (typically when the organization chart is defined). The date delivered is a field that is filled in as deliveries are made.

Over the course of the project, a comparison of the due date and the date delivered provides one metric for how well deliverable dates are met by the project team.

Work Product Identification

Product Name

Due Date

Date Delivered

Author/ POC

Requirement Specification

4/1/96 G. Brown

Design Specification

8/1/96 G. Brown

Test Plan 8/1/96 A. Jones Implementation

Plan 11/1/96 B. White

Source Code 12/1/96 L. Brass Test Report 1/30/97 A. Jones

While the deliverables list is a compilation of information identified in the WBS and the project schedule, it is useful to maintain a separate list since delivering deliverables on schedule is so important. Separate tracking of deliverables can help keep a project on track. It also serves as a useful communication tool for defining the status of the project.







Development of a Project Schedule The following PERT chart is designed to clearly show the relationships between the tasks. It is an extremely valuable planning tool if the sequence of events is quite complex. However, using the PERT chart makes it difficult to show progress and to communicate with the Steering Committee at a high level. The chart should be used only when the audience needs a detailed understanding of the task relationships.

Sample PERT Chart







Typically, a GANTT chart (or bar graph) is adequate. These schedules are two-dimensional representations that show the tasks and the timeframe for completion. Since task interrelationships are not easily shown on a GANTT chart, it is considered a weak planning tool for very complex information technology projects. However, the GANTT chart is very common for reporting status and for defining the schedule. A sample GANTT follows.

Sample GANTT Chart

ID Task Name Duration Work1 Plan Network Infrastructure 40 d 40 d

2 Determine Current Environment 9 d 9 d

3 Establish General Req's 20 d 20 d

4 Create Conceptual Diagram of Network 11 d 11 d

5 Install LAN in Admin 55 d 41.5 d

6 Get Bids on Wiring and Equipment 1 d 1 d

7 Order Wiring, Hub, PCs, Servers, etc. 1 d 1 d

8 Install Wiring 22 d 22 d

9 Receive and Store Equipment 2 d 0.5 d

10 Install Equipment 1 d 1 d

11 Setup and Install Network Software 1 d 4 d

12 Setup Individual Workstations for NetworkAccess

3 d 12 d

13 Train Users 58 d 123 d

14 Define Training Requirements 2 d 10 d

15 Develop Training Plan 4 d 10 d

16 Develop Training Materials 20 d 40 d

17 Conduct Training Sessions 3 d 63 d

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Define Precise and Measurable Milestones Key events are often denoted by milestones. These events typically have no duration. For example, deliverables often are represented as milestones, while the effort to produce the deliverable is referred to as a task.

While milestones are unique to each project, some example project milestones are shown below:

• Requirements Approval • Phase Review Approval • Prototype Approval • Design Reviews Complete • Code Reviews Complete • Unit Test Complete







• Integration Test Complete • Acceptance Test Complete • System Acceptance by User • Order Hardware • Hardware Shipment • Hardware Arrives • Documentation Delivery

Milestones can occur at the end of almost any work package in the WBS. Major project milestones should and included in the project plan and schedule.

For contracted work, milestones are often used as a point in the project where interim payments might be made. If this approach is used, mutual agreement is necessary on the content of each milestone and the cost associated with that milestone.

Steps to Creating a Project Schedule Activity sequencing involves dividing the project into smaller, more manageable components (activities) and then specifying the order of completion. The Activity List form is a valuable tool for initially creating the WBS, and then by completing the remaining columns, a Project Schedule can be completed.

Activity List (Sample) Work Breakdown Structure

Provide an activity list (work breakdown structure) that describes each task required by the project

Activity # Activity Name Description Roles Elapsed Days

Work Hours

Start Date Dependency Milestone X-Ref

1 Design System Architecture 10 80 9/1/XX Detailed Design 2 Develop System Development 20 160 10/1/XX 1FS Software Code 2.1 Code Sub-routine 10 80

2.2 Integrate Sub-routine 10 80

3 Testing System 10 80 11/6/XX Completed Accept. Test of Doc.

4 Installation State Rollout 35 320 12/15/XX

4.1 Pilot Installation 10 120 12/15/XX

4.2 Statewide Installation 20 200 1/15/XX 4.1 FS + 5 day lag Installation Certificate

5 Provide User Support 30 300 12/30/XX 4. FS

6 Provide User Training 10 80 12/15/XX 4.1 SS Training Certificate 7 Transfer System to Operations 1 16 1/30/XX 4.2 FS + 5 day lag

Legend FS = The specific task must finish prior to starting the identified task. SS = Two identified task start at the same time, but are not linked to finish at the same time. FF = Two identified task finish at the same time, but are not linked to start at the same time. Blank = Task has no dependency Lag = Additional days can be added for reserve to ensure project stays on schedule. X-ref = To your Assumptions

• Activity # = the reference number of the activity, task and subtask • Activity Name Description = A short description of the activity or task • Roles = Roles or positions assigned to the task







• Elapsed Days = Calendar working days of the task from beginning to end; duration • Work Hours = Person hours associated with the tasks; used to calculate task cost • Start Date = Planned start date of the task • Dependency = The type of relationship this task has with other tasks in the project • Milestone = A key event in the project related to the completion of this specific task • Xref = A place to reference to an assumption that further explains this task, its hour, duration, etc.

Estimate Task Duration Estimating task duration is one of the most challenging aspects of project planning. It is also a key to later cost estimation. This is a process that occurs throughout the planning process.

With defined task durations, the team knows what to expect and what is expected of them. Task duration is frequently underestimated. Inaccurate estimates can result in an increase in the "frenzy level" of a project. The frenzy escalates as sponsors scramble for more money, and/or the technical staff scrambles to complete a project in an unrealistic timeframe. Often, the end result is cutting corners, excessive overtime, and a dissatisfied user.

The estimation process is complex because activity duration is affected by numerous variables that must be dealt with concurrently in the planning phase. Some of these variables include staff availability, the skill level of the person assigned to the task, unexpected events, efficiency of work time, and mistakes and misunderstandings during the development of the project plan.

When estimating the duration of a task, reality is a major factor. The knowledgeable scheduler takes into account absenteeism, meetings, discussions, and interaction among the staff. No one is 100% productive every hour of the workday. If a scheduled task assumes 100% productivity, the schedule rapidly falls apart. A successful schedule builds these types of factors into the duration estimate.

There are several techniques that support task duration estimation. The most common technique is based on the historical experience of a similar scope of work previously performed. Collected and archived historical project data are used successfully by many organizations to achieve quality performance on project deliveries. The database of Post Implementation Evaluation Reports maintained by the agency and OIT should have a wide range of project schedules plans and standards to review in developing your project schedule.

Historical records greatly support both the duration and the cost estimations that are so important in this phase. Data based on current staff skills are far more valuable than generalized “industry” estimates. If historical data does not exist, seek the advice of experts and others who have completed similar tasks.

When historical data or experts are not available, use a technique of getting estimates from multiple sources, comparing results and estimating the duration based on the multiple inputs. The nature of this method is predicated on finding good sources for providing the estimates.

Remember to always base your estimates on some easy-to-understand quantifiable parameters, for example:

• Documents to be prepared: number of pages assumed in the document times minutes per page

• Proposals: number of proposals to be evaluated times average number of pages times person hours per page







• Requirements: number of functional specifications, or number of technical specifications times person hours per requirement to generate and review

• Tests: number of user tests, string tests, stress tests, times person hours per test

• Training: number of people to be trained times hours of training plus preparation and coordination

• Meetings: number of meetings times people involved times length of meetings. Be sure and include travel time and preparation time.

• Configuration Management: estimated hours per week to include all time for change control board, documenting changes, issues and versions, completing analysis, and updating all associated files. Can range from .5 to 5% of total budget.

• Quality Assurance: number of reviews times person hours of review time. Include all involved personnel in your estimates.

Estimating using these techniques will improve the accuracy of the estimates and improve the communications between the planning team, the Steering Committee and the stakeholders.

Define Priorities Clearly defining the task priorities helps to resolve any scheduling and/or resource conflicts. Understanding the priorities and relationships of the tasks assists in resolving difficult scheduling conflicts.

Define the Critical Path The critical path is the longest path through a project. It determines the earliest possible completion of the work. The critical path is carefully managed because if critical path tasks slip, the entire project is delayed. In order to manage the project, the project manager determines the critical path and remains aware of its importance throughout the implementation of the plan. The successful scheduler considers availability of both labor and non-labor resources. Equipment availability on a long lead item often drives the critical path of a schedule. If installation equipment is required, for example, and the equipment cannot be delivered for six months, the installation phase is held up for that period of time.

Document Task Relationship After the WBS has been created, the tasks of each major section should be ordered into their logical sequence. Then, if tasks are dependent on each other, the task dependencies should be indicated. That is, if one task must be completed before another, then the first is a predecessor to the second, and the second task is a successor to the first. This relationship would be a Finish-to-Start relationship, i.e., the first task must finish before the second task can begin.

Other task relationships include: • Start-to-Finish: this task must start before the previous one can finish. A lead time can be added

to indicate that this task must start x days before the previous task finishes.







• Start-to-Start: this task must start at the same time as the other task plus or minus lead time.

• Finish-to-Finish: this task must finish at the same time as the other task plus or minus lead time.

Document Assumptions Documentation of the assumptions made in developing the project schedule are critical to the later success of the project. Without clear documentation of these assumptions, later changes to the schedule are very difficult and risky.

If, for example, a schedule was shortened because it was assumed that a highly skilled person would be performing the work, that assumption should be documented. Then, if a less skilled person is actually assigned to perform the task, the project manager can recognize the risk and make necessary changes and decisions. Without documentation of the assumption, the schedule could be later placed at serious risk without the project manager realizing it.

Review the Results The development of a schedule requires input from more than one person. No one possesses all the knowledge or understanding of all the factors that affect schedules in every aspect of a project. Schedule review also prompts buy-in to the schedule.

Once an initial cut at the schedule is ready, a team should perform a review. Determine if there is a common understanding of what has to be done. Get their independent estimates as to how long it will take to do the job. Where there are significant differences between the current schedule and new estimates, review and revise the schedule estimates.






Budgeting

Overview of Project Budgeting Paralleling the development of the schedule is the development of a detailed project budget. This budget should include all internal and external costs including contractors, hardware, software, travel and other related expenses. The steps associated with budgeting are highly dependent on the estimated length of tasks and the resources assigned to the project.

Budget estimates are refined in the planning process until they are baselined at project start-up. Budgeting serves as a control mechanism where actual costs can be compared to the budgeted costs. The budget is often the most important parameter in the execution of the project. When a schedule begins to slip, cost is proportionally affected. When project costs begin to escalate, revisit the project plan to determine whether scope, budget, or schedule needs adjusting.

Identify Cost Factors To develop the budget, the applicable cost factors associated with the project tasks are identified. The development of costs for each task should be simple and direct and consist of labor (internal and external), material, and other costs. Cost of performing a task is directly related to the personnel assigned to the task, the duration of the task, the cost of any non-labor items required by the task, and any allocated indirect cost.

Generally budget estimates and associated assumptions are obtained from experts. Experts may be internal or external. This provides the expertise required to make the estimate and provides buy-in and accountability during the actual performance of the task.

Determining work hours is the single most difficult part of deriving a cost estimate. The costs should factor in vacation time, sick leave, breaks, meetings, and other day-to-day activities. Not including these factors jeopardizes both scheduling and cost estimates.

In calculating the cost of labor, be certain to burden the costs appropriately for your organization. Burdened cost typically refers to the overhead and general expenses associated with an employee. These costs are beyond strict salary expenses (e.g., office space, benefits, etc.).

Non-labor charges include such items as material costs, reproduction, travel, and cost of capital (if leasing equipment), computer center charges, and equipment costs.

Project Estimate Summary Worksheet

For large systems, a project management tool is typically preferred for cost estimation. A Project Estimate Summary worksheet is another simple tool for costing and can be useful if completed prior to entering information into a tool.

Costs are assigned to the lowest level WBS work package task. These costs are then combined to determine a sub-task cost. In turn, these are combined to determine the overall task cost, which can be summed to find the total project cost. This is an example of “bottoms-up” estimating, since we are estimating at the bottom and then rolling up the totals.






Budgeting

Instructions for the Project Estimate Summary Worksheet Task Number

The number corresponds to the activity number reflected on the activity list and schedule. The numbering sequence is an outline format. Few projects require lower than three levels of sub-tasking. Each task structure should include deliverables and milestones.

Project Tasks

1. Task

1.1 Sub-Task

1.1.1 Work Package or second level of sub-task

1.1.1.1 Third level

Task and Activity NameThe project’s task and activity name is a brief description. This task description should remain consistent throughout the project plan.

Project Tasks

1. Project Design

1.1 Develop Functional Specifications

1.2 Develop System Architecture

1.3 Develop Preliminary Design Specification

The remainder of the columns pertain to cost and hour details relative to a specific activity. The cost categories include: labor, material, travel and other.

Always start your cost analysis at the lowest level and total the lowest level tasks to the next level. All “x.x.x” would be added together to determine the value of “x.x” and all “x.x” level tasks would be totaled for “x” level. Finally, all “x” level totals would be totaled to get project total.

The project may require more than one line to complete the budget when multiple salary rates are used to determine “labor cost” for an activity. Labor cost is derived by multiplying labor hours by the labor rate. The project manager may either use an aggregate rate or specific multiple rates. For example, committee meetings could have a standard hourly rate which includes the rate for each attendee. The costs for each task should be totaled and put in “Total per Task.”






Budgeting

At the end of the form is a line for risk totals. Risk allowances are added to the project in terms of Schedule (adding more time) and Cost (adding additional cost to estimates). A project manager can do this in two ways: adding time and/or cost at the activity level; or adding time and/or cost at the end of the project. This information should come from your Risk Analysis Worksheet, which will be discussed in subsequent sections.

The following is a sample of a Section of a Project Estimate Worksheet.






Budgeting

Project Estimate Summary Worksheet – Sample Customer:

MDOTPrepared by:

H.A.T.

Project:

MGT System

Date: 9-9-1999

WBS Project Task Labor Hour

Labor Rate

Labor Cost

Material Cost

Travel Cost

Other Cost

Total per Task

:

5.0 Define Requirements 624 24200 300 2500 27000

5.1 Define Functional Requirements 528 20040 2500 22540

5.1.1 Conduct JAD Sessions 320 12000 2000 14000

5.1.1.1 Schedule Sessions 8 30 240 240

5.1.1.2 Prepare for Sessions 24 40 960 960

5.1.1.3 Facilitate Meetings 24 40 960 960

5.1.1.4 Attend and Participate 240 38 9120 2000 11120

5.1.1.5 Document JAD Meetings 24 30 720 720

5.1.2 Prepare JAD Document 208 8040 500 8540

5.1.2.1 Prepare Documents for Review 80 40 3200 3200

5.1.2.2 Schedule Review Meetings and Distribute Document

8 30 240 240

5.1.2.3 Review the Documents 80 38 3040 500 3540

5.1.2.4 Meet to Gain Sign-off 40 39* 1560 1560

5.2 Define Technical Requirements 88 3824 3824

5.2.1 Review Missouri Architecture Guidelines

16 42 672 672

5.2.2 Review Current System Architecture

16 42 672 672

5.2.3 Review Agency IT Plan 16 42 672 672

5.2.4 Document Interface Points 8 42 336 336






Budgeting

WBS Project Task Labor Hour

Labor Rate

Labor Cost

Material Cost

Travel Cost

Other Cost

Total per Task

5.2.5 Document the Technical Requirements for New Application

16 42 672 672

5.2.6 Review the Technical Requirements

16 50 800 800

5.3 Prepare Consolidated Requirements Documents

8 42 336 300 636

:

:

Other:

Sub-Totals: 622,406

Risk (Reserve) From Risk Analysis Worksheet

76,120

TOTAL (scheduled) 698,526

Comments: (List assumptions for costs as appropriate.)

* Blended Meeting Rate






Budgeting

Document Assumptions As with developing a project schedule, documenting assumptions made while developing the project budget is critical to the success of the project. Without clear documentation of these assumptions, tracking to the budget is very difficult.

If, for example, a budget assumed that the material would be acquired at one price rate and only substantially higher cost material was available to perform the task, there would be a budget problem. If the assumption is not documented, the project manager may inadvertently increase project cost and may jeopardize chances for the project’s success.

Review the Cost Estimates Development of project budgets typically requires more than one person. Rarely, if ever does a single individual have the knowledge and understanding of all the factors affecting every aspect of a project.

Upon completion of a draft budget, interview the team and other experts and determine if the work descriptions, schedule and associated budgets are complete and reasonable. Get independent estimates. Where there are significant differences, determine the reasons and either redefine the work packages, schedule, and budgets or review and reiterate the estimates. The total labor days per phase should be checked against the rule of thumb that suggests the following distribution of development project effort and cost:

• 40% for planning and design • 20% for development • 40% for testing

It is helpful to get buy-in on the budget from the people who will actually perform the work. Participation results in having a stake in the project's success and fosters accountability.

Estimated Cost at Completion Report A sample of one type of budget report, which would become part of the Project Plan, is the EAC or Estimated Cost at Completion. It reflects the anticipated cost and hours of the planned project.

Estimated Cost at Completion Summary

Analysis in Hours Analysis in Dollars WBS No.

Activity Description Budget Hours

Actual Hours Est. to Complete

Est. @ Complete

Variance (+ = More)

Budget $ Actual $ Est. to Complete

Est. @ Complete

Variance (+ =

More) 1.0 Define Requirements 430 0 430 430 0 17,780 0 17,780 17,780 0 2.0 Prepare RFP 572 0 572 572 0 22,880 0 22,880 22,880 0 3.0 Issue RFP and Evaluate

Vendors 433 0 433 433 0 17,320 0 17,320 17,320 0

4.0 Close-Out 72 0 72 72 0 2,880 0 2,880 2,880 0 TOTAL 1,507 1,507 0 60,860 60,860 0

The Estimated Cost at Completion Summary is also used as a status reporting document to the Steering Committee and will be further discussed in Section 5.






Configuration Management

Configuration Management For our purposes, Configuration Management includes the processes, procedures and tools to control project deliverable(s) in terms of release and revision; to monitor project scope against the baseline; and manage approval on any change to the baseline, e.g. product and project scope. It also includes the following other concepts and definitions:

Control item is a project element that is considered a unit for the purpose of configuration management. This includes such things as software modules, versions of software systems, the project design document, the project plans, and so forth. A control item, sometimes referred to as a control element, is anything under the control of the Configuration Manager.

Change control is the process of controlling, documenting, and storing the changes to control items. This includes proposing the change, evaluating it, approving or rejecting it, scheduling it, and tracking it.

Version control is a process used to control the release and installation of versions. This includes recording and saving each release and documenting the differences between the releases. Version control applies to developed software, off-the-shelf software systems and any document that includes versions.

Issue control or management is a process that provides a mechanism to document, research and resolve issues that arise during project planning and execution.

Action Item control is a process that provides a mechanism to document and track action items that arises during project planning and execution.

Configuration Management Organization Effective configuration management requires an effective and well-defined configuration management role and process. The configuration role is responsible for:

• Defining who will be responsible for and have authority over configuration management processes.

• Setting standards, procedures, and guidelines for the full project team to follow.

• Defining tools, resources, and facilities to be used for configuration management.

This information is summarized in either a standard configuration management policy manual and/or in the project Configuration Management Plan. The detailed configuration management information is represented as a summary page in the Project Management Plan. The relationship of the Configuration Management Plan in the Project Management Plan and the organization’s Project Management Configuration Management Manual is depicted in the figure on the following page.







Project Management

Configuration Management Manual

Person(s) responsible for Configuration Management:

(Should be represented on Organizational Chart)

How will CM be performed throughout the life of the project

What is the repository for control items (both automated and paper)

How will project manager ensure that CM activities are done on a regular basis

Configuration

Management

Plan for

Project XYZ

Date: 5/20/96


Project Management Configuration Management Summary

Configuration Management Plan A sample Configuration Management Plan outline is shown below.

Sample Outline for a Configuration Management Plan

1. Configuration Management organization and resources 1.1 Organization structure related to CM 1.2 Personnel skill level and qualifications for CM 1.3 Facilities needed 1.4 Equipment and tools used

2. Standards, procedures, policies, and guidelines 2.1 Diagram of information flow 2.2 Rules for documentation and approval

3. Configuration identification 3.1 Method for defining control item 3.2 Method for configuration control 3.3 List of potential control items

4. Identification methods (Naming and marking of document, software components, revisions, releases, etc.)






5. Submission and retrieval of control items

6. Version control 6.1 Preparation of software and documentation versions 6.2 Release approval procedure

7. Storage handling and delivery of project media Storage requirements (both automated and paper)

8. Relationship to contractor configuration management (include their plan and procedures if separate from state's processes)

9. Other information

Tasks During the Planning Phase During the planning process, the project manager defines the group or persons responsible for project configuration management and defines the procedure and required resources for performing configuration management. During the planning phase, the project team also identifies the control items. The goal is to:

• Explicitly assign configuration management’s authority and responsibility for the project.

• Ensure that configuration management is implemented throughout the project’s life cycle by setting standards, procedures, and guidelines that are produced and distributed to the full project team.

• Ensure that project management has a repository for storing configuration items and associated configuration management records.

• Ensure that QA reviews the configuration management activities on a regular basis.

Relationship to Quality Management Many of the issues related to configuration management are similar to the issues related to developing a project’s quality system. In fact, in software development projects, many of the tasks for quality and configuration management overlap. For this reason, a clear definition needs to be established, even at the planning stage, as to who will play what role.







Authority and Responsibility Every project includes some activity that requires configuration management. The responsibility for configuration management is assigned in the project plan.

The configuration management authority and responsibility can be handled in the following ways: 1. The state organization maintains a standard, enterprise-wide approach to configuration

management and has an identified group responsible for these tasks on all projects undertaken; or 2. The project develops a sub-team within the project management structure to perform the

configuration management. This team may be assigned to the project on a full-time or part-time basis depending on the size of the project.

3. Contracted services

In all cases, both the authority and the responsibility for all roles and activities must be clearly defined.

Control Items During the early stages of project planning, the person responsible for configuration management and the project manager defines the elements placed under configuration control. The list of control items is not standard. The best place to start is with the Activity List or Work Breakdown Structure. Typically, all major deliverables are controlled.

Some of the more specific considerations include:

• Hardware configuration, system architecture, and communication diagrams.

• Software, code, design documents, testing plan, and software review data.

• The Project Management Plan (schedules, budgets, contracts), support function plans, and correspondence and other documents necessary to recreate a project.

• Requirements document, RFP, documentation, training materials.

Configuration Management Procedures

Procedures and tools are necessary to ensure successful implementation of a configuration management process.

The plan also contains information on how the detailed procedures will be developed and specifies that these procedures are in place by project start-up. Some key processes to be addressed in the procedures include:

• How do developers and project team members request and retrieve configuration control items?

• What are the numbering, sequencing, and data processes to be used?







• Does the project contain sensitive or security-driven data; if so, will the configuration management meet the control requirements for this data?

• Where is the location of controlled items, and how does the project team get access to them?

• What items will be placed under automated control and what items will be manually controlled?

• Will there be a change control board for this project, and how will they interface with the other configuration management procedures?

• What is the relationship to the quality assurance and quality control teams?

The plan may also include diagrams and flow charts to describe procedures for submitting change requests and for reporting problems.

Storage of Control Items Ensure that the Project has a repository for storing Configuration Items and associated Configuration Management Records.

The configuration management environment includes the resources necessary for the implementation of the configuration plan. This includes:

• Configuration control tools: ⇒ Automatic version control and change control tools. ⇒ Monitoring, reviewing, and registration of support utilities.

• Storage facilities -- a safe repository for all approved configuration items, including: ⇒ On-site automated storage for the day-to-day development process. ⇒ On-site paper storage for the day-to-day project for configuration control items that are

not stored in automated form. ⇒ Off-site storage for disaster recovery.

Configuration Management is one area in which many automated tools exist. Automated configuration control is best when used in a multi-user development environment, such as a LAN, to facilitate the sharing of project information and data and to allow for consistent application of the configuration management procedures. Controlled elements can be stored in a central database, and developer access is managed from a central configuration control system. Without such a system, added manual controls and additional tasks for the developers may need to be imposed. Multi-location development is another environment that could be more easily handled with automated tools.

Configuration Management Goes Beyond Development Configuration management is a process that continues beyond the project development cycle and into the maintenance and operation phases. A project that has clearly implemented a successful configuration management process adds to the value of the system once it reaches maintenance.


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Project Management Planning Quality Planning

Quality Process The quality plan identifies the procedures and activities that the project team defines, plans for, and executes for quality. A detailed quality model should be maintained by each state organization, and this model should describe the detailed quality procedures that are used for IT projects. The following model defines a quality assurance process that is consistent with ISO (International Standards Organization) 9000 standards.

Quality Assurance Model

age ence

Phase Reviews

TechnicalReviews

WalkthroughReviews

Quality Assessment

Quality Management

Verification &Validation

Quality Definition

Methods, Tools,Techniques

Procedures Standards Config. Management Change Management

Quality AttributesMeasurement & Verification

FunctionalityPerformance

Quality Process QualityDefinition

Project Management Best Practices

PlanQu

and Manage Plan and Manality AssurancQuality Assura

nnaiuniversity.netals,Notes,Ebooks online !

Quality Reviews

SolutionAcceptance

Quality Audits

AcceptanceTesting

QualityAssessment

Verify quality of solution being developed

Release: 2.0 Section 3 - Page 29





Creating the Quality Plan The state organization’s quality model should be based on standards and procedures that enable the quality manager to ensure quality throughout the life of the project by:

• enforcing quality standards and procedures through formal reviews, walkthroughs, and inspections

• tracking and reviewing defects at each phase of the project

• ensuring all approved project management activities are properly planned and executed.

Most projects will not require a “unique” quality plan, but can be completed under the standard process. For large or complex projects requiring a unique Quality Plan, it defines, tracks, and measures the project’s quality goals. The Quality Plan describes how the project implements its quality process and defines the processes that will be taken to prevent and remove defects. It is important for management to consider the quality goals early in the project and ensure that quality activities are integrated into the overall project management plan.

The quality plan identifies the role or roles is responsible for the quality assurance activities, identifies the scheduled quality activities, and identifies the resources required to conduct the activities. Quality activities are included in the project schedule as milestones and quality audits that require budgeting and staffing.

Successful quality processes always strive to see quality through the eyes of the customer. The customer is the ultimate judge of the quality of the product they receive. They will typically judge a project by whether or not their requirements and business objectives are met. To ensure delivery of a quality product, each phase of the project should ensure that requirements are addressed.

It is important to include a process that validates that the currently defined requirements will be satisfactory to the customer. It is counterproductive to develop a system that meets a documented requirement if you and the user know that the requirement has changed. The change management process helps to control the number of such changes, but quality processes must be in place in order to make changes when they are necessary.

Responsibility for Quality

Though the Project Manager has overall responsibility for the quality of the final product, every project member needs to buy-in to the responsibility for doing quality work. Through ownership of the organization’s quality policy, the individual team members become the most effective way to implement quality into products efficiently and completely. A quality policy cannot rely on “adding” quality at the end of a process; it must be built into the work of each individual on the team. This is why it is important to see Quality Assurance reviewing as a process. It is far more cost effective to have team members add quality into their day-to-day jobs than to have a quality analyst find a problem after a process has been completed.






Independence of the Quality Assurance Team The Quality Assurance team assures that the quality plan is executed as planned. This quality team reports functionally to the Project Manager, but must also have a reporting chain outside the project to facilitate problem escalation. Problem escalation is the process of moving a problem to a higher management level if sufficient attention is not given by the project manager. The independent reporting chain provides a check and balance on the project.

Checklist Quality checklists are often developed as part of the quality procedure definitions. The checklists and associated quality procedures are developed individually by each state organization and by each Quality Assurance audit team.

References The quality plan overview for the project is included in the Project Management Plan.





Project Management Planning Requirements Definition

Importance of Project Requirements Requirements definition in the Planning process is one of the most crucial steps in the process of creating a project. Without well-defined requirements, managers cannot plan a project, developers and integrators do not know what to build, customers do not know what to expect, and there is no way to validate that the system as built satisfies the needs of the organization.

What is a Requirements Process? The disciplined application of proven methods and tools to describe a proposed system's intended behavior and its associated constraints.

When are Requirements Defined? System requirements evolve over time. At each stage planning or execution, additional information is derived and documented. At the onset of the initiating phase, for instance, basic business needs are expressed and documented. Over time, these needs are refined and developed into functional user requirements and are later developed into detailed technical specifications.

During project planning, product requirements must be understood in enough detail to develop project budgets and define resources needed to implement the solution.

A project team should never commit to the project activities list, schedule, or budget to build something product requirements are defined.

At project startup, requirements are reviewed to ensure that they are clear and that the development team has a full understanding of the requirements. Areas where additional definition is required are noted and logged as action items.

During the design phase of the System Development Life Cycle, detailed specifications are developed based upon the product functional and technical requirements and the defined scope of the project. These specifications are used to define the specific technical approach and implementation that will be used to fulfill system requirements.

Requirements Specifications The requirements specifications involve many layers of specification, but starts with a Business Problem Statement within the Project Charter. This is a very high level document that describes the top level needs that the solution must meet. The statements are high level and may be met by a combination of automated and manual processes. For example, a Business Problem might be: “The system must support timely payment of invoices.”

A functional specification describes the hardware and software requirements needed to perform defined functions. It is based upon the Business Problem and further defines those business needs into technical requirements. The functional requirements express more specifically how business needs might be met.






For example: “Invoices must be created weekly based on input received from the order processing system.”

The functional specification defines requirements in terms of inputs, outputs, and behavior of the system. External interfaces are also defined. Non-functional requirements and constraints, such as performance, portability, standards compliance, and reliability are also defined in a functional specification.

Who Defines Requirements?

Requirements definition is a difficult task. People often have difficulty expressing needs without immediately attempting to define the solution. It is also difficult to conceptualize how new automation will affect a task that is currently being done manually or with older technology.

Requirements definition is also a communication intensive process, and, unfortunately, technologists and subject matter experts have different vocabularies, backgrounds, and preferences. This makes the specification process difficult.

To successfully define the requirements of a system, the requirements process includes, and is focused on, the intended users. There are various techniques that can be used to derive the requirements, including interviewing users, observing users conducting their tasks, and holding Joint Application Design (JAD) sessions, where users and analysts interactively explore requirements in a facilitated session.

For more complex systems, prototyping of user screens and reports can help facilitate the communication process. With a prototype, users can see samples of how the system operates, and the developers can provide detailed information that the user group can comprehend.

Requirements Traceability

The requirements process ensures that the requirements defined in the functional specification are carried through the planning, execution, and testing phases. Requirements definition performed during the Planning is always done at a very high level. The traceability process involves the following steps:

Decompose requirements to

discrete statements

Develop requirements table and indicate

source

Track requirements in plan, design and implementation

Develop tests to ensure requirements are fully

met

Throughout the SDLC, requirements traceability is facilitated by decomposing requirements from a document format to a list or table format. Often requirements that are not decomposed result in some ambiguities, such as:

• Multiple requirements may be embedded in a single sentence.

• Compound conditions to requirements may exist in a single sentence (i.e., and/or conditions).

• Requirements may not be testable or determined as met.

• Requirements may be inconsistent.






By placing each requirement as an individual statement that can be tracked and accounted for, the project team can ensure that stated needs of the system can be traced. The first traceability can occur when the WBS is completed. Each requirement is reviewed to ensure that there is a task defined for fulfilling that requirement. Allocation of requirements to the WBS helps define the WBS element and indicates the scope of work covered by the item. This definition allows for a more careful estimate of schedule, budget, and resources in the planning phase.

A sample requirements traceability table is shown below:

Project Requirements Project Traceability Table Product Scope Statement

Documents Product Specifications with appropriate cross-references to other documents.

No. RequirementRFP

ReferenceSOW

ReferenceTask

ReferenceSpecification

Reference Completed Comments / Clarification

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

SOW = Statement of Work

The system shall incorporate a welldefined help function

Function key macros and /or othershortcut techniques shall be providedfor “power users”

The system shall require each user tosign on to the system with a password

The average response time to allentries shall be 1/2 second or less.

Any data item shall only have to beentered once.

2.2.102.4.2

2.2.10

2.2.102.4.2

2.2.10

2.2.102.4.2

S01230

S01230.1

S01230

S01230.1

S01240

SSS 3.2.6.4

SSS 3.2.6.4

SSS 3.2.6.1

SSS 3.2.6.1

SSS 3.2.6.1

Yes

Yes

Yes

Yes

Yes

S01230

S01230.1

S01230

S01230.1

S01240

Yes

Numbering each requirement with a unique identifier further facilitates reference to the requirement for the purposes of contract, engineering, quality assurance, and project management.






Where appropriate, columns can also be added that assign the requirement to a category for sorting. Also, as the project progresses, there can be references to the test plans and procedures, and a compliance field can be entered to define which requirements have been fulfilled and tested.

This requirements analysis process allows specific requirements to be uniquely identified and serves as a common method between developers, customers, and the project management team. It facilitates general communication, traceability, and provides a method for controlling requirements changes.

Approvals Requirements documents are approved by the project team, the users, and the Steering Committee. Specifications are reviewed and baselined at the start of the project. Detailed specifications developed within the project execution phase are rebaselined at approval to incorporate changes to the project scope, of course, these changes must be approved by the Steering Committee.

Managing Requirements Changes A change control process is developed to ensure that the requirements of a project do not change uncontrollably as discussed in Configuration Management.

References The Requirements Traceability Table, i.e. Project Requirements, is included in the Project Plan.





Project Management Planning Resource Planning

Overview of Resource Planning Every organization has a limited number of resources to perform tasks. A project manager's primary role is to find a way to successfully execute a project within these resource constraints. Resource planning is comprised of establishing a team that possesses the skills required to perform the work, as well as scheduling the non-labor resources (tools, equipment, and processes) that enable the staff to complete the project.

Determining the Size of the Team The optimal size of a project team is driven by two principal factors. One is the total number of tasks to be performed, and the other is the effort needed to perform the tasks.

In developing the schedule and assigning the resources, the project manager determines the optimal mix of staff to activities. Doubling resources does not necessarily double productivity. For example, 365 engineers could not complete in a day a project estimated at one person per year. At some point, people begin to get in each other’s way. The significance of the project duration, as well as each major activity's duration, needs to be clearly understood and documented as part of the scheduling process.

Adding more people to an activity creates the need for additional communication and may also increase the need for equipment or tools. Large teams require a significant amount of coordination and teamwork. Sometimes a smaller team can accomplish much more than a larger one in a shorter period of time. The optimal selection also depends on the personalities of the team members and the communication and organizational skills of the project manager.

Adequate and timely personnel planning contains cost overruns. Having personnel on-board when they are not essential is extremely costly. It is important for the project manager to understand the size of the required team needed to perform the work on a week by week basis. For this reason, significant effort needs to be made in the planning phase to identify the resources required to complete each task. And then determining when those resources are needed within the Execution process.

Determining Required Skills Finding available staff with the skills required to perform a task is critical to project success. For example, some assumptions about the skills of the person performing the task are made by the project manager. The skills of the people performing the work is directly related to the time it takes to perform a task.

In the planning process, develop a list of skills required. This skills list is then used to determine the type of personnel required for the project and all the individual tasks.

During Start-up, project manager pragmatically assesses the skills of the available people for the project. The project manager’s job is to determine the risks associated with the available skills and to build a plan that realistically accounts for those skills. Unfortunately, skill level is not a yes/no factor. People have varying degrees of skill, and the manager needs to determine the level of schedule adjustment that should be made based upon the staff skill level. Significant issues should quickly be addressed by management.






Where staff with the necessary skills are largely unavailable, the project manager and project sponsor has the option to hire the necessary talent or contract services to perform the work or adjust the schedule accordingly if agreed to in the Management Plan. Typically, these decisions are made early in the planning process.

Identifying Required Non-Labor Assets All project teams require the tools necessary to successfully perform the tasks assigned. In scheduling resources, the project manager must ensure that both people and necessary equipment are available simultaneously.

The need for adequate work space is often overlooked when planning a project. If a 15-person project team is going to start work, there needs to be a facility to house the staff. Ideally, the team should be placed in contiguous space to facilitate interaction and communication. By having everyone working in close proximity, chances for project success are increased.

In addition to workspace, equipment for the team should be included in the plan. Assuring the availability of equipment at critical points in the project is key in planning a successful project. Also, technical support for equipment and software should be identified at this point. Efficiency and morale are negatively affected by non-availability of equipment information or support needed to perform a task.

Define Resource Profiles A staffing plan is developed for each project. For small projects, this may be simply stated as the assignment of three people full time to the project throughout its six month duration. For more significant projects, the staffing plan identifies when and how staff is brought onto and taken off the project team.

The chart and the graph on the following page are useful in the Project Plan for staffing projects and are required to be included in the Project Management Plan. Both of these documents are also updated during Execution and are used in Project Status Reports.






FTE Resource Loading POSITION Wk. 1 Wk. 2 Wk. 3 Wk. 4 Wk. 5 Wk. 6 Wk. 7 Wk. 8 Wk. 9 Wk. 10 Wk. 11 Wk. 12

Project Manager 1 1 1 1 1 1 1 1 1 1 1 1

SW Mgr 1 1 1 1 1 1 1 1 1 1 1 1

Sr. SW Eng. 1 1 1 1 1 1 1 1 1 1 1 1

SW Analyst 1 1 1 1 1 0.5 0.5 0.5 0.5 0.5 1 1

Programmer 2 2 3 3 3 3 3 3 3 2

Config. Mgr 0.5 1 1 1 1 1 1 1 1 1

Tech Writer 0.5 1 1 1 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Support 0.25 0.5 0.5 1 1 0.25 0.25 0.25 0.25 0.25 1 0.5

Steering Committee .2 .2 .2 .2 .2 .2

Sponsor .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1 .1

TOTAL

PLANNED 5.05 5.6 8.3 9.1 9.8 8.35 8.55 8.35 8.55 8.35 9.8 8.1

POSITION Wk. 1 Wk. 2 Wk. 3 Wk. 4 Wk. 5 Wk. 6 Wk. 7 Wk. 8 Wk. 9 Wk. 10 Wk. 11 Wk. 12

Project Manager

SW Mgr

Sr. SW Eng.

SW Analyst

Programmer

Config Mgr

Tech Writer

Support

Steering Committee

Sponsor

TOTAL

ACTUAL

DIFFERENCE

Staffing Plan

0

1

2

3

4

5

6

7

8

9

10

01 02 03 04 05 06 07 08 09 10 11 12

Weeks

Num

ber o

f FTE

's

PLANNED

ACTUAL






The previous chart and graph illustrates the planned number of people required by week for a project team. Both of these charts will be used in the Execution Phase to depict how actuals might be applied in the performance of the project.

The graphic representation of the staffing plan helps to point out peaks and valleys in staffing that can present serious project management problems. The project manager realistically determines how a relatively consistent staffing level can be maintained. Particular attention is paid to releasing resources when they are no longer needed on the project. It is unrealistic to assume that the project can go from a 5-person to 10-person level of effort in a month and then return to a 5-person effort in another month. Resource leveling is supported by many project scheduling tools, but requires the special attention of the project manager in both the planning and the execution phases of the project.

Forming the Team Project organization is used to coordinate the activity of the team and to define the roles and responsibilities of team members. Project organization is needed for every IT project, and a project manager must always be identified and active.

Confusion and lack of productivity are the result of poor project organization. This is where many projects run into trouble. A good organization facilitates communication and clearly defines roles and responsibilities.

There are numerous ways to organize a project, but projects require a unique organizational structure. There are no standard organizational methodologies that every project should use. A sample organization chart for a large project is shown on the following page, with the types of functions that are often assigned to a project. Some projects update the organization chart to indicate those who will be attending the project status meetings, risk meetings, and change control board meetings.






Sample High-Level Organizational Chart For a Large Project

ExecutiveSteering

Committee

Project Manager

SM STM CCB

Administrative Support

User Subject Experts

Quality AssuranceConfiguration

Manager STM

Software TaskManager

SM STM CCB

Project ResourceTask Manager

SM STM

Hardware / CommTask Manager

STM

Project Services Task Manager

CCB STM RM

SM = Steering Committee MeetingRM = Risk ManagerCCB = Change Control BoardSTM = Status Meeting

DatabaseDesigner

DesktopSystem

Designer

WANManager

LANManager

Development Manager

BudgetingManager

SchedulingManager

TrainingManager

DocumentationManager

Data Conversion

Manager

Change Control Board

Users and Steering Committeealso represented on CCB

External Contract

Programming Staff

Programmer / AnalystsTrainers Documenters

Test Manager

TestTeam

The larger the project, the more critical the organizational structure becomes. In a small project, a single team member may be responsible for several functions, whereas in a large project the functions might require full-time attention. A very large project, for instance, often requires a deputy project manager. A small project might have the senior technical staff member serving as a development manager. Definition of the project organization is a critical part of the planning process.

Project complexity also is a major factor when organizing a project. For example, a project that includes a large software development component typically includes a software development manager. This allows for a concentration of resources on a high risk area. Unless a project is extremely small, it is useful to organize the project into functional teams. This approach leads to idea synergy and improved communications. The project manager is responsible for defining and selecting the team leaders. Team leaders can off-load some of the work of the project manager and take responsibility for completion of tasks. Team composition should be determined early in the planning phase.





Project Management Planning Project Management

Support Functions While the project manager, in theory, is responsible for all of the management aspects of a project, rarely can all of these tasks be performed by one person. In fact, some should not be performed by the project manager due to the time consuming nature of the function. These necessary support tasks can be divided into administrative and technical support functions and are shown in the following figure.

Project Management Support Functions Project Management

Planning / Organizating / Tracking / Reviewing / Leading

ConfigurationManagement

Testing

QualityAssurance

ContractManagement

Procurement

DocumentProduction

AdministrativeSupport

Technical SupportFunctions

Administrative SupportFunctions

Relationship can be dotted or direct to PM, exceptfor QA, which should report outside of the project.

The administrative functions are fairly obvious and can be further expanded to include scheduling and budgeting in very large projects. Within the technical support functions, configuration management ensures that changes to the product being developed are controlled; quality assurance monitors the process of the product being developed; and testing or quality control verifies compliance of the product being developed to the stated requirements.

It is the project manager’s responsibility to organize the project support groups and to document their planned activities.

Define Assumptions Documenting the assumptions made in resource allocation is critical to the later success of the project. Without clear documentation of these assumptions, later changes in the staffing are difficult and risky.

If, for example, a key person with a specialized technical skill was assumed in the plan, that assumption must be documented. Then, if that resource is unavailable to perform the task, the project manager can recognize the risk and make necessary decisions. Without documentation of the assumption, the plan is open to serious risk without the project manager realizing it.





Project Management Planning Risk Management Plan

Identify Risks A risk is any factor that may potentially interfere with successful completion of the project. Risk management recognizes that a problem might occur. When a problem develops, the risk of it happening is 100%. By recognizing potential problems, the project manager can attempt to avoid a problem through proper actions.

Risks are inherently involved with scheduling resources. Sound resource planning makes allowances for dealing with risks in one or more of the following ways:

• The most recommended technique for risk allowance is to add an additional WBS task for risk management/risk reduction, and financial reserves can be set aside to deal with potentially delayed schedules.

• Add time to those tasks where resources are known to be a problem. There is no rule of thumb for this multiplier; it depends on the degree of risk and the overall impact that resource problems can have on the project. The cost for this task would be derived from the Total Risk Hours from the Risk Analysis Worksheet.

• Add a percentage time multiplier to the schedule for specific individuals, particularly if new technology is being used or if the person providing the estimate is extremely optimistic. Remember that technical staff typically underestimates the time required to do any particular task.

• Where skill shortage is identified, add time and resources for training. By recognizing resource shortfalls and providing the necessary training, a project manager mitigates some level of risk.

Risk Management Process The procedure that the team will use to manage project risks is defined in the planning stage, documented in the project plan, and then executed throughout the life of the project. Risk management deals with the following risk phases:

• Risk identification

• Risk analysis, quantification and prioritization

• Risk mitigation planning

• Risk response

The Risk Management Plan i.e. Risk Management Worksheet, documents the procedures used to manage risk throughout the project. In addition to documenting the results of the risk identification and analysis phases, it must cover who is responsible for managing various areas of risk, how risks will be tracked throughout the life cycle, how contingency plans will be implemented, and how project resources will be allocated to handle risk.

Project risks are identified and carefully managed throughout the life of the project. It is particularly important in the planning stage to document risks and identify reserves that have been applied to the risks.

There are various areas that can affect a project, including:






• The technology used on the project

• The environment in which the project is executed

• Relationships between team members

• How well the project fits the culture of the enterprise

• How great a change will result from the project?

Risk identification consists of determining risks that are likely to affect the project and documenting the characteristics of those risks. Don’t try to identify all possible risks that might affect the project, but focus on those likely to affect the project’s success.

Responsibility for Risk Identification All members of the project team can identify risk, but the project manager has overall responsibility. The project manager is responsible for tracking risks and for developing contingency plans. Sometimes a risk identification “brainstorming” session can help in the initial identification process. Such meetings help team members understand various perspectives and can help the team members better understand the “big picture.”

Risk identification begins in the early planning phase of the project. A Risk Management Worksheet (shown later in this section) is started during the planning phase. Then, as scheduling, budgeting, and resource planning occur, the worksheet is updated to reflect further risks identified in the planning stage.

At project startup, the Risk Management Worksheet is reviewed again, and any new risks are added to it. As the project progresses, members of the team identify new risk areas that are added to the Risk Management Worksheet. Also during the project, risks identified earlier may be removed.

Risks are documented so that contingency measures can be taken to mitigate their effects. Risks to both the internal and external aspects of the project should be tracked. Internal risks are those items the project team can directly control (e.g., staffing), and external risks are those events that happen outside the direct influence of the project team (e.g., legislative action).






Risk Management Worksheet Instructions The risk categories/events shown on the Risk Management Worksheet are provided for guidance, and do not represent an exhaustive list of risks. The risk categories/events should be customized for each individual project.

The project manager, with the support of the project team, then evaluates each risk event for the following:

Loss Hours:

Indicate the expected increase in hours that will occur if the risk event occurs.

Probability:

Use the probability field to quantify the chance of the event taking place. Use a decimal value from 0 to 1 (e.g., .70).

Risk Hours:

This field represents the estimated risk for this event. The field is calculated by multiplying the loss and the probability fields.

Previous Risk Hours:

This field represents the value of risk hours reported in the previous period of the Execution Phase. A difference between this value and the current risk hours indicates a change in the risk status and is used to alert management that a change has occurred.

Preventative Measures and Contingency Measures:

The next two columns document the planned preventative and contingency measures that could minimize the effect of the risk event. The measures shown in the next figure are representative of common contingency measures, but are not an exhaustive list. The project manager should provide specific contingency plans for the specific project.

Responsible Person:

The individual assigned to track, report on or manage this specific risk.

Comments:

The comments column should be used to document items such as a change in value of risk hours from the previous period, management actions needed to contain risk, and status of preventive and contingency plans.

Total:

The sum total of values in column four is the total risk hours for the project and should be reported in the project plan. This total should be multiplied by a blended rate for personnel and included in the WBS, Schedule and/or Project Estimate Summary Worksheet.






Contingency Planning Contingency plans are developed as a result of a risk being identified. Contingency plans are pre-defined action plans that can be implemented if identified risks actually occur. If a problem actually occurs, the contingency plan must be implemented and reserves must be allocated.

As a guideline, contingency plans are developed for the top five risks associated with a project. For large projects the top five risks of each major sub-system may be actively tracked. To properly implement a plan, a reserve is usually required where dollars and/or time are held by a project manager to apply to the execution of a contingency plan. Such contingency reserves are discussed in the appropriate sections of planning. Without maintaining a reserve, the project manager is forced to go back for additional time or dollars for every risk as it becomes a problem. It is far more desirable to maintain a level of reserve where problems can be dealt with from within the original budget and schedule of the project.

There are some situations where nothing can realistically be done to prevent or deal with a risk. In this case, the project must be managed in such a way that the probability of the event occurring is minimized. If the event does occur, the project manager must replan the project and include the effect of the problem.






Risk Management Worksheet A description of all risks identified for the project, the probability of the risk occurring, the impact of the risk on the project, and the suggested mitigation activities.

Last Risk Assessment Date: Prepared by:

Ref

#

Risk Category/ Event

Loss

Hours

Probability RiskHours

Previous Risk Hours

Preventive Measures

Contingency Measures

Responsible

Person

Comments

Personnel1 Lack of

knowledge in this hw/sw

200 .10 20 1, 2 DevelopmentManager

2 Insufficient resources available

400 .25 100 13 DevelopmentManager

Equipment 3 Delivery date slip 100 .25 25 3, 4 Purchasing4 Insufficient

configuration 100 .15 15 5, 6 3, 4 Technical

Architect Customer

5 Infighting 150 .2 30 7 8 ProjectManager

6 Unacceptable working environment

200 .3 60 9 8 ProjectSponsor

7 Third party involvement

300 .1 30 14, 15 SteeringCommittee

8 Customer availability

250 .25 63 7, 16 29 ProjectSponsor

Logistics 9 Multiple

customer sites

300 .2 60 20, 21, 22






Ref

#

Risk Category/ Event

Loss

Hours

Probability Risk Hours

Previous Risk Hours

Preventive Measures

Contingency Measures

Responsible

Person

Comments

10 Physicalseparation of team and customer

200 .2 40 20, 21, 22, 23

ProjectSponsor

Organization 11 Team > 10 200 .2 40 24, 25 Project

Manager 12 Customer

people on team

300 .3 90 26 ProjectSponsor

Other

TOTAL RISK HOURS

573

Risk Reserve $22,920 at $40 average hourly cost






Suggested Preventive and Contingency Measures 1. Provide appropriate training. 2. Hire trained specialists. 3. Install temporary hardware. 4. Utilize internal hardware temporarily. 5. Purchase additional equipment. 6. Implement product functionality in a phased manner. 7. Get agreement on who has decision authority; designate key user

responsibility. 8. Locate project team in our offices. 9. Negotiate better environment. 10. Ensure that all the resources are provided. 11. Suggest/sell Functional Specifications before development. 12. Unilaterally develop Functional Specifications. 13. Adjust deadline and get our customer buy-in. 14. Do not commit to third-party performance. 15. Get third party commitment at least equal to (if not more than) our

commitment. 16. Get customer commitment to participate in the project. 17. Increase estimates for the related tasks. 18. Do not commit to response time unless absolutely necessary and,

then only if a study is done by knowledgeable persons. 19. Establish access to product support personnel. 20. Hold regular meetings with customer. 21. Maintain constant written and oral communication with remote

personnel. 22. Visit remote sites as needed. 23. Demonstrate incremental results. 24. Divide staff into teams and assign team leaders. 25. Dedicate our management resources. 26. Establish final authority of our project manager. 27. Use proven hardware for development if possible. 28. Reduce functionality to meet deadline. 29. Document our assumptions and understandings and get Customer’s

sign-off before investing substantial resources. 30. Design an alternate (contingent) solution strategy.






Risk Identification Summary (Top Five Risk)

Category Prob Imp Risk Mitigation Approaches

MANAGEMENT

Personnel Availability High Med Personnel developing the system did not participate in the design effort, resulting in less understanding of the system functionality.

Ensure that specifications/overview documents contain sufficient information to allow new personnel to understand system.

Personnel Skills Low High Personnel assigned to project will not have skills to perform work

Since contractor provided quality personnel in design effort, anticipate that skills will be met.

Schedule Med High Completed system (i.e., the system ready for use) not delivered within 18 month timeframe.

Break project into smaller segments to ensure schedule being maintained.

Cost Med High Proposed budget does not reflect all required activities.

Review costing to ensure that all state organization activities reflected.

Change Control Med Med System requirements will change during the development time.

Ensure that a change control process is established that limits changes to those essential to business

Legend Prob = Probability of Occurrence Imp = Impact





Project Management Planning Project Plan Format

The Project Plan Template

The project plan forms the basis for all management efforts associated with the project. This plan template emphasizes documenting only the pertinent information associated with the plan. The blank forms for the project plan are provided in Appendix B: Forms. The forms are actually WordTM and ExcelTM

documents which are available for download from the Office of Information Technology.

The plan does not require verbose textual content filled with boilerplate material. Information associated with detailed procedures for executing such processes as technical development, configuration management, and quality assurance should be documented in the state organization’s policy manuals. For example, the configuration management information contained in the plan only references a procedure document that defines the specific activities and responsibility for each configuration item. The project plan may only summarize who is responsible for the configuration management activities, what is under configuration control, and where the repository will reside.

Plan Approval It is important that project plans are approved prior to beginning a project. These approvals should be located at the beginning of the plan to emphasize support for the project plan. In the template format, approval signatures are included on the cover of the plan, as shown below. In some cases, this approval page may need to be modified to include the appropriate signatures.

Project Management Plan Approval Signatures Form

Project Management PlanProject Management PlanProject Name: Document Handling SystemDate: August 1, 2000Plan Release #: 1.0Project Manager: John Smith

Approvals:John Smith Betty WhiteProject Manager Prime Contractor Manager

Tom Snow Steve BrownState Organization Management/Steering Committee Chair. User Management

Faye McNeill Peter ChanOversight Manager Project Sponsor

CIO -(if Applicable)

The above signatures represent agreement with the attached plan including agreement with the activities, the risks, the effort and the cost of the associated project.






Project Summary Following the approvals page, there should be a project summary that defines:

• The project goals, objectives and success factors.

• The estimated value of the project.

• The duration of the effort.

• The purpose of the project.

• Major dependencies/constraints.

• The Project Summary and Project Charter are maintained over the course of the project. It needs to be updated with each new release of the plan.

Page 2 of the Project Summary includes points of contact and prime contractor information.

The following two pages show a completed sample project summary from the template.







1. Project Summary (Sample) Information in the project summary areas was started during the project initiating phase and should be included here

X

X

X

FY X 20XFY

20XX

2.0 m

.8

1.2 m

Included additional activities for

X X

more hardware for statewide rollout Additional funds were needed to add

June 30, 20XX

John Smith

August 15, 20XX

Vision Quest

MDA

Document Handling System

Yes No

Total Amount:

Funded?Year: Budget Amount:



Budget for project by fiscal year and is project funded? If so, for what amount(s) and periods(s):

Is this an updated Project Plan? If so, reason for update:statewide rollout

Please answer the following questions by marking “Yes” or “No” and provide a brief response as ppropriate

No:

Comments:

Yes: No:

Details are on page 6

X

Yes:

within Budget:

Project isProject is On Schedule:

Development Life Cycle (Design, Development, Integration, Testing or Implementation)

Date Awarded:

Submitted By:

Start Date:

Current Stage of Project:

Prime Contractor:

State Organization:

Project Name:





Project Summary - Continued

Points of Contact This should be the list of individuals that will be involved with the project during the execution phase.

Position Name / Organization Phone E-Mail Project Manager John Smith 573-692-0962 [email protected] Senior Management Sponsor Joe Done 573-752-1666 [email protected] Senior Technical Sponsor Mary Lane 573-359-0993 [email protected] Procurement Contract Tina Black 573-425-1254 [email protected]

Customers: Unemployment Audit Compliance

Bill Nick Anne Wright Lance Gonlin

573-694-3442 573-358-6996 573-536-8888

[email protected] [email protected] [email protected]

Other Stakeholders (Top 3) Same as above

Prime Contractor Information

Company:

Position Name Phone E-Mail Project Manager Betty White 573-664-3229 [email protected] Senior Management Sponsor Ned Jack 573-664-3869 [email protected] Senior Technical Sponsor Bob Bowman 573-664-3283 [email protected]






Project Charter The project charter follows the project summary information. Like the project summary, the program charter information was developed during the project initiating phase. The project charter is completed in the planning phase. It includes a business problem, statement of work, objectives, success factors, project dependencies, and constraints. A sample of the completed information is shown below.

2. Project Charter (Sample) Business Problem. All projects start with a business problem/issue to solve.

The lack of a statewide automated planning system for scheduling transportation road repair maintenance resources has resulted in road closures, duplicated capital expenditures, and increased staff overtime costs.

Statement of Work / Goal / High-level Project Scope Statement The statement should be short and to the point.

Design and prototype an automated, dynamic planning system by Q4, 20XX, based on an SQL database and GUI front end. Based on the prototype, pilot the system and complete full implementation by Q4,20XX.

Project Objectives / Detailed Project Scope Statement Provide a brief, concise list of what the project is to accomplish. The project objectives are a detailed version of the statement of work. Taken with the statement of work, the objectives define the boundaries (scope) of the project. The objective statement can also be seen as a decomposition of the statement of work into a set of necessary and sufficient objective statements.

Short-Term 1. Define the planning requirements for the system 2. Define user needs in terms of inputs and outputs 3. Develop the prototype and test 4. Conduct the pilot of system with completion by Q2, 20XX, with the pilot lasting at least three months 5. Complete system acceptance and user documentation 6. Complete system installation at all locations by Q4, 20XX Long-Term 7. Substantially reduce road maintenance cost over the next several years.

Success Factors: List factors that will be used to determine the success of the project.

Short-Term 1. Have all locations installed and trained by Q1, 20XX

Long-Term 1. Reduce total maintenance project cost by 3% per year in the 12 months following implementation. 2. Reduce total maintenance project cost by 5% per year in the subsequent following 12 months.

Project Dependencies/Constraints: The schedule for implementation for such a large, complex system is very constrained.






Project Trade Off Matrix and Status Summary Managing a project requires the balancing of three factors: resource, schedule, and scope. These three factors are interrelated, i.e., a change in one of them causes the others to change as well. The project trade off matrix shows the relative importance of each factor:

• constrained means the factor cannot be changed or is severely limited

• accepted means the factor is somewhat flexible

• improved means that the factor is very flexible

Also included on this page of the template is a matrix for project status. The matrix reflects whether the technical, schedule, and cost estimates for each task are behind, on schedule, or ahead of schedule. Comments are added for any deviation from the original estimate. For each project, the unique teams or phase should be filled in the appropriate category.

3. Project Tradeoff Matrix and Status Summary

Schedule Scope Resources CONSTRAINED ACCEPTED IMPROVED

Identify variable to be CONSTRAINED, IMPROVED, ACCEPTED

+/- Status

Team/Phase Technical Schedule Cost Comment Req. On Ahead On Completed this phase ahead of

schedule, on budget. Dev Team 1 On Ahead On Completed this phase ahead of

schedule, on budget Dev Team 2 On On On Completed this phase on schedule,

on budget Testing On On On Cannot be closed until installation is

complete Installation Behind Behind On Additional pieces of hardware were

required to complete statewide rollout causing impact to technical and schedule measures






Project Organization The project plan should include a description of the project organization team. A project manager is required for every project. Many plans may also include a narrative of key project member responsibilities. Small projects will require less organizational definition than larger projects, but responsibilities should always be defined.

See Resources Planning for a sample Project Organization Chart.

Activity List / Work Breakdown Structure / Schedule The WBS describes each task required in the project.

Tasks are assigned as work packages which define schedules, identify requirements to be completed and describe specific work to be performed. Refer to Activity Definition and Sequencing for further information on development of a work breakdown structure.

It should include milestones, task dependencies, task duration, work product delivery dates, quality milestones (reviews/audits/inspections), configuration management milestones, and action items (with deadlines and responsibilities). See Activity Definition and Sequencing for samples of GANTT Charts.

Work Product Identification The list of project deliverables that includes the date due and the role responsible for the delivery is part of the plan. This information is derived from the project activity list. See the Activity Definition and Sequencing Section for a sample of a Work Product Identification Form.

Estimated Cost at Completion This estimated cost at completion is an assessment of the total project effort in terms of time and dollars. See Budgeting within this section for a sample of the Estimated Cost at Completion Worksheet.






Resource Loading Profiles The FTE Resource Loading and the Staffing Plan shows the number of personnel, by type, that are required on the project on a weekly or monthly basis. This information is compared on a planned versus actual basis. See Resource Planning for a sample Project Staffing Plan.

Requirements The detailed listing of product requirements should be included in the Project Management Plan. Refer toRequirements Definition for a sample.

Risk Management Plan A Risk Management Plan for the project should be included. A risk is anything that could potentially affect the successful completion of the project. The contractual, management, and technical risks associated are identified and assessed for the probability of the risk occurring, the cost to correct if the risk occurs, the impact of the risk on the project, and the prevention and mitigation activities. Refer to Risk Identification section for further information and sample forms.






Configuration Management Plan The Configuration Management Plan defines the staff level or the actual person, if known responsible for project configuration management, the procedures used, the planned configuration items and resources required to conduct Configuration Management. This Configuration Management Plan is summarized in a format depicted in the figure below. Refer to the Configuration Management section for further information on configuration management planning.

12. Configuration Management Plan

Provide a configuration management plan that defines the person responsible for project configuration management, the procedures that will be used, the planned configuration items, planned release dates for configuration items, and resources required to conduct CM.

CM Responsibility

Manager: J. Smith

Additional Staff for CM: No additional staff anticipated.

Procedure Reference: MDA CM-01 to CM-03

Configuration Items: Ensure that CM is implemented throughout the project’s life cycle. No. Item Comments 1. System / Management / PPlan Project Plan 2. System / Req / Sys Spec System Specifications 3. System / Test / TPlan Test Plan 4. System / Management / TPlan Implementation

Ensure that project has a repository for storing configuration items and associated CM records. Briefly describe.






Quality Plan The Quality Plan defines the person responsible for project quality, the planned quality activities, and resources required to conduct QA activities is summarized in the project plan. Refer to the Quality Plan Development section for further information on quality planning. The QA Plan is summarized in a format illustrated in the figure below.

13. Quality Plan

Provide a quality plan that defines the person responsible for project quality assurance, the procedures that will be used and resources required to conduct quality assurance.

QA Responsibility

Manager: M. Anderson

Additional Staff for QA:

Support needed by lead design and development members

Procedure Reference: MDA QA01 to QA - 10

Planned Quality Event:

Ensure that QA is implemented throughout the project’s life cycle. Dates include QA audits, reviews and other project activities that QA st ff will participate in.a

No. 1.

Item Comments Due Requirement Review 10/1/XX

2. Code Walk Through User Interface Prototype 3. 11/15/XX

11/1/XX

4. Testing Audit 12/13/XX

Ensure that project has a repository for storing configuration item associated QA records. Briefly describe. s and

A records are stored w/project CM materialQ

Ensure that QA audits the baselines and CM activities on a regular basis. riefly describe B

efined in project scheduleD






Top Five Issues

This form identifies the Top Five Issues that have been identified for this project. It defines the person responsible for resolving the issue, and an associated open and close date, with proposed or recommended solutions.

14. Top Five Issues

Issue Description Responsible Individual

Open Date Closure Date Status

Change order pending for AP processing

A. Smith 4/5/XX 5/1/XX Estimated release date 4/15/XX

Enhancement number 1 inactive; requirements still not defined

D. Hall 4/1/XX 5/1/XX Awaiting input form Jim who needs to meet with Bob on 3/15/XX

Out of scope item on month end processing must be decided

A. Smith 2/15/XX 3/1/XX Determined effort was out of scope. No action to be taken.

Configuration Item Status Reporting system not yet installed.

B. Jones 1/15/XX 1/25/XX System installed and operational. Baselines entered into CM.

Issue Item Status The plan should include a list of issues that are maintained by the Configuration Manager. A sample table is shown here.

15. Issue Status

Maintain a list of action items, including a description of the item, a point of contact a date by which action should be taken and a description of the action taken to close items.

Issue Item #

Issue Description Responsible Individual

Open Date

Closure Date

Status

0001 Document Flow for hardware acquisition

R. Smith 8/1/XX Developing Flow

0002 Check status of subcontract agreement

B. Hill 8/2/XX 8/4/XX Signed and Executed

0003 Organize team meeting to review support requirements

M. Jones 8/1/XX 8/2/XX Meeting scheduled for 8/12/XX

0004 Contact W. Smith regarding coordination of delivery

B. Hill 8/3/XX

0005 PMP updates Past Due C. White 8/4/XX Required by 8/1/XX

0006 0007






Action Item Status A similar chart as the one above can be used to show Action Items that need to be tracked at the beginning and throughout the project. Action item are important items but too short to be included as a Work Assignment.





Table of Contents

SECTION 3 PROJECT MANAGEMENT PLANNING

INTRODUCTION _______________________________________________________ 1 Planning is the Seed for Success ___________________________________________________ 1

Responsibilities _________________________________________________________________ 1

Terminology____________________________________________________________________ 1

PLANNING PROCESS AND PROJECT PLAN _______________________________ 3 What is Project Planning? _________________________________________________________ 3

The Planning Process ____________________________________________________________ 3

Importance of the Project Plan _____________________________________________________ 4

Steps in the Planning Process______________________________________________________ 5

Overview of Project Scheduling_____________________________________________________ 5

ACTIVITY DEFINITION AND SEQUENCING _________________________________ 7 Develop Project Tasks____________________________________________________________ 7

Define Task Relationships________________________________________________________ 11

Defining Deliverables____________________________________________________________ 11

Development of a Project Schedule ________________________________________________ 12

Define Precise and Measurable Milestones __________________________________________ 13

Steps to Creating a Project Schedule _______________________________________________ 14

Estimate Task Duration __________________________________________________________ 15

Define Priorities ________________________________________________________________ 16

Define Critical Path _____________________________________________________________ 16

Document Task Relationship______________________________________________________ 16

Document Assumptions__________________________________________________________ 17

Review the Results _____________________________________________________________ 17

BUDGETING _________________________________________________________ 18 Overview of Project Budgeting ____________________________________________________ 18

Identify Cost Factors ____________________________________________________________ 18

Project Estimate Summary Worksheet ______________________________________________ 18

Instructions for the Project Estimate Summary Worksheet _______________________________ 19

Document Assumptions__________________________________________________________ 23

Review the Cost Estimates _______________________________________________________ 23

Estimated Cost at Completion Report _______________________________________________ 23




Table of Contents

CONFIGURATION MANAGEMENT _______________________________________ 24 Configuration Management _______________________________________________________ 24

Configuration Management Organization ____________________________________________ 24

Configuration Management Plan ___________________________________________________ 25

Tasks During the Planning Phase __________________________________________________ 26

Relationship to Quality Management________________________________________________ 26

Authority and Responsibility ______________________________________________________ 27

Control Items __________________________________________________________________ 27

Configuration Management Procedures _____________________________________________ 27

Storage of Control Items _________________________________________________________ 28

Configuration Management Goes Beyond Development_________________________________ 28

QUALITY PLANNING __________________________________________________ 29 Quality Process ________________________________________________________________ 29

Creating the Quality Plan_________________________________________________________ 30

Responsibility for Quality _________________________________________________________ 30

Independence of the Quality Assurance Team ________________________________________ 31

Checklist _____________________________________________________________________ 31

References ___________________________________________________________________ 31

REQUIREMENTS DEFINITION ___________________________________________ 32 Importance of Project Requirements ________________________________________________ 32

When are Requirements Defined? _________________________________________________ 32

Requirements Specifications ______________________________________________________ 32

Who Defines Requirements?______________________________________________________ 33

Requirements Traceability________________________________________________________ 33

Approvals_____________________________________________________________________ 35

Managing Requirements Changes _________________________________________________ 35

References ___________________________________________________________________ 35

RESOURCE PLANNING ________________________________________________ 36 Overview of Resource Planning ___________________________________________________ 36

Determining the Size of the Team __________________________________________________ 36

Determining Required Skills ______________________________________________________ 36

Identifying Required Non-Labor Assets______________________________________________ 37

Define Resource Profiles_________________________________________________________ 37

Forming the Team ______________________________________________________________ 39

PROJECT MANAGEMENT ______________________________________________ 41 Support Functions ______________________________________________________________ 41




Table of Contents

Define Assumptions_____________________________________________________________ 41

RISK MANAGEMENT PLAN_____________________________________________ 42 Identify Risks __________________________________________________________________ 42

Risk Management Process _______________________________________________________ 42

Responsibility for Risk Identification ________________________________________________ 43

Risk Management Worksheet Instructions ___________________________________________ 44

Contingency Planning ___________________________________________________________ 45

Risk Management Worksheet Sample ______________________________________________ 46

Suggested Preventive and Contingency Measures_____________________________________ 48

Risk Identification Summary (Top Five Risk)__________________________________________ 49

PROJECT PLAN FORMAT ______________________________________________ 50 The Project Plan Template _______________________________________________________ 50

Plan Approval _________________________________________________________________ 50

Project Summary _______________________________________________________________ 51

Project Charter ________________________________________________________________ 54

Project Trade Off Matrix and Status Summary ________________________________________ 55

Project Organization ____________________________________________________________ 56

Activity List / Work Breakdown Structure_____________________________________________ 56

Work Product Identification _______________________________________________________ 56

Project Schedule _______________________________________________________________ 56

Estimated Cost at Completion _____________________________________________________ 56

Resource Loading Profiles________________________________________________________ 57

Requirements _________________________________________________________________ 57

Risk Management Plan __________________________________________________________ 57

Configuration Management Plan ___________________________________________________ 58

Quality Plan ___________________________________________________________________ 59

Top Five Issues ________________________________________________________________ 60

Issue Item Status_______________________________________________________________ 60

Action Item Status ______________________________________________________________ 61




QUALITY CONTROL AND SAFETY DURING CONSTRUCTION

Quality and Safety concerns in construction

♥ Quality control and safety represent important concerns for project managers. ♥ Defects or failures in constructed facilities can result in very large costs. ♥ Even with minor defects, re-construction may be required and facility operations

impaired. ♥ Increased costs and delays are the result. In worst case, failures may cause personal

injuries or fatalities. ♥ Accidents during the construction process can similarly result in personal injuries and

large coats. ♥ Indirect costs of insurance, inspection and regulation are increasing rapidly due to these

increased direct costs.

♥ As with cost control, the most important decisions regarding the quality of a completed facility are made during the design and planning stages rather than during construction.

♥ It is during these preliminary stages that component configurations, material specifications and functional performance are decided.

♥ Quality control during construction consists largely of insuring conformance to this original design and planning decisions.

♥ There are expectations on the primary focus of quality control, i.e. unforeseen circumstances such as incorrect design decisions or changes desired by an owner in the facility function may require re-evaluation of design decisions during the course of construction.

♥ Some designs rely upon informed and appropriate decision making during the construction process itself.

♥ For example, some tunnelling methods make decisions about the amount of shoring required at different locations based on better information concerning actual site conditions; the facility design may be more cost effective as a result.

♥ Quality requirements should be clear and verifiable, so that all parties in the project can understand the requirements for conformance.

♥ Safety during the construction project is also influenced in large part by decisions made during the planning and design process.

♥ Some designs or construction plans are inherently difficult and dangerous to implement, whereas other, comparable plans may considerably reduce the possibility of accidents.

♥ For example, clear separation of traffic from construction zones during roadway rehabilitation can greatly reduce the possibility of accidental collisions.

♥ Beyond these design decisions, safety largely depends upon education, vigilance and cooperation during the construction process.




♥ Workers should be constantly alert to the possibilities of accidents and avoid taken unnecessary risks.

Organising for Quality and Safety

♥ A variety of different organisations are possible for quality and safety control during construction.

♥ One common model is to have a group responsible for quality assurance and another group primary responsible for safety within an organisation.

♥ In large organisations, departments dedicated to quality assurance and to safety might assign specific individuals to assume responsibility for these functions on particular projects.

♥ For smaller, the project manager or an assistant might assume these and other responsibilities.

♥ In both the cases, insuring quality and safety are main concerns for a manager in addition to personnel, cost time and other management issues.

♥ Every project will have their own quality and safety inspectors, including the owner, the engineer/architect, and the various constructor firms.

♥ These inspectors may be contractors from specialised quality assurance organisations. In addition to on-site inspections, samples of materials will be tested by specialised laboratories to insure compliance.

♥ Common examples of inspectors for the local government’s building department, for environmental agencies and for occupational health and safety agencies.

♥ The US Occupational Safety and Health Administration (OSHA) routinely conducts site visits of work places in conjunction with approved state inspection agencies.

♥ Safety standards prescribe a variety of mechanical safeguards and procedures; for example, ladder safety is covered by over 140 regulations.

♥ In cases of extreme non-compliance with standards, OSHA inspectors can stop work on a project. (Only visit a small fraction of construction sites).

♥ As a result, safety is largely the responsibility of the managers on site rather than that of public inspectors.

♥ Quality control should be the primary objective for all the members of a project team. Mangers should take responsibility for maintaining and improving quality control.

♥ Employee participation in quality control should be sought and rewarded, including the introduction of new ideas.

Work and Material Specifications

♣ Specifications are important feature of quality and its components need documentation which includes special provisions to be made in design to be used during construction if required.

♣ General specifications of work quality are available in numerous fields and are issued in publications of organisations such as the American Society for Testing and Materials




(AATM), the American National Standards Institute (ANSI), or the Construction Specifications Institute (CSI).

♣ Distinct specifications are formalised for particular types of construction activities, such as welding standards issued by the American welding Society, or for particular facility types, such as the standard specifications for Highway Bridges issued by the American Association of state Highway and Transportation officials.

♣ Construction specifications normally consist of a series of instructions or prohibitions for specific operations. For example, the following passage illustrates a typical specification, in this case for excavation for structures:

♣ Conform to elevations and dimensions shown on plan within a tolerance of plus or minus 0.10 foot and extending a sufficient distance from footings and foundations to permit placing and removal of concrete formwork, installation of services, other construction and for inspection. In excavating for footings and foundations, take care not to disturb bottom of excavation. Excavate by hand to final grade just before concrete reinforcement is placed. Trim bottoms to required lines and grades to leave solid base to receive concrete.

♣ In recent years, performance specifications have been developed for many construction operations.

♣ Rather than specifying the required construction process, these specifications refer to the required performance or quality of the finished facility.

♣ For Example, traditional specifications for asphalt pavement specified the composition of asphalt material, the asphalt temperature during paving and compacting procedures.

♣ In contrast, a performance specification for asphalt would detail the desired performance of the pavement with respect to impermeability, strength,etc;

Example: Concrete Pavement Strength

♦ Concrete pavements of superior strength result in cost savings by delaying the time at which repairs or re-construction is required.

♦ In contrast, concrete of lower quality will necessitate more frequent overlays or other repair procedures.

♦ Even if a pavement does not meet the “ultimate” design standard, it is still worth using the lower quality pavement and re-surfacing later rather than completely rejecting the pavement. Based on these life cycle cost considerations, a typical pay schedule might be:

Load Ratio Pay Factor < 0.50 Reject

0.50-0.59 0.90 0.70-0.89 0.95 0.90-1.09 1.00 1.10-1.29 1.05 1.30-1.49 1.10

>1.50 1.12




♦ In this table load ratio is the ratio of the actual pavement strength to the desired design strength and the pay factor is a fraction by which the total pavement contract amount is multiplied to obtain the appropriate compensation to the contractor.

♦ For example, if a contractor achieves concrete strength twenty percent greater than the design specification, then the load ratio is 1.20 and the appropriate pay factor is 1.05, so the contractor receives a five percent bonus.

♦ Load factors are computed after tests on the concrete actually used in pavement. Note that a 90% pay factor exists in this case with even pavement quality only 50% of that originally desired.

♦ This high pay factor incurred in preparing the payment foundation. Concrete strengths of less than 50% are cause for complete rejection in this case, however.

Total Quality Control

♠ Quality control in construction typically involves insuring compliance with minimum standards of material and workmanship in order to insure the performance of the facility according to the design.

♠ For the purpose of insuring compliance, random samples and statistical methods are commonly used as the basis for accepting or rejecting work completed and batches of materials.

♠ Rejection of a batch is based on non-conformance or violation of the relevant design specifications.

♠ Materials obtained from suppliers or work performed by an organisation is inspected and passed as acceptable if the estimated defective percentage is within the acceptable quality level.

♠ Problems with materials or goods are corrected after delivery of the product. ♠ But the traditional approach of quality control is the goal of total quality, in this system,

no defective items are allowed anywhere in the construction process. ♠ While zero defects goal can never be permanently obtained. ♠ The best known formal certification for quality improvement is the international

Organisation for Standardization’s ISO: 9000 standard. ♠ ISO:9000 emphasizes good documentation, quality goals and a series of cycles of

planning, implementation and review. ♠ Major elements of total quality control are design reviews to insure safe and effective

construction procedures. ♠ Other elements include extensive training for personnel, shifting the responsibility for

defecting defects from quality control inspectors to workers, and continually maintaining equipment.

♠ Worker involvement in improved quality control is often formalized in quality circles in which groups of workers meet regularly to make suggestions for quality improvement.

♠ Material suppliers are also required to insure zero defects in delivered goods.




♠ Initially, all materials from a supplier are inspected and batches of goods with any defective items are returned.

♠ Suppliers with good records can be certified and not subject to complete inspection subsequently.

♠ Many companies have found that commitment to total quality control has substantial economic benefits.

♠ Expenses associated with inventory, rework, scrap and warranties were reduced. ♠ Worker enthusiasm and commitment improved. ♠ Customers often appreciated higher quality work and would pay a premium for good

quality. ♠ Off course, it is difficult apply total quality control in construction. The unique nature of

each facility, the variability in the workforce, the multitude of subcontractors and the cost of making necessary investments in education and procedures make programs of total quality control in construction difficult.

Experience with Quality Circles

Quality circles represent a group of five to fifteen workers who meet on a frequent basis to identify, discuss and solve productivity and quality problems. A circle leader acts as a link between the workers in the group and upper levels of management.

Examples: 1. On a Highway project under construction, it was found that the loss rate of ready-mixed

concrete was too high. A quality circle composed of cement masons found out that the most important reason for this was due to an inaccurate checking method. By applying circle’s recommendations, the loss was reduced by 11.4 %.

2. In a building project, many cases of faulty reinforced concrete work were reported. The iron workers quality circle examined their work thoroughly and soon the faulty workmanship disappeared. A 10 % increase in productivity was also achieved.

Quality Control by Statistical Methods

♥ The use of statistics is essential in interpreting the results of testing on a small sample. Without adequate interpretation, small sample testing results can be quite misleading.

♥ As an example, suppose that there are ten defective pieces of material in a lot of one hundred. In taking a sample of five pieces, the inspector might not find any defective pieces or might have all sample pieces defective.

♥ Drawing a direct inference that none or all pieces in the population are defective on the basis of these samples would be incorrect.

♥ Due to this random nature of the sample selection process, testing results can vary substantially. It is only with statistical methods that issues such as the chance of different levels of defective in the full lot can be fully analysed from a small sample test.




There are 2 types of statistical sampling methods:

1. The acceptance or rejection of a lot is based on the number of defective or non defective items in the sample. This is referred to as sampling by attributes.

2. Instead of using defective and non defective classifications for an item, a quantitative quality measure or the value of a measured variable is used as a quality indicator. This testing procedure is referred to as sampling by variables.

Statistical Quality Control with Sampling by Attributes




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